Doom and Depression Death Spiral Deliberations

It’s all going down. The Euro is going to explode and Crash Mk2 is on its way. It’s hurricane season on the stock markets.

This is the sort of thing that could really change things for me. I haven’t got enough capital to become particularly rich, but I have cleared all my debts and cut my costs.

I have tried investing in a bull market – the late 1990s. Everybody wants to invest in a bull market like that – until it ends and they lose their shirts. I’ve also tried index investing into the post-dotcom crash over the 2000s. Though the circumstances were unfortunate, I had to liquidate in 2007, before the crash. Like SG, I was lucky and dodged a bullet…

After waiting a year, I am lucky enough to have started again into the teeth of this recession, and I expect it to turn to Depression over then next few years. I believe there is some possibility this is the denouement of Western industrial civilisation, in which case the stock market will never recover, because the assumptions that underpin industrial civilisation are beginning to unravel. In particular the myth of unending growth in a finite world is beginning to fail in the face of natural limits.

The Germans have a fine saying that “The good Lord sees to it that the trees do not grow into the sky”. Tragically, we have built this requirement for continual growth into the foundations of capitalism. Without growth we will see an erosion of jobs and will never be able to pay off debts.

However, I feel that this is not that time yet. Which is why I want to invest into this blue funk, because paradoxically it could change things significantly for me. If the market turns, and the assumptions of capitalism still hold, then the 5% or so of my working life earnings will be magnified by buying when stocks are on sale.

In the end it boils down to if I believe in the stock market as a way to get a return on money, then if I’m not prepared to buy into a bear market, then when else? Doing otherwise is illogical and being untrue to my values. I am aware that I may be throwing this last year’s salary into oblivion, but I feel the likelihood is a lot less than 50%.

So bring on that stock market death spiral. If I am right, my 5% of my working life will punch above it’s weight. I want to invest in a bear market, and I want to be still investing while I am still working, through the low-water-mark when all seems lost. And if the assumptions of capitalism hold, there will be a turning point.

If they don’t, well, so what? That year’s worth of income won’t buy me early retirement in the desperate times to follow, but some of the community and alternative non-financial investments may help soften the blow as living standards in the UK decline, and we focus once again on the needs of life rather than the wants.

Money isn’t everything. You need a certain amount of it in an industrial civilisation. Most of the wins are to be had in not being suckered into consumerism, to know when enough is enough, and what is necessary, what is nice to have, and what shouldn’t be bought even if you have the money.

Not buying crap and empty dreams is most of the personal finance battle, along with gaining an appreciation of the economic cycles. It’s one of the benefits of gaining experience as you get older. I was a child in the 1970s crises, though I observed the upside of it when my Dad bought his house outright in his late forties. I thought I would never find a job in Thatcher’s first recession of the early 1980s, but it did happen after six months.

I survived the negative equity and 14% mortgage rates of Thatcher’s second recession in the early 1990s, when it looked like house prices would never recover to the long-term norm of 3-4* salary (I know that sounds like a sick joke now, but reversion to the mean is a strong force, both from the upside and the downside. The problem is it tends to work over the 10 year period, which is a long time to put life on hold). What I lost of the first house I gained on this one.

So in financial crises it always looks like the world is going to end, it goes with the territory. And the bear argument always makes a better story. This crisis is probably different from others, inasmuch as it is the cumulative denouement of several recessions that were put off by inflating asset prices in 2001 and the mid 2000s, so we probably have got three recessions-worth of pain to go through anyway as all the stuff that was put off comes home to roost. Capitalism seems to need recessions to flush out irrational exuberances.

Added to that are the structural changes in the global economy, the barmy shenanigans un Euroland, increasing energy prices and the like. None of this is looking good, but it’s not clear to me that it amounts to a terminal death spiral. In the West we have been living above our means on borrowed money, so not only will living standards fall to something that matches the wealth we create, they will fall below that with the suckout from paying down debt. In the end you don’t borrow money from someone else, you borrow it from your future self. We are now that future self and it’s pay back time.

My aim is to do okay out of the Depression, for in such times what matters is to be truly debt-free, because money will be tight.

Need $100 - CASH ONLY

This guy needed $100 more than he needed a car in the 1930s. We will see things approaching this, I don’t know if we will see Hoovervilles in the years to come.

The way to tackle a Depression is basically to try and decouple as much as possible from the economic system. That means

  1. Eliminate debt – of any sort. The reason is that money becomes incredibly hard to come by, so servicing non-negotiable debts like mortgages becomes extremely onerous if your income falls or disappears. Where you can’t do this then prioritise mortgage debt over all else.
  2. Don’t rely on benefits of any sort. I am not sure that this will fall to 1930s era harshness, but it’s likely to be a lot less liberal than we’ve been used to
  3. Reduce costs wherever you can, particularly recurring costs (gym memberships, Sky or other pay TV, long mobile phone and internet contracts.
  4. Insource – do as much as possible for yourself  – whether it’s home repair, prepare and grow your own food or bringing up your own kids.

My policy is to avoid debt of any kind unless it’s underwritten by cash assets, and to minimise dependency on others, particularly the government and any benefits. The latter will come as a shock to a lot of people who have built the assumption of continuing benefits into their economic lives. Many of these will probably be scaled down or shed in the coming years because the government doesn’t have the income it used to have. We already see the straws in the wind with the clampdown on incapacity benefits and the steady increases to the state pension age.

There are other things to be done to improve resilience in the harsh times ahead.

One of those is to live healthier – in addition to the usual culprits of eating and drinking less and taking more exercise this is at odds with my financial goals. Financially, it would make sense to work a little bit longer, but I have seen all too often that as people get older their tolerance for the day to day low levels of stress in the modern workplace can break out in physical form. I am lucky enough to enjoy good health at the moment, but I have seen too many colleagues fall by the wayside in the last ten years of their working life.

In the hard times to come health spending will be less. Although we don’t have the health insurance fears in Europe that Americans suffer from, the quality and availability of health care will fall. It is also something that one should do anyway, but the stress of working life mitigates against living healthily in many ways.

Connection with the community is another aspect of life that may pay dividends in future. Rich societies become atomised because everybody can afford to buy in services and every house can have their own washing machine and lawn mower. However, getting to know other people gets you a wider range of skills and a deeper understanding of the way things work in your house, if these are your responsibility. I repaired my central heating system which failed for want of a zone valve with a replacement motor for less than £15, whereas I am sure getting in a heating engineer would probably cost more. Repairing things rather than replacing will probably become more widespread. Knowing other people and helping them out and being helped out by them makes a lot of things that are expensive or are a grunt a lot eaiser. We would have really struggled to raise a polytunnel between two of us, whereas many hands do make this easier and a lot more fun.

The next few years are going to be a rough ride. I could get slaughtered financially in it, and I’m aware of the risk. However, I also believe fortune favours those who are prepared to take a calculated risk, and this is mine. I’m not one of the pussies that when asked what is your attitude to losing money is “No, never, under no circumstances” and shovels all their money into cash. I’m prepared to take the hit if I screw up, on the grounds that the UK economy is going to be so shattered if I am wiped out that there’s precious little that would preserve wealth. Sometimes you have to do the best you can with whatever you have to hand.



Bankers say don’t mess with us – classic special interest pleading

Another day, another Mandy Rice-Davies moment. Our bankers seem to be getting their mates on the case of helping them avoid the consequences of their actions. The Item club is warning of all sorts of doom and destruction if we swap universal banking for investment banking and retail banking. Well, actually they say we’ll lose 0.3% of GDP.

Now I’m not so sure that’s a bad deal. We lost an awful lot of GDP when it all went titsup in 2008, so perhaps a little bit less in exchange for not having a near death experience might be okay. I think Vickers is tackling the wrong thing. Instead of creating a general form of the Glass-Steagall Act, howsabout making FSCS compensation conditional.

If a bank wants to offer an account protected under the FSCS then it has to operate as a retail bank and ringfenced. No compulsion, but then strip FSCS compensation from the likes of Barclays and the rest of the BSD brigade.  And force them to print a health warning on all their ads in no less than 8pt type for a magazine ad to the effect of

This account is not protected by the FSCS. You may lose all your money if we screw up like we did in 2007/8

and print this on the bottom of every statement, email and other bank communication. Widows and orphans will go with the retail banks, and the sort of people that were attracted to Icesave will go with Barclays and their ilk.

Retail savers don’t need a universal FSCS protection scheme. We just need the option. I’m happy to save in a shares ISA, knowing that I could lose most of it in a market crash. However, I’d like to have somewhere I could park cash without the same feeling that it could all die quietly in the night. I don’t expect cash to give me a return, I’d just like to find it still there when I come back for it.

Others of a more racy disposition might want to take their chance with Barclays, and presumably be compensated with more interest. As long as their noses are continually rubbed into the fact they are giving BSDs the use of their money and they have a history of good returns combined with total annihilation then that’s fine. Consumer choice is what capitalism is meant to be good at, so if Barclays and their buddies want to gamble with their customers cash then let them – as long as the customers are easy with the risk.

UKAR gets on the dog-and-bone to chavs and tells them to pay mortgage before Sky

Sounds all right to me, what’s not to like? Deborah Orr of the Grauniad thought it patronising, but it really is a fair cop. UK Asset Resolution, which represents the taxpayers of this sceptred isle, are using credit checks and have identified 30,000 customers who are going to be in the brown stuff when interest rates rise. These checks will flag those who have rising unsecured debts. Not all of these will be chavs, of course, some will be people who have genuinely fallen on hard times since the heady days of Northern Rock’s 125% mortgages.

However, if you are the sort that prioritises the continued supply of sport on TV over keeping a roof over your head, then to be honest you shouldn’t really be in charge of a mortgage. Some financial vehicles need a modicum of training to drive…

It’s hard to argue with the appropriately named UKAR head honcho Richard Banks

“They need to think about what is their most important debt. It is not their credit card or renewing their Sky subscription, or going out for the latest mobile technology. It is their mortgage.”

Quite. If you haven’t jumped to that then there’s nothing patronising about it 🙂

Apart from that I am generally with the cut of Deborah Orr’s argument. I’m not generally with the Graun’s view of Margaret Thatcher, who did sort out some pretty toxic stuff. However, Thatcher’s abuse of power in seizing control of some collectively owned assets and flogging them off to buy votes was a devastating stroke of evil genius, and council house sales started the ball rolling.

I recall from many decades ago genuinely mixed council housing which had aspirational blue collar families as well as a few of what we now know as chavs. There were some sink estates too, but council housing was generally far more mixed in family incomes that social housing appears to be now.

What Thatcher’s move did, as well as buying her three elections, was give free housing capital to an awful lot of people, which in itself wasn’t so bad, but it bottom-sliced what was to become social housing, concentrating people by the lack of income and wealth. She may not have meant to do that, but it seems to be what has all too often happened. And it forced upon us the current dysfunctional housing market which seems to make nobody particularly happy.

Most jobs in Britain don’t pay enough to be able to afford a house at 3.5 times income, and I would go further in asserting that the standard of financial education is such that there are a lot of people who had mortgages that didn’t understand what they were for. They appeared to be under the misapprehension that they were virtual ATMs which regularly doled out free money, to be used for holidays or Tarquin and Jemima’s school fees, rather than a way of buying a damned expensive consumer good called a house, secured upon the house.

This fact that most families didn’t earn enough to be able to buy a house was acknowledged in the council house system, where only the rich or the frugal owned their houses, but now it makes us hostage to working for The Man for 40 years, plus crazy asset bubbles.

So though I’m all for UKAR ringing up people to tell them to pay the mortgage before their Sky subscription, perhaps we do need to think about whether owner-occupation is such a great idea in a globalised world of unstable jobs. How the heck we row back from here I have no idea, but we do seem to have got ourselves into a hole. Thanks a lot, Thatch…