The Independent Financial Adviser from Buckingham

Why Public Sector Workers deserve our support and how we should do it.

2011-06-30T08:16:00.003Z

As we batten down our collective hatches for a day’s ‘Industrial Action’ - a classic oxymoron, the irony of which has always tickled me - I find myself compelled to put pen to paper once more.

I have to confess to having great sympathies for many of the public service workers and the glaring uncertainties they face when looking forward. The realisation that your future is not necessarily going to be as good as that which has been enjoyed by those who came before is an unpleasant and unwelcomed shock. Pay that has been squeezed while temporarily uncontrollable inflation takes hold in the world around us leaves these people already stretching their incomes to support their families and save for the future, so a call for them to pay more into their diminishing retirement planning must seem the ultimate inconvenience.

However, the point that strikes me as being blindingly obvious is that none of the difficulties listed above are in any way unique to either Teachers or the broader selection of Public Sector Workers. In fact they are the new reality for us all. The only difference is that these unfortunate people are being led by the nose into this misguided and ultimately pointless action by their cynical Union leadership that has chosen to ‘take a stand’ on their behalf, while the rest of us just get on with trying to make a living.

The truly breath-taking advances that we have seen in longevity over the past three decades has meant that the prospects of surviving long into retirement are now much more real than ever they were until quite recently and yet the funding model for these incredibly generous retirement schemes has for the most part gone unchanged. There is a guarantee of income that is driven only by your final salary and the number of years that you have worked. This income is then paid for life, usually with generous inflation-linking and widows/widowers benefits to boot. The expensive bit is that it is guaranteed and makes no allowance whatsoever for changes to the circumstances that may prevail when these people retire. In other words, if investment performance has been poor (or worse) and interest rates have collapsed then the massive increase in the cost of those benefits is simply met by the pension scheme (that’s you and me by the way).

When you contrast those guarantees to the total lack of any certainty that the rest of us face with our own future planning then you see a most unfair situation. We have to adjust our funding to overcome all the same obstacles and pitfalls that I have described above, but we do so whilst paying an ever increasing share of our income to support the cast-iron guarantees afforded to Public Sector schemes. This situation simply cannot go on – it has been true for years that workers in the private sector have been over-taxed in order that the Public Sector pension differential should be maintained and this is something that we should have tackled properly years ago. It is never nice to have something taken away from you, but when it is something that is simply no longer appropriate to the modern age then it is time to wake up and smell the coffee.

I have heard countless interviews where the main thrust goes along the lines of “I am being asked to work for longer, pay in more and get less back at the end”. Clearly I am expected to be sympathetic to this plight, but I am afraid I am not, for the simple reason that this is precisely the situation that we all of us face. The only difference between myself and those shouting this message presently is that I pay for my entire retirement funding and always have. I have no benevolent employer who decides to secure my future with tax-payers’ money, leaving me to balance my future with the costs of running my family for the present. Thus I am only too well acquainted with the true cost of planning for the future.

The truth behind this is that times have changed immeasurably and the concept at the heart of of the kind of schemes that are being fought over today is out-dated and unaffordable. We are told that the (Public Sector) pensions bill alone will be almost £10BN a year by 2015. This is not at all something that has crept up on us in the past couple of years. It is an imbalance that has been growing for decades and full marks to the current Government for having the guts to begin to seek at least the beginnings of a reform.

For intelligent people, the Teachers have allowed themselves to be wound up and filled with fury over something that is an absolute inevitability in the modern age. I have much time for these people and the sterling work they do for us every day of life. In my opinion the true villains in this piece are the Union leaders purporting to represent their members. They should for years have been counselling Teachers and other public servants on the reality that they all face and negotiating on their behalf for a fair evolution of the ‘gold-plated’ and unsustainable benefits they are still fortunate enough to enjoy.

I am sure that today’s action will not be the last, as there are many who would like this to become a full-blown and rolling movement like the ‘Poll-Tax Riots’ we saw twenty years ago. Next time you see someone like Mr Serwotka telling us of the iniquities that his members face, just listen carefully to see if there is any constructive alternative being put forward - other than our continuing to pay from our taxes for a scheme that is massively more generous than ever we could afford for our own retirement planning. To pretend that the current situation is a fair one and thus that his argument is a just one is at best misguided. We should all support our Public Sector workers by helping them understand that the proposed changes are a necessary evil in the modern world, that the reforms will still leave them with a very generous and expensive pension and above all not to be taken in by those who want to make political mischief from their plight.

These are of course my own personal views. For a full regulatory statement of my status etc etc please see my website (link above)

"To my Bank Manager. From your Humble Client"

2011-01-07T15:00:00.003Z

Though a little off-topic from my usual posts, I felt the need to share with you the letter below. This was recently published in The Times and is purportedly from a 98-year-old lady, fed up at the way she had been treated by that organisation. In places it seems hard to believe that such a lady might write such a letter, it is nevertheless a classic. I hope you enjoy.

Happy New Year to one and all.

"Dear Sir,

I am writing to thank you for bouncing my cheque with which I endeavoured to pay my plumber last month. By my calculations, three nanoseconds must have elapsed between his presenting the cheque and the arrival in my account of the funds needed to honour it. I refer, of course, to the automatic monthly deposit of my Pension, an arrangement, which, I admit, has been in place for only thirty eight years. You are to be commended for seizing that brief window of opportunity, and also for debiting my account £30 by way of penalty for the inconvenience caused to your bank.

My thankfulness springs from the manner in which this incident has caused me to rethink my errant financial ways. I noticed that whereas I personally attend to your telephone calls and letters, but when I try to contact you, I am confronted by the impersonal, overcharging, pre-recorded, faceless entity which your bank has become.

From now on, I, like you, choose only to deal with a flesh-and-blood person.

My mortgage and loan payments will therefore and hereafter no longer be automatic, but will arrive at your bank by cheque, addressed personally and confidentially to an employee at your bank whom you must nominate. Be aware that it is an offence under the Postal Act for any other person to open such an envelope.

Please find attached an Application Contact Status which I require your chosen employee to complete. I am sorry it runs to eight pages, but in order that I know as much about him or her as your bank knows about me, there is no alternative. Please note that all copies of his or her medical history must be countersigned by a Solicitor, and the mandatory details of his/her financial situation (income, debts, assets and liabilities) must be accompanied by documented proof.

In due course, I will issue your employee with PIN number which he/she must quote in dealings with me. I regret that it cannot be shorter than 28 digits but, again, I have modelled it on the number of button presses required of me to access my account balance on your phone bank service.

As they say, imitation is the sincerest form of flattery.

Let me level the playing field even further. When you call me, press buttons as follows:

1. To make an appointment to see me.
2. To query a missing payment.
3. To transfer the call to my living room in case I am there.
4. To transfer the call to my bedroom in case I am sleeping.
5. To transfer the call to my toilet in case I am attending to nature.
6. To transfer the call to my mobile phone if I am not at home.
7. To leave a message on my computer (a password to access my computer is required.
A password will be communicated to you at a later date to the Authorized Contact.)
8. To return to the main menu and to listen to options 1 through to 8.
9. To make a general complaint or inquiry, the contact will then be put on hold, pending the attention of my automated answering service. While this may, on occasion, involve a lengthy wait, uplifting music will play for the duration of the call.

Regrettably, but again following your example, I must also levy an establishment fee to cover the setting up of this new arrangement.

May I wish you a happy, if ever so slightly less prosperous, New Year.

Your Humble Client

More Quantitative Easing on the way?

2010-08-05T17:46:00.000Z

It seems strange that there is currently such a debate on a subject that most of us know little or nothing about, but Quantitative Easing (QE) is once again a hot topic.

QE has been the process by which the Bank of England has injected more liquid funds into the economy. It started in March 2009 with an initial purchase of £75 Million’s worth of Bonds. This has been gradually extended to the point where £200 Million had been let into the economy in this manner. There has been much controversy about what has actually happened to this money since that point, with many sceptical that it simply sits with Banks because the current rates of interest make it not worth their while risking lending it out.

Whatever, I don’t think it is any coincidence that the beginning of the equity recovery happened to come at the same time as this money began to appear. There has been much talk about money that isn’t worth lending fuelling asset price rises and we certainly haven’t seen massive increases in business lending or indeed mortgage take-up. This led to well founded fears that when the BoE do eventually remove QE, markets would have once more to rely on ‘real money’ alone and we might see an asset price slump.

There is now speculation that the Summer’s Budget and more so the Spending Round due in the Autumn will depress prospects generally, as they both effectively signal less Public Spending and thus less artificial money filtering though. This is leading to calls for more Quantitative Easing here in the UK as in the US, in the hope that this will make up the difference. It is certainly true to say that of the two measures the Bank could take to stimulate things, the one of reducing interest rates (held firm again in today’s announcement from the MPC) is effectively a non-runner, leaving QE as the only chance of a boost.

This might just be my eternal optimism kicking in, but if there is to be more QE in the coming months, we might just see a further boost to the stock market as this money is put to use. The old adage of ‘many a slip twixt cup and lip’ is never truer than here, but I would say that there is a fair likelihood of further stimulus, and until rates rise significantly, which doesn’t look like happening this side of next summer, real and still attractively priced assets are the most logical place for this money to end up.

Watch this space. In a year’s time I shall either be right or very wrong!

The Author of the Credit Crisis?

2010-07-03T11:48:00.001Z

Since the week following the General Election, there has been a notable absentee from the public stage. We are told that Gordon Brown is writing a potted history of the Credit Crisis and that at this stage it is not known whether this is merely for exorcising his personal demons or for the benefit of the rest of us. No doubt this work will emerge at some point and in some form and who knows? - It might just be quite informative.

Breaking down any complex situation into an account that is easy to understand is always difficult, with the attendant risk of misrepresentation. However, the simplest way I can find to understand and report what happened goes like this:
• In the red corner we had the manufacturers, exporters and savers. I’ll refer to them here as “Chermany”.
• In the Blue corner we had those who bought the products and services from Chermany, and tended to do so with excessive amounts of often carelessly borrowed money.
• The money from these sales was, in large part invested by the Chermans in US Treasury Stocks, which in turn financed the borrowing for those purchases.
• A direct effect of this was artificially inflated asset-price bubbles in areas such as property.

As we know, bubbles rarely let themselves down gently, preferring it seems to go ‘Pop’. When such a bursting happens, those who have invested in the overpriced assets at the top of the market catch a cold. In the most recent playing out of this, it was banks who found themselves holding vast amounts of securitised mortgage assets whose situation was the gravest. This was made even worse by the fact that these securitised debts were, apparently, such a fantastic idea that they had sold them on to many other institutions with gay abandon. It seems that in this process there was a total breakdown of reasonable care and diligence, with rating agencies apparently happy that the debt was not sub-prime and banks so greedy to fill their boots that they didn’t seem to care much for the downside.

We know what happened next...........

However, what we perhaps haven’t been told by our leaders is that the terrible imbalances created in the merry-go-round described above have in no way been corrected. Instead, they have just been moved around the playing surface. In the virtue-less circle that got us into this, the following process has happened over time:

Debt began with consumers, being then taken on by corporates such as US Mortgage Lenders. This was rapidly ‘sliced and diced’ and passed on to witless and greedy banks. The music then stopped and the banks were left to unwrap their parcel, finding that instead of the novel present of which all the other children are envious, what they had ‘won’ was the kind of gift that sends you home from the party in tears.

However, in a climate of Global fear of banking collapse and civil unrest, the music was cranked up one more time and the nasty parcel passed on to the respective Governments. These administrations have variously borrowed extensively to finance their bail-outs and as a result we now have an unhealthy preoccupation with what is known as Sovereign Debt. Just as it was with the banks, some of these Governments look more able to service these debts into the future than others.

The speculation about a default from Greece has temporarily abated following their massive bail-out from elsewhere, but this has doubtless only put off the inevitable, while speculators are now giving both Spain and Italy careful examination. In any case, the bail-outs of nation by nation are only an extension of the process above, the final phase in which the debt is passed from poorer nations to richer ones.

One of Newton’s laws goes something like “Matter can neither be created nor destroyed” and I am afraid the same is true of debt. Real wealth, created by real economic activity is the only thing that can ultimately remove this debt from the equation and that is not easy in a world where growth is at best anaemic.

I’m minded to write something under a separate heading about the current state of play as regards the Euro, as this is an area on which I face increasing questions as I discuss things with clients. I think that is probably a large enough topic to deserve its own blog altogether!

It will be interesting to see what Mr Brown’s journal does actually contain, if ever it does see the light of public scrutiny. I am sure that there will be many phrases along the lines of ‘Made in USA’ and perhaps not as much comment made about lax and incompetent regulation in the UK banking system as there should be, but it would be unfair to make such assumptions without seeing the document.

One thing is for sure – all that has happened means that the world is a very different place now to the one it was but a few years ago. Fear now prevails in many, many areas and I think it will be a good while before the underlying factors that feed this can rightly be said to have been overcome.

At Last! A Budget that isn't a Bodge-It

2010-06-25T10:03:00.002Z

With the Emergency Budget now a couple of days behind us it is interesting to observe the general reception given to it. I think many are genuinely surprised with how well George Osborne presented the backdrop to his budget and how he has balanced a number of conflicting demands.

There has been much spinning, both for and against the general tone and indeed some of the specifics. The Coalition Government is keen to emphasise the unavoidable nature of the decisions they have set in motion, while Labour is at great pains to stress how many less painful options could have been explored. This is the same labour that left the shame-faced memo to the new Treasury Secretary explaining that there was ‘no money left’, a detail which invalidates any comment they have, be it supporting or conflicting.

What is clear is that things are likely to be slow and dull for some time to come. I have written in this column before about the ‘hangover’ and the need for us to face up to what has for some time been essential. The fact that under the previous administration we endured almost two years of paralysis prior to the election has only made the decisions put forward earlier this week tougher and further reaching. It is also true to say that many Government departments were already facing swingeing cuts initiated before the change of administration, so much of what was said on Tuesday merely formalises action already begun.

The proposed discussion about bringing forward retirement age increases seems to have caused widespread alarm, though I cannot see the surprise in any of this. People are living longer, far longer than ever they did, while there are less rather than more of us gainfully employed paying taxes. It doesn’t need a rocket scientist to deduce that something therefore has to change. We needed either:

• An increase to the retirement age
• A reduction in the State Pension
• Higher Tax and National Insurance

Of the three, an increase to the retirement age would be the only option that doesn’t actually remove any real money, today, from the economy. I therefore see this as the natural and obvious economic choice. This is before we confront the pros and cons of a situation where we might be spending almost as long retired as we have done in work, which would be somewhat perverse I feel.

We also discovered in the Budget that we currently spend more on Housing Benefit than we do on the Police service. Without even uttering the word ‘scrounger’ this has to be wrong. Clearly, this benefit is essential to many people and their future, but it simply cannot be appropriate that it has ballooned to such an enormous level. Attempting to address this clear imbalance is brave and in my opinion commendable.

Above all, what we saw this week was a clear statement that UK plc is aware of its ‘issues’ and is prepared to address them head-on. I have no doubt that this will be a painful and drawn out exercise, but the fact that the price of Government Debt fell in response to the announcements signals that the markets think we are ‘good for it’ in a way they were unsure of before.

I am prepared to acknowledge where I was wrong. I felt that a coalition was not what we needed for prompt and decisive action on the burning issues and the truth has been far from that. In no more than a few weeks we have seen the Coalition emerge with a convincing attempt to right some of the wrongs we have allowed. I am impressed and relieved by this, and only hope that they have the courage to see their ideas through to some form of conclusion, while having the sense to continue to present their case so openly and cohernetly.

Cuts - The Argument Begins

2010-06-16T20:20:00.003Z

We saw today that Dave Prentis, who heads up the Unison Trade Union has said that his 1.3 million members should do their best to resist the imminent cuts that they anticipate as part of the deficit reduction plan. He said that if plans affected "pay, services or pensions" then the Government "wouldn't know what had hit them".

Well, thanks Dave, but I wonder what is your solution to the problem? Perhaps we should borrow some more money so that the make believe world we have inhabited thus far can last a little longer? I think not. Reality has to bite and to bite now, before it is too late. We would all like jobs for life and a guaranteed annual pay rise, alongside shorter working hours and better benefits. A Final Salary pension scheme would be nice too if you're offering Mr. P! The truth though is that there is no money to pay for these dreams and until there is, we must cut our cloth accordingly.

This I fear is the first of what will no doubt be an agonising but ultimately futile string of 'industrial actions' (always something of an oxymoron I thought) that will rumble round like the thunderstorm that doesn't go away. Our Government has a very hard road ahead of it, and one that by definition we have to follow with it. That same Government will be supremely unpopular by the time we have got only part of the way down that road, but they will have to stick to their guns if we are not to witness our very own Greek Tragedy here in Blighty.

Apart from resisting every attempt to rebalance our economy, union leaders seem to have nothing else to bring to the table. I would suggest that as we embark on the second decade of the twenty-first century, if they cannot be more constructive, then they will soon be as redundant as so many others who have contributed so much more.

Now is most definitely a time for pulling together, so step up to the plate please Dave, and others like you. What we need now is positive engagement. If we can't manage that then we collectively "won't know what has hit us".

Who'd be a Euro-Millionaire?

2010-06-03T13:50:00.002Z

It would appear that I may have jumped to conclusions in my last post that related to the Hung Parliament. The new administration seems to me making a good fist of things so far, reminding us at all available opportunity that the deficit reduction is central to their objectives.

And so it should be. The note from the Departing Chief Treasury Secretary to his replacement in which he stated that the money had run out was widely seen as a joke. I am afraid I must have had a sense-of-humour-bypass operation, because I see it as many things, but most definitely not funny. In a sense though the note says more than a thousand press releases by the new incumbents ever could, as it removes any legitimacy from any economic argument that our new opposition might dare to make, showing as it does their signal failure and their conscious squandering of our reserves. It was reassuring too to hear the Bank of England Governor’s supporting comments with regard to attacking the deficit now as opposed to waiting in the forlorn hope of there ever being a better or less painful time.

On the whole I am very impressed with the way that things have gone in the month or so since the General Election. It was a shame to see David Laws depart from the Treasury team, not only for the personal trials that the whole affair must have brought him but also as he appeared to have a lot to offer his department and the country as a whole. Let’s hope that the coalition manages to bring back its stronger players from the dead in the same way that we saw the continual resurrection of Peter Mandelson!

The fragility of the Euro following Greece’s near bankruptcy and the ensuing speculation over the other ‘PIIGS’ is difficult to fathom. Many commentators are predicting the eventual failure of the single currency altogether as a result of the tensions this episode and others like it create. It seems hard to believe that the Euro would be allowed to fail, given the amount of political capital that has been invested into it over the years, particularly the primary players in France and Germany. However, there seems to be growing weariness within Germany that they have bank-rolled the profligate South for too long and if German leaders are faced with quietly putting the Euro out of its misery or losing power in their own country the choice will not be a difficult one.

The alternative is that the Euro continues to soldier on, but that Germany installs ‘Economic Advisers’ in each of the member states as a way of ‘Federalising’ the economic policy Euro-wide so as to be a clone of what is done back home. This would of course work in pure economic terms, but would cause untold pain and anguish as the ‘German Way’ proved far too hard a road for the states who have always taken a more relaxed approach to their finances. As we know, it is that relaxed approach that has got them, and now the single currency, into such hot water, but that doesn’t mean they will see it that way.

Whatever, we have interesting times ahead, both here in the UK and on the wider stage too. I like to think that the current negativity might be coming to an end. However, even if it does, it will only be a temporary relief, as the only thing predictable about the future remains its unpredictability.

Now where did I leave those old Peseta notes and coin I wonder?

Give us enough rope...........

2010-05-08T04:50:00.001Z

So there we have it. The result of the UK’s General Election is, err, actually a non-result. Having waited five years to exercise our democratic right, we have managed collectively to deliver little better than confusion and disarray. I was speaking with someone the other day about the prospect of a Hung Parliament and we agreed that if this turned out to be the product of our Election then it would be interesting to see ‘which one we got to hang first!’

Things are, sadly, more serious than that though. If we had the luxury of being able to drift gently through calm azure waters while we made up our collective mind then this would not be an issue. However, we happen to inhabit a time so perilous to our national well-being, with seas so grey and choppy that this was possibly the worst of the potential Election outcomes.

I have in previous posts banged on about the deficit and the need for us to have come up with something coherent and convincing as to how we are going to address it, but with the Greek troubles now fully broken on the world, the economic imperative has just escalated once more. I am convinced that markets were already tired of waiting for some clear and decisive action from us and had pinned their hopes on the Election as marking a punctuation point between what has gone and what is to come.

With the lack of a definitive working result, we can expect perhaps a few days’ grace from international markets before they take the Pound out and shoot it in the street. Now therefore has to be a time when we bury some of our ideological differences for a while and get on and begin to deal with the elephant that is now threatening to squeeze us out of the room altogether.

I was struck with the Public’s reaction to the televised Prime Ministerial debates recently. The ‘worms’ that we were told were a display of leaders’ popularity and appeal were a telling indicator of what I feel is an alarming comfort-seeking urge that we need to overcome. All too often we saw the worms dipping into negative the moment the individuals actually began to engage in any real debate . People interviewed afterwards told of how they became disengaged when leaders argued with one another. I am puzzled by this. Surely what we want most of all from our leaders is for them to show us that they genuinely believe in their proposals being the most appropriate for the conditions we find ourselves in? Yet we somehow find it unattractive that they should seek to stand up for those ideas, seeing this somehow as a bad sign.

I think that we, the Electorate have to wake up a little and sniff the beans. The world we live in has a number of very difficult issues that we need to deal with right now. Not facing up to these issues will not make them go away. The tragedy currently playing out in Greece is a perfect illustration of where we inaction could lead us. Only so much can be swept under the collective carpet. If we keep on denying that problems exist, sooner or later they will blow up in our faces and take us and our carpets with them.

It is time that we faced up to the fact that not all in the garden is rosy, that it is acceptable and indeed healthy for Politicians to have differing views on these issues and to seek to debate them and persuade us that they are right. We don’t need to be sold schmaltz – we need to be convinced, with the facts, that the chosen course has merit and will deliver us a better and more sound basis from which to move forward. I am afraid that these facts and the real disagreements they will no doubt bring with them may be unpalatable for those who seek a comfy, soft consensus, but that is the reality.

We spent far too long appeasing a certain Mr. Hitler, because the alternatives were too hideous to contemplate, but we still ended up having to go through with them. The current state of our nation’s finances is rather similar and divides opinion in a similar manner, but decisive action is nevertheless essential. And soon please.

We were given the rope; I only hope that we haven’t hanged ourselves with it.

Learning to live with a weak Pound

2010-03-21T06:50:00.001Z

Following Sterling’s relative strength against the Euro during 2005-2006, where it sat in the mid €1.40’s, the year 2007 saw almost 10% wiped from the relative value of our pound and 2008 a further 30%. This is all very humiliating and has made the European holiday a very much more costly affair than ever it used to be, of that there is no doubt.

Typically though, a weakened currency has always been seen as a bit of a helping hand to an economy suffering contraction or recession. Periods of slow-down can be eased by the increased trade that comes as your goods and services are more competitive abroad. Quite simply, £10 worth of trade to us used to sell for around €14 on the continent, where now, thanks to our devaluation it would cost more like €11, creating the hope that it is more likely to sell and in stronger numbers. Of course where this idea falls down is that if your major export markets are also feeling the pinch in terms of unemployment and ‘feel-bad factor’, then cheap though your goods may be, they are less likely to find the numbers of willing buyers that you so desperately need.

One positive factor that is often overlooked in relation to a weak Pound is the high number of UK-listed companies that are truly multi-nationals. BP would be the obvious example of this. BP sits atop the FTSE-100 and is clearly regarded as a British company. However, it realises more than 90% of its income in dollars. These dollars are bigger, fatter and more significant than they used to be when compared to BP’s native currency. This has the effect that though the home market looks very flat indeed, this helps to keep staff costs and perhaps taxation down in the short term, while the weaker currency actually has the effect of inflating earnings in Sterling terms. This is a very powerful phenomenon and is in no way confined to BP. It can only help the already healthy dividend yield on the FTSE and help support share prices.

Where we do need a certain amount of re-education is in what this weak currency signals. We appear to be embarking on a period where we have a weak economy, are less competitive and have poorer prospects. It is this and our potentially crippling levels of debt that is driving down our currency.

The political debate centres on who will cut what and when they might start and for all their efforts to show clear differences, our politicians are not giving us or wider markets a clear enough message. I begin to feel that it is not so much a question of how big a cut you promise as how believable you are about the time-frames and your will to get on with it. What makes us weak on the world stage is that we have built up this enormous burden of debt systematically over a number of years and yet have not been prepared to state for the record a coherent and credible plan to begin its reduction.

So long as our leaders give these mixed messages on a world stage then we must become used to being a weaker force internationally and with that the weaker currency that goes along with it.

Anyone for Devon this year?

After the Bail Out - The Hangover

2010-02-05T12:56:00.005Z

We will all remember only too well the almost gleeful way in which the various media reported the financial crisis as the enormity of the problems facing us emerged. There seemed a time when journalists and commentators were trying to outdo each other in their predictions of how bad things would get. The debate seemed to be over the number of decades the coming depression would last.

In truth, nobody really knew even what was going on at the time, let alone what was likely to come as a result, but of course it did sell plenty of newspapers. However, we now know that the longest lasting legacy of what happened is going to be the unimaginably large amount of debt that we have been signed up to as a result of the ensuing ‘Bailout’.

It is difficult to be sure just what the impact of this debt might be, as we don’t yet know the full extent of it. More importantly though, how the world’s debt markets will view our creditworthiness into the future is going to have a significant effect on our way out of the mire.

A recent European Union Commission report pointed to the UK having a ‘sustainability gap’ of 12.4% of Gross Domestic Product (GDP), which represents almost twice the average figure across the EU. The report concluded “The UK appears to be at high risk with regard to the long-term sustainability of (its) public finances”, and reckoned that the debt-to-GDP ratio would rise from 2007’s 52% to well over 200% by 2025.

Share prices have for the most part bounced back and are in rude health once more, though it remains to be seen how much of this is as a result of an asset price bubble induced by the extra funds from Quantitative Easing. However, the debt that remains needs to be tacked in a concerted manner if we are to creep back to solvency and indeed if we want to retain our ‘Triple A’ credit rating.

The paralysis in government that we have endured since embarking on this vast odyssey of borrowing does nothing for the confidence of debt markets. As a result we need to come out with plans that make it very clear just what we are going to do to address the problem. Essentially, it is not rocket science – we need to balance our income and expenditure in such a way as to begin to repay the debt. However, without a booming economy, ‘income’ from tax revenues can only be increased by raising the taxes themselves, risking choking off whatever spark of life might be returning to activity. Similarly, the other side of this equation is expenditure, which can and probably should be cut significantly. However, this too can have the same unwelcome effect and we at all costs want to avoid the scenario that Japan endured throughout the 90’s and well into the decade we have just left, where government could not get to grips with this balancing act and inflicted the ‘lost decade’ on their people instead.

Whatever, we do have to have the courage at least to pin our colours to the mast by stating what we are going to do and when. A clear and published plan of attack is what is required, as it will let economists and public alike know what they can expect from the coming years.

One thing is for certain: Prudence left the building some considerable time ago.

Why I'm with Obama

2010-01-30T07:32:00.002Z

The fact that President Obama’s recent statement of intent as regards splitting out ordinary banking activities from the more speculative ‘off piste’ forays that have brought us all so much trouble caused a shock to the US stock market should be no surprise. Banks, heavily damaged though they are, remain truly enormous and still represent a very significant chunk of the Dow Jones. However, I am sure that the correction that we saw last week will be the usual short lived demonstration of annoyance and not much more.

Much more significant in the long run will be the much better than expected US GDP figures, which showed that the US economy grew by an annualised 5.7% in the last quarter of 2009.

When contrasted with our ‘narrow squeak’ of +0.1% estimated growth for the same period, we begin to see who might have been “best placed to deal with a recession”.

I’m with Obama all the way, and I am not referring to his campaign slogan of just over a year ago. I believe that it is imperative that banking practices are made more transparent for the public and investors alike if we are to be expected once more to engage with these organisations going forward. Where I differ with many is that I feel that the more experimental and innovative trading activities are also to be welcomed, just not mixed in with the same organisations whom we expect to be clearing our pay cheques every month.

I fear that the President’s honourable aims may be thwarted by the many vested interests, which would prefer that the institutions in question remain vast, monolithic structures that are beyond comprehension and control. Indeed, the pronouncement may even have been evidence of a certain degree of cynicism on Obama’s part, designed as a bargaining tool that can later be withdrawn to ease his Healthcare Bill into reality. If so, it might still have served as valuable a purpose but I would love to see it succeed.

One senses that despite what we all might have felt about him during his election campaign, there is more intent about Obama and less playing to the galleries than is the case with our incumbents. I was somewhat puzzled quite why Lord Myners, the man who approved Sir Fred Goodwin’s pension deal at RBS, despite warnings at the time that it would be “enormous”, followed Obama’s announcement quickly with a statement that he would not be pursuing the same strategy for the UK. To date I have seen no plausible rationale for this, which leaves me to suspect that it is either merely another symptom of the pre-election paralysis that stops us attending to all the other pressing economic issues or is yet more evidence of an opportunity missed as a result of key figures not being ‘up to the job’.

There were many factors that caused our present economic malaise, too many in fact to list here. We were unfortunate that a number of these happened to coincide, turning what could have been a simple correction of cycle into a vicious collapse. That we stand broken as a result is undisputed. The crippling level of unemployment, record levels of debt and a stagnating economy will all take many years to overcome.

The saddest thing of all to my mind is that we appear to be happy to let this painful time pass into history without truly learning the lessons of how we made greater the danger of this mess befalling us in the first place.

Any man who tells you he can predict the future is misguided, but the bigger fool is the one who ignores the past.

Bank of England projections "Unbelievable"

2010-01-15T11:25:00.002Z

Danny Blanchflower, former member of the Monetary Policy Committee (MPC), the body that sets the Bank of England Base Rate went on record this week as suggesting that the Banks’ projections of recovery were “unbelievable”. In an interview for the Citywire organisation Blanchflower said that the bank was forecasting that our recovery from this recession would be the “fastest we’ve ever seen” and went on to say that “it’s unbelievable, and we will see that”.

Analysts have for some time been expressing doubts about the pronouncements that have come from the Treasury, which have looked more like a sharp rebound than a process of recovery and now the BoE’s own forecasts seem to be coming under the same level of doubt.

What is not in doubt is that the most important economic decision of this century will be the point at which the financial support for the economy, the much talked about Quantitative Easing (QE), begins to be withdrawn. This will be a decision made by the Bank at such a time as they feel the economy has built sufficient momentum that it can stand on its own again.

The timing of the withdrawal of support is so critical because of the dire consequences of getting it wrong. If support is withdrawn too early (as might be the case if the over enthusiastic forecasts are believed despite what the fact might be telling us), then we risk the ‘Double Dip’ recession, that shows a glimmer of recovery only for activity to plummet further as we enter a prolonged period that might look very much like a depression. On the other hand, if support is given for too long we risk lurching sharply from recession to inflationary spike without the intervening few years of things feeling Ok that we are normally accustomed to in the general run of things. Thus, the decision around when to scale back on QE will undoubtedly be what shapes the next couple of decades of our economic prosperity.

No pressure gentlemen!

2010-01-08T13:58:00.002Z

Tax Rises – beat the inevitable!

A very Happy New Year to anyone who reads my blog. I wish you all a healthy and prosperous 2010.

With the current state of the Public Purse we see constant veiled references to ‘savings, economies and efficiencies’ within Government spending that offer the opportunity to improve the situation. Whilst it is undoubtedly true that there must remain huge inefficiencies within such a huge beast as UK plc, no degree of corner-cutting is going to make enough of a difference for us. ‘Cuts’ remains the one word that nobody wants to utter, but it is only a matter of time before it re-enters the vocabulary, after which point the debate will quickly become over how much and where such cuts can be made.

Cuts alone though will not get us out of the hole that we have collectively dug. Thus, Tax has to be the one area where the greatest difference can be found. In a growing economy, tax receipts would be expected to rise as the money circulates swiftly and productively from each of us to the other. Even the most optimistic of pundits reckon on there being a fairly long slog before we return to that kind of environment and with a flat or shrinking economy, we need to wise up to the inevitability of tax rises. Some no doubt will be stealthy, some more direct, but taxes must rise as part of our rehabilitation program.

Scanning the tax system for an obvious target leads me to Capital Gains Tax, the tax that we pay on profits when we sell assets such as shares, second homes and the like. Capital Gains Tax (CGT) always used to be paid at the individual’s highest rate, until recently 40% after various allowances for inflation and so on. In April 2008 this rate was reduced to 18% across the board, regardless of income or wealth of the individual concerned. Thus, at a stroke, the likely tax bill on a £1,000 gain for a higher rate taxpayer was reduced from £400 to £180. This has since been exaggerated all the more with the introduction of the 50% Income Tax bracket.

According to HM Treasury, every 1% by which the CGT rate rises would raise a further £120 Million of revenue for them. It has to be said therefore that the current 18% flat rate for CGT looks very vulnerable indeed and I would say that it is only a matter of time before the anomaly is corrected.

Where is the Opportunity?

CGT is chargeable on the difference between the purchase price of an asset and that at which it is sold. £10,100 of the resulting gains are free if tax with the rest being chargeable at the prevailing CGT rate. As we have said, the rate is subject to change, but so too is the threshold above which the tax is paid. Historically the current £10,100 tax-free gain amount is the result of occasional incremental increases, but there is nothing to stop this process being reversed. As we know, a Chancellor desperate for revenue can and probably will look anywhere for what he needs.

If a rise to the rate of CGT is indeed going to happen, then an opportunity is created for investors to ‘crystallise’ gains now and get the proceeds sheltered into ISA or Pension funds depending upon their objectives, where CGT will no longer be an issue.

If ISA’s have already been fully used for the year then it is still possible to crystallise the gains and reset the ‘base cost’ for the investments to the current value. Changes to the law mean that investors cannot simply reinvest in the same stock as before, but there is a whole universe of funds and stocks out there from which to choose.

Above all, the message should be not to wait for the axe to fall and close off these areas of opportunity but to sit down with an appropriate Adviser and see if the current situation offers you some scope for advantage.

ISA's make the sun shine in October!

2009-10-10T08:15:00.004Z

A little ray of sunshine in the Chancellor’s Budget of 2009 was the proposal to increase personal investment limits to ISA plans. With no significant increases since Individual Savings Accounts were launched almost ten years ago, this was crying out for attention.

The new rules mean that:

• For the over-50’s it became possible earlier this week to invest £10,200 in total into your ISA per tax year.

• For the rest of us we shall have to wait till the new tax year next April for the enhanced limits.

• In addition it became possible earlier this year to transfer your accumulated Cash-ISA investments into Stocks & Shares ISA plans without compromising your current year’s allowances – attractive given the poor deposit rates currently available.

This is broadly excellent news, as investors have been able over recent years with the old £7,200 annual Stocks & Shares allowance to build portfolios that become increasingly tax-efficient over the years as their ISA allowance absorbs more and more of their potentially taxable investments.

A couple over 50 can now invest £20,400 per year into ISAs. For those of us with that amount of ready funds to invest this makes an extremely attractive proposition but in fact it should have far wider appeal than that. For investors with historic investments into Unit Trusts, Open Ended Investment Companies (OEICs) and even Investment Bonds there has always been the prospect of perhaps morphing these less tax-efficient holdings into their ISAs over a period of years. The recent changes simply allow us to increase the rate of travel in the direction of ultimate tax-efficiency by a factor of 50%. The next tax year will see this freedom extended to all investors.

Most decent providers are allowing existing investors who might have made maximum use of the ‘old’ allowance to take advantage of the increase, but even if this is not the case there is the prospect of an ISA Transfer to a provider who is more flexible, followed by a further contribution to the new limit for those who are not so blessed.

The ISA is here to stay and now offers even greater scope to invest in a highly efficient tax environment. You should speak to your Financial Adviser to be sure that the funds you utilise make best use of these tax advantages and are appropriate to your risk philosophy.

Is now a good time to invest?

2009-09-03T13:47:00.004Z

I often attend presentations by Fund Managers and other Investment Professionals, usually in the hope that I shall find some ‘inside track’ of knowledge and insight that is going to make a difference. Most times I come away wondering what I have learnt that I didn’t already know!

The Specialist takes great pains to explain all the positives that underlie the current situation and just as you are beginning to think that the overall message to take away must be a positive one, he goes on to list an equal number of reasons why we should all be gloomy.

All this bet-hedging used to be a great irritation to me until I cottoned on to the bigger picture – Nobody knows what is going to happen and there is in fact no inside track. All we can ever do is weigh up the relative pros and cons and draw our own conclusions.

There are many soothsayers who would have you believe that the recent spectacular rally seen in most developed markets is about to end in tears, matched, funnily enough by as many who would have you believe that the recovery is here and markets will not look back till they regain the highs of a couple of years ago.

My own feeling is that while there is still much to fear, things do look undoubtedly better than they did six months ago. There will, I am sure be more bad news to come, particularly from the Banking and Financial Services sector, but the fact is that an awful lot of the ‘toxic’ assets that we all feared so much have simply been written off already, and cannot be so again.

From the point of view of making investments, the old rules remain as true as ever they were:

• Above all, time will be the investor’s friend. A short term view encourages investors into more risk than they should be taking.

• Diversification is everything – across asset classes, geographical boundaries and fund management groups. Your eggs are invariably better spread across a number of baskets than addling in just the one.

• Last year’s wonder fund or sector could be next year’s dog. Track record can tell you a lot about how things might be in the future, but only if you look over a long enough period. If you can see evidence of how a manager or fund has coped well with hard times in the past then you have a decent hope that he might do so again in the future. A manager who has never had to cope with trouble may not recognise it or know how to deal with it when it arrives.

• Know where your risk lies and make sure that you have it balanced by sufficient low or no risk assets elsewhere – bank deposits, premium bonds and the like are perfect for this. A well considered mix of black and white is usually better than ‘Vanilla Grey’.

• Stay on top of the changes to your portfolio that time brings. Your higher risk holdings will ultimately deliver more growth than the lower risk ones. As a result if you don’t occasionally ‘rebalance’ back toward your original philosophy then it is likely that the aggregate risk profile of your holdings will steadily rise over time.

Markets may now be considerably higher than they were in March of this year. However, even allowing for over-valued banks and financials at the peaks seen in 2007, their levels are still way below where their genuine highs should be, so for the long term, now should still be a good time to pick up decent assets a reasonable prices.

So – Is now a good time to invest? On balance, Yes I think it is, but always make sure you diversify well and keep risk under control. The age-old warning that assets can fall as well as rise in value has taken on a resonance all of its own in recent months. Taking note of the rules above should help in managing those ups and downs.

Where now for the UK Economy?

2009-08-14T06:24:00.001Z

Where now for the UK Economy?

With France and Germany now officially ‘out of recession’, at least technically, where does that leave the UK? “Better placed to weather a recession than any of our rivals” was the proud claim that Mr Brown felt appropriate some time ago. While there might have been a degree of reason for making such a statement at that time, the passage of the intervening months has not been so kind to us.

* In the second quarter of 2009 the French & German economies both grew by 0.3%.
* During the same period, that of the UK shrank by a further 0.8%.

It is likely that this is in large part a result of the reliance in our economy and particularly London’s on Financial Services as a significant driver of the growth that we experienced during those ‘good times’. With the ever more exotic means that were employed to make money in Banking and its associated areas, the growth curve became ever steeper, leading to the inevitable reversal being steeper and deeper than it otherwise might have been. Indeed, it was one of our banks who rushed to take on the ailing ABN Ambro, thus importing the risk of their failure to the UK. Thus, our European friends can now be seen to be leading us by more than a short head in the crawl back to prosperity.

So is this the way it is going to be?

Well, for the short term I would say probably yes. In the longer term there are some positive signs within the generally depressed mess that we call a home economy. Mortgage Approvals rose for the fifth consecutive month in June. This is a measure of the new lending that has been approved in the retail housing market. If we care to look back over previous economic cycles, it is this measure that nearly always falls as a precursor to a down-turn and equally clearly the one that signals a positive direction change on the way out of the doldrums. Typically we could expect the upturn in mortgage approvals to precede any recovery by six to twelve months, as has been the case in the past.

Unemployment

However, that is not the whole story. Sadly we will still have the unhappy tail of rising unemployment to contend with for some months to come. Again, it invariably happens that the capacity that is being shed within the economy continues to be lost even past the point where technically things are beginning to improve, and as a result I believe we can expect unemployment to continue rising, probably past the end of 2009 and into 2010. Of course the numbers we see published are just data, but beneath each job lost lies a personal tragedy, with fall-out that has implications far beyond that poor person’s immediate financial situation – the holiday that they were going to book but now can’t afford, the new car they now won’t be ordering or the home improvement plans that are now on hold – all of which means money that is effectively being taken out of the pockets of all of the professionals with whom they could be doing business. This is why the true financial cost of unemployment is so difficult to assess, and that is before we even attempt to put a value on the ‘tried and failed’ state of mind it can so often engender. Unemployment is therefore going to be a continuing theme going forward.

Flogging a dead horse?

Another uncomfortable theme will be the effects of taxation. In its blind panic to right the Banking sector, the UK Government has signed us all up for more borrowing than we have ever embarked upon before. Whether or not that was the right thing to do is almost not the issue. What is far more pertinent is that the borrowing has to be both serviced and repaid, something which requires a significant amount of cash on an ongoing basis. The Government is pretty limited as to where this can come from, with the main and most obvious target being revenue it can extract from the general economy. Whether we call it Insurance Premium Taxation, Airport Tax, Parking Charges, Speed Camera Fines or indeed if we are honest and call it good old fashioned Income Tax, we still need a lot of it in order to come anywhere close to that which is needed to service this increased borrowing. As a result there is a very real danger that we might snuff out whatever spark of recovery does exist within the economy currently and prolong the pain. Don’t forget, recessions are not a good time to be putting up the cost of employing staff, the cost of using Public Services, the cost of working, and yet that is the very real situation faced by our leaders as a result of the massive debts we have run up.

This I think is the most destructive influence into the medium term – the fact that the almost insatiable need for cash to service our borrowing may fix us in the rut that we currently trudge for far longer than would have been the case if we were just in a ‘normal’ recession. Time will tell.

Why are Bank profits actually a good thing?

I will end my first blog on a contrary but positive note. There has been much vilification of Banks and Mortgage Lenders recently, and I am not about to spring to their defence. It is true that with still very limited amounts of money being lent relative to the excesses of the past and even that which is available, lenders are making significantly higher margins than they were before. All of this is indeed a rather unpleasant truth when so many people are struggling to pay their mortgages each month. However, ironically it may turn out to be our best hope of a faster exit from the problem I have highlighted above. The Chancellor’s Budget was based upon economic projections that I think will come to be seen at best as naively optimistic, but I suspect that his predictions for the Banking sector might have been overly subdued, in line with the ‘Meltdown & Armageddon’ generally being pushed by our various media. If, as I suspect, the Banks turn out to be making far more money out of us currently than was predicted, then there is a chance that we might actually be able to see returned some of the borrowed Public Money that we advanced them, sooner and in larger amounts than we had expected. This might in turn relieve the pressure on the Public Purse, since it would mean that we were able to repay some of our borrowings without the potentially crippling taxation that would normally be required to do so. Again, time will tell on this one too.

Sam Lever is an Independent Financial Adviser. His blogs are an expression of personal views and nothing more. For Independent Financial Advice in Buckingham and the surrounding area give Sam a call. Please see the website link (top right) for contact details.