passive investors, are you destroying your children’s world?

Most of the brouhaha about the rise of passive investing comes from the intuitive feeling that passive investors are only along for the ride, they don’t know or care ‘owt for what the companies they hold passively are up to.  Insofar as they are not engaged shareholders, they don’t guide the companies they own collectively, and the burden of shareholder feedback falls upon a smaller band of active investors.

Most of the argument about this in the FI sphere is a concern on corporate governance and returns, and there are various forms of rebuttal. The dumb passive billions are like the carriages on a train following the remaining active engines, but they switch to a different locomotive depending on the outcome, the fickle bastards. So it comes out alright in the end, is the received wisdom – the passive crew are amplifiers to the results of the active guys, rather than sponsors of their yachts. So the dumb money is safe1, because it follows the smart money.

The Anglo-Saxon business model eats the future, quoth the British Academy

who make the case in an extensive report that the narrow definition of the aims of the corporation in the English-speaking Western world makes companies focus on making money to the exclusion of all else. They are required by law to make as much money as you can for your shareholders. There is an implied “by legal means”, but globalisation means that there is a race to the bottom because what’s legal there isn’t necessarily what’s legal here. That this has been damaging to Western working populations can be seen by the changes in the workplace, particularly since the global financial crash – disaffected Western aspirations voted for Trump, and Brexit.

One of the problems of globalisation is that it has massively reduced the leverage of government regulation. The UK government could regulate to reduce practices that harm the environment, but the activity so discouraged will then migrate to a jurisdiction that doesn’t have such scruples.

On the other side, as buyers we qualify our investments by the desired rate of return. This is marginal enough as it is – the common assumption is a 4-5% real return on investment integrated over decades. The corollary of that is that you need a capital of 20-25 times your desired annual income. Shift that down to 2 to 3% and that starts to become 50 times your desired income; doing that in a 30 year working life starts to look really tough.

A quick spin through the top components of a whole world index fund

Do big firms eat the future? A glance at the undesirable practices of the biggest components of a well-regarded recommendation of world index fund VWRL isn’t happy reading for those with a social conscience:

Apple Inc: Failure to adhere to Chinese labour laws. I’d charge ’em with price-fixing, planned obsolescence, anticompetitive practices, non-replaceable batteries2 and refusal to engage with third-party or DIY repairs. Pictures of workers and pollution here

MSFT: I couldn’t dig up that much dirt. Yesterday’s men, they tried to rule the world and failed, though they were done for antitrust offences ISTR. Bill’s still rich as Croesus

AMZN: So bad Wikipedia has a page dedicated to AMZN criticism. Closer to home they treat people like shit in distribution centres. I think their riposte boils down to ‘treating people like shit is part of our business’ and while it’s true that I left work because I was treated like shit at a critical juncture, it’s notable that for the vast majority of my working life treating people like shit wasn’t a widespread part of my work experience or that of people I know.

FB: Suborning the political process, getting rich on fake news, making sociopaths of us all, aiding and abetting Dominic Cummings, refusing to stop meddling in elections by showing different things to different people. Selling personal data to the highest bidder, lying about it until caught. The problem was manifest from the get-go as the youthful Zuck described his punters as dumb f**s. Evil courses through the company’s veins. If I were God for a day social media is a class of product/service I’d uninvent and rewire human brains so it could never be dreamed up again. Yes, it’s nice that Grandma in York can keep in touch with the grandkids Down Under but the collateral damage in terms of human misery is appalling IMO

JPM: I couldn’t come up with any dirt but they paid a $13bn fine for something to do with the GFC. Presumably they have enough money to pay decent lawyers to get them off the hook, so it must’ve been bad.

Two lots of Alphabet, Google’s holding/parent company: How’s that ‘Don’t be evil’ thing going down with y’all? Oh and this

on Youtube, owned by Google. It’s either irony, hubris or advertising, and I am not clever enough to determine which. Orwell called it forty or fifty years too early with “if you want a picture of the future, imagine a boot stamping on a human face – for ever.” Usual charges against Big Data, suborning the common weal, all that stuff. I’m kinda tickled that the Google search of what’s wrong with Google assumes you have technical problems, rather than searching for the central heart of darkness. Chapeau for the subtle control of framing, guys. What’s wrong with Google? Nothing to see here, move along now.

JNJ: I couldn’t dig up that much dirt.

VISA: I couldn’t dig up that much dirt.

NESTLE: Baby Milk Action. ’nuff said, although the £25 Kit-Kat should get an honourable mention just for taking the piss, I can’t make the case that it’s evil.

It may help me retire early, but I’m not sure I can actually feel good about owning VWRL. Perhaps I can tell myself that’s only 12% of the market cap (and mainly American) and that the levels of evil were dropping as I went down the list to the smaller fry, but to be honest I’m not sure I want to know what the rest of them get up to after this exercise!

On the other hand if you try and stick to being ethical you get slaughtered in the markets. Sin pays. You can read countervailing arguments, but it’s people talking their book. It is interesting to observe that ethical investment screening locks you out of nearly two-thirds of the UK’s largest firms. This suggests ethical passive investing just isn’t possible in the UK market. Passive investing only works if it is representative of the market by capitalisation, and a third just isn’t representative. Turn the telescope round and the British Academy chaps have some point – two thirds of the top British firms are harming the public good somewhere.

Maybe nobody will be able to retire in future if this is cleaned up, the rate of return will be so dreadful you just aren’t going to live long enough to save enough to get out of the rat race. Historically, capital accumulated very slowly across a human life, to the extent that dynastic and ancestral capital ruled society. You still see the background radiation of this in that 25000 landowners own half the UK. and the largest share of a third is the aristocracy, where the land has remained in the same families since William the Conk declared himself owner of all of it after 1066 3.

The problem is that money is power, and power corrupts. Most of these firms get an edge through scale. With the exception of FB, they all provide a useful or valued service, they just happen to cut corners in parts of their operation, and globalisation weakens limits on their ability to cut those corners in dark places. We’ve seen some of this movie before – the robber barons of the Gilded Age, and a lot of the pollution and abusive work practices echo what happened4 in the industrialising West in the last century or two. Tim Worstall would probably say that sort of exploitation is a price worth paying. It worked in the West and it’ll work for the global poor.

Globalisation was good for humanity in general, but not for most people in the West

In the article the crisis of capitalism Milanovic argues that

The western malaise is the product of uneven distribution of the gains from globalisation. When globalisation began in the 1980s, it was politically “sold” in the west – especially as it came together with “the end of history” – on the premise that it would disproportionately benefit richer countries. The outcome was the opposite. Asia in particular was a beneficiary, especially the most populous countries: China, India, Vietnam and Indonesia. In Europe, as in the US, it benefitted the 1%. It is the gap between the expectations entertained by the middle classes and the low growth in their incomes that has fuelled dissatisfaction with globalisation and, by association, with capitalism.

Harvard isn’t noted for being a hotbed of Marxist anti-globalisation thinking, but their Dani Rodrik made a similar case in 1997 in his book Has Globalisation Gone Too Far5, observing that lower-skilled wages have fallen in real terms in the US and then Europe since the 1970s. This fall predated my entry into the workplace. I did not observe this at first, because my experience of the workplace was different from my father’s6. He was a maintenance fitter, I worked in industrial research. The suckout took thirty years to reach me, but reach me it did – I retired eight years earlier than normal retirement age for The Firm to escape this deterioration in the workplace.

It’s quite chastening to see that the pathologies dragging us down now were foretold in 1997, exactly as I reached the halfway mark of my shortened working life. Of course, the problem with working out which portents of doom to heed is that  there are so many of them, most of the things that could go wrong don’t go wrong. The bear case always sounds smarter. It’s still eerie to see that over twenty years ago a forecast of the troubles we  face now was written:

Globalization is exposing social fissures between those with the education, skills, and mobility to flourish in an unfettered world market―the apparent “winners”―and those without. These apparent “losers” are increasingly anxious about their standards of living and their precarious place in an integrated world economy. The result is severe tension between the market and broad sectors of society, with governments caught in the middle. Compounding the very real problems that need to be addressed by all involved, the knee-jerk rhetoric of both sides threatens to crowd out rational debate.

The standard answer to that from Calvinist work-is-good-for-you believers is adapt to creative destruction, get on your bike, or die, suckas. Bollocks to that – life is about more than work, I don’t want to hustle for the rest of my days, because I loathe hustle and self-promotion. Had I been born ten years later, that escape route wouldn’t have been an option open to me.

There’s no good reason to put up with a deteriorating workplace if you can buy manumission from The Man. Arguably the stagnation in living standards since I left work meant I haven’t gotten relatively poorer as a result of rising wages in the time I have been out of the workforce. Observation shows that in the West, and in Britain in particular, work is getting more shit for most people. Rodrik was right.

There’s a case to be made that Brexit was partly a rejection of globalisation, the line that if I am going down, you lot are going down with me. Time will show if they get what they wished for. Let’s hope they like it, eh? They’re not going to get a do-over.

Globalisation is much more popular in Asia than in the West, according to Milanovic

But the dissatisfaction with globalised capitalism is not universal: a YouGov survey showed a very high degree of support for globalisation in Asia, with the lowest support in the US and France.

It stands to reason – it has been a win, particularly for the Asian middle class.

Who has gained from globalisation, 1998 to 2008. Tea-leafed from Milanovich’s report in the Harvard Business Review, “Why the Global 1% and the Asian Middle Class Have Gained the Most from Globalization”

Right-wing nut-jobs like the Adam Smith Institute’s Tim Worstall makes a cogent case that globalisation has been a good thing for humanity in the round. He is probably right in that nobody has experienced an absolute terms retrenchment7, but if I had followed my Dad into a blue collar job and Tim showed up in a bar telling me “chin up old boy, your end of the boat had to go down for the greater good, but though you can’t buy a house your telly’s sharper and your phone isn’t screwed to the wall like your Dad’s” then he might end up with a robust and physical riposte, because I don’t particularly care about humanity if I am feeling shat on. He’s also got an answer to the tosspot8 David Attenborough yammering on about environmental issues and that there is no problem that exists in the world to which the right answer is ‘more human beings’, basically don’tcha worry your little head about that, capitalism will fix that too.

Even on a white-collar income, Dani Rodrik’s declining trajectory is shown in my life. I discharged my mortgage ten years later in life than my Dad did, on his single household income. The arrow of time still points in the same direction, the retrenchment in home ownership9 in more recent generations. Worstall would say so what, Millennials will live longer than previous generations, and they have far more choice in what to spend their incomes on. If he makes the case in some hipster east London bar through a mouthful of smashed avocado on toast, he may be met with some pushback in the form of “as long as those things we can afford don’t include buying a house or having children, yes”.

Is your passive FI/RE dream eating your children’s future?

The British Academy lays out the charge on page 27, Corporate Financing that the arm’s-length passive ownership is not only detrimental to the common weal, but it amplifies the actions of bad actors

Traditionally, corporate financing has been concerned with the interests of investors alone. Stock market listed companies in the UK and US are dominated by dispersed passive shareholders who do not provide the active engagement with companies that is associated with larger share blocks in other countries around the world.

In particular, universal shareholders who hold the global portfolio of shares through index funds have risen to the fore. To the extent that there are engaged investors, they take the form of short-term hedge fund activists who hold blocks of shares in companies for an average of between two to four years.

What is for the most part missing in the UK and US are long-term, engaged holders of blocks of shares who act as true owners of corporate purposes . Since one cannot have a relationship with the anonymous, the absence of identifiable holders of blocks of shares undermines the provision of long-term relationship forms of equity finance. The result is not only insufficient governance and stewardship by investors but also a deficiency of committed owners of corporate purposes.

I am not clever enough to see if they are right, but at least some of that seems to have a grain of truth to it. This bell has been tolling for some time – 8 years ago I watched the programme Finished at Fifty that showed a stark contrast between the lifestyles of a Chinese middle class aspirant in an economy with rising prospects and a fifty-year old Brit who had already been offed from one job, carried too much mortgage for his stage of life, lived high on the hog and wasn’t looking at the road ahead. Some of the anger I had in that post is because I saw myself in him, and I was half-way through extricating myself from that sort of folly. We hate seeing in others the dim reflection of our Shadow, and that was why watching this berk do what I had done two years before got on my tits so much…

The stench of decline in the West has grown worse since that programme, in the English-speaking world it’s names are Trump and Brexit, and they harken back to making America Great Again and its Mini-Me Brexit Putting the Great back into Great Britain Again over here.

Putting the Great back into Britain

It just ain’t gonna happen, guys. Sic transit gloria mundi. Well, it’s going to happen for the better off, but although I am over halfway up the UK wealth scale10  I am nowhere near safe from that firestorm, and I don’t even have the right to live elsewhere any more11 any more because of these nostalgic dreamers of Imperial glories past selling their jingoistic story.

Jacob Rees-Mogg will do all right out of it

Jakes will do all right out of it. Of course he’s not influencing Somerset Capital Management‘s investment decisions since he’s an MP. So that’s all tickety-boo and above board then. But the engine of globalisation is driven by our money as well as his. Perhaps I am closer to Tim Worstall than I like to think. It’s not a good feeling.


  1. I am sure one day there will be someone with enough cash to be able to flush this dumb money by pumping and dumping enough stocks along the index rebalancing cycle, but it hasn’t happened so far that we know of. 
  2. The battery works on a chemical process and has a finite number of cycles before it loses capacity. Once upon a time you could change the rechargeable battery in a mobile phone just like in any other electronic doo-hickey. Apple led the way by glueing the damn thing inside the case, so you get to throw the whole thing in the trash when the battery is knackered. 
  3. The Domesday Book of 1086 is the first and last comprehensive record of land ownership in England. Unlike any other self-respecting European country the cadastral records of the modern Land Registry don’t cover 14% of the country because the aristocracy don’t want you to know how rich they are. Land is their preferred method of preserving capital across the generations. Estates aren’t sold when inherited, so they can do this on the Q.T. 
  4. for instance the Dhaka garment factory fire of 2012 has echoes of the Triangle Shirtwaist disaster in NYC a hundred years earlier 
  5. Yeah, that’s an Amazon link. I am part of the problem, as I’m sure are most of you. Don’t like His Jeffness? Google it…oh never mind 
  6. My Dad retired just after his 65th birthday, having worked at that company for 23 years, but he started work at 14, so he worked for 50 years in total. 
  7. I find this hard to square with the increasing signs of overt poverty in the UK, the increased amount of visible homelessness, the food banks that Iain Duncan-Smith regarded as just the third sector picking up the slack rather than the direct result of his vile disdain for the lower orders not being able to ride out the five-week delay built into Universal Credit welfare reforms pour encourager les autres. But let’s not pick the fight with Sir Tim Worstall, eh? 
  8. If you’re about to pound the keyboard giving me what for about the dastardly disrepect shown to Sir David, may I respectfully suggest to you that your irony detector has failed in service. 
  9. You can make the case that home-ownership isn’t as well suited to modern insecure working patterns. The trouble is that the rental market is too skewed to favour landlords in Britain, with virtually no security of tenure what with the section 21 eviction at short notice without reason, though there are moves afoot to change this. That won’t take things anywhere near the sort of security of tenure German renters have, for instance. 
  10. the median UK household wealth is about £260k according to the ONS 
  11. I suppose I could buy Maltese citizenship but Brexit has shown just how frail supranational entitlements of residency really are. You gotta admire Maltese chutzpah, when the EU gave them a bollocking for selling citizenship they simply raised the price (to more than I can probably afford) and said that that was all right then. Malta’s got other serious problems – it is far too close to obvious geopolitical hazards, the government seems to have issues with journalists who find out too much. Before Brits point fingers at those Maltese fly-by-nights note that the UK government sells citizenship on a sliding scale of £2,000,000 to £10,000,000. Interested? Apply right here on gov.uk. The extra £8M readies buys you three years off the settlement delay, and you can fast-track the application for 500 nuts (on top of the £1600 fee).  We don’t give you all that US bollocks about moral turpitude. Acts of baseness, vileness, or depravity in the private and social duties which a man owes to his fellowmen are absolutely fine with us. As long as you do your crime and skip the country where you perpetrated it within 12 months, or your criminality is more than 10 years ago we’ll whistle a dancing tune and welcome you and your money with open arms. What’s more, unlike those money-grabbing Maltese the money is still yours, all we ask is you lob it in a UK bank and convert it to sterling. Ta muchly. Obviously if you wanted to get EU citizenship you are SOL, but £2mill ought to get you a suitable gated pad with a concierge, so you don’t need to fear the revolting proletariat in the years to come. Toodle pip old boy and the best of British luck in sharing your ill-gotten gains with us investing sagely. 

Crafty Klarna card bites savvy student

Fintech is a jazzy name for innovation in ways of providing you with financial services. It usually involves a mobile phone, which should never be involved in anything valuable to you, because of the ease with which ne’er-do-wells can run off with your phone number via a SIM swap. But it doesn’t have to. The trouble is in the word innovation. A lot of innovation is put into parting you from your money. It began with Access being your flexible friend, helping out Money when you run out of month. The song’s still the same after 30 years, but innovation is there to riff on the tune.

The problem is that innovation means that your usual spidey sense for scams or bad outcomes doesn’t work. Take Klarna, f’rinstance. Classic piece of fintech, it’s designed to reduce friction in spending for the young. I’ve already had a grouse about Klarna this time last year in the YOLO train-wreck post, and now there’s this story about a young lady who has only just discovered the impact of Klarna on her credit score.

Our Klarna victim

Your grizzled scrivener has a sneaking admiration for Erin, because at 21 she is keeping an eye on her credit score and seems to be managing her general finances with a competence that my younger self failed to achieve. I had to chase earning more to assuage the leakage from my pay packet into things like beer, music and high living. OTOH my younger self was still not so far from the principles my parents had instilled

Don’t spend more than you earn, son, and if you have to do it, only for non-wasting assets. Do not borrow money for consumption

Klarna seems to be a specific case of a new class of fintech, basically designed to part the poor from their money, by salami-slicing the sticker shock over time. It comes with instagram-friendly puffery but the basic premise is that £100 sounds high, so make it four lots of £25. It is absolutely true that it’s easier to pay off four lots of £25 from four pay packets than one lot of £100.

Always pay cash for your thneeds

What you must not do, however, is to then go and do that another three times that month, thinking to yourself it’s only £25, I can easily manage that.  Because four lots of £25 is just as tough as one lot of £100, but now you’re stuck doing that for four months rather than one. This is the fundamental scam behind all these slice-it-and-dice-it buy-now-pay-later schemes, they’re trying to get you to spend more.

The rule is simple. Always pay cash for thneeds. What is a thneed? The Lorax had this taped way back in the 1970s. It’s something that you think you need, but the subtext is you don’t really. And it destroys the environment in some way. Fits fast fashion perfectly.

In the personal finance world we call these Wants, as opposed to Needs. There’s nothing inherently wrong with Wants, they make life a bit more interesting and colourful. But you should never borrow to buy Wants. Pay cash. Or use a credit card but pay it off at the end of the month.

If you can buy it with Klarna, it’s a Thneed. You can’t buy food, or toilet bleach with Klarna. Take a butcher’s hook at Klarna’s Instagram. It’s lifestyle, not substance. Strapline

The Pay later people. Highlighting UK retailers smoooth enough to offer Klarna.
Shop our Instagram here

For God’s sake don’t borrow to buy shit like that. If you have money left over at the end of the month, fine. Head on over to MSE’s Demotivator first, however, to find out how many weeks you have to work a year to buy this garbage.

The trouble with Klarna is it’s a ragtag mix of different products

Pay in full in 30 days? It’s a charge card. Pay in 3 instalments? It’s a personal loan application, but for a pissy small amount. Worse still, use the instalment procedure often, and you look like a deadbeat trying to get loan after loan after loan, which means any self-respecting financial institution is going to be very wary of lending you money. If you’re going to take on a hard credit search, then borrow a decent amount of money in the thousands, don’t piddle about with £100 here and there.

Sure, you don’t pay interest if you pay over three months. But you hurt your chances of getting a loan, credit card or mortgage. Here’s a radical idea. Save up for your thneeds before you buy them. There are things in life you do have to borrow money for, and they are important enough (housing, a buffer against losing your job etc). Don’t screw your chances of getting to borrow when you need to for saving a couple of month’ interest on your thneeds. If you must buy your thneeds before you have the money use a credit card, preferably just after you’ve paid off the balance. You get a month and a half of interest-free credit if you pay it off, and if you don’t, then at least it doesn’t crap on your credit score.

Klarna is the fintech version of your grandmother’s catalogue shopping

Back in the day there used to be catalogues of consumer crap and thneeds and clothes delivered to working-class neighbourhoods. These advertised some ghastly object, say for £50. It wouldn’t say this was £50, it would say that this was 50p a week over three years. Their hope was to reduce the sticker shock so people would think that’s only 50p, I can afford that for a while, let’s have it. Then they get to pay nearly £80 over the three years. Klarna is using that sort of principle. It’s not quite Brighthouse, which is the online version of the catalogue scam.

Fintech credit is bad, but fintech isn’t inherently bad.

New ways of borrowing money are bad for your wealth IMO. There are established ways of borrowing money: mortgages, bank loans and credit cards. We are used to them and they are reasonably regulated. We don’t need new ways of borrowing money in funny ways, particularly for Wants.

However, some sorts of fintech are good IMO. I use Starling Bank. Starling means I can buy things in foreign currencies without eating the stupid fees that old-tech banks charge, just because they can. The ability to switch off the card and re-enable it has some value, as does the immediate itemisation of card purchases including contactless. All good stuff. Fintech is doing some good stuff with investing, reducing transaction costs.

If you can’t Pay Now, then Don’t Pay

Klarna. The Pay later people.

The red flag is right up there. Pay Later is always bad for your financial health in some way. If your current self can’t pay now, what do you know about your future self that means they can pay later? Particularly when your future self is only a month away? When was the last time you saw a mortgage advertised as Pay Later? That’s what it is, but at least it’s on an appreciating asset. Nothing you can buy with Klarna is an asset, it’s for consumables. Pay cash for that sort of thing, or use a credit or debit card and pay it off in full. If you can’t do that you can’t afford it, and your next-month-older-self won’t be able to afford it any better than your current skint self. Buy your consumer shit just before the end of the month, with cash or a debit card 😉 Then you know you can afford it. Want to buy a consumable that’s dearer than a month’s spare cash? Here’s a radical idea. Save up for it beforehand. No spare cash? Don’t buy it.

Klarna. Just Say No. Erin can buy several sizes, try them on and return the ones that don’t fit using a regular credit card. If she’s buying enough that five of each size is maxing her credit card limit then perhaps she needs to think about her fashion habit, but she’s probably OK.

For sure if she screws up she will end up paying interest, but it sounds like she’s organised enough to avoid that – just don’t buy fashion in the week before her statement is produced, or have two credit cards, one with a statement date at the beginning of the month and one in the middle, and use whichever one has been billed most recently. And make sure to pay them off. In full.