Fear and loathing in the markets again

The Ermine household decamped to Wales for a few days, near Saundersfoot. Over a decade ago I was halfway through my three-year plan to gain manumission from The Man. The halfway point of any drawn out goal like that is really tough – you have lost the comfort of the port of departure, and are on the stormy uncertain seas without sight of the distant friendly shores.

I was living on roughly the national minimum wage, in order to maximize the benefits of salary sacrifice. This was greatly softened by the fact we owned a house outright and several acres of farmland which Mrs Ermine grew a fair amount of our food. But it was tough, and for a holiday in that period we took two weeks out, touring south Wales in our campervan, staying on campsites. Mrs Ermine has a penchant for spas, and while we stayed at Trevayne Farm campsite one afternoon she sampled the spa, and in the evening I walked down from the campsite and we had dinner at St Brides Spa Hotel. It wasn’t cheap, but not having gone out to a restaurant for a long time the experience was great. Hedonic adaptation means eating out every week gets ho hum, but if you go big once in a while it really hits the spot.

This time we stayed in a flat in Saundersfoot itself, which is a better experience than having to walk back three-quarters of a mile uphill to the campsite, and I got to see more of the strange heritage of the place.

It used to be a coal harbour, and the train ran along the now rather pleasant promenade along to Wiseman’s Bridge going through some tunnels carved through the dark rock, some of them long enough to be a struggle to see your way in the middle.

King’s Quoit, Manorbier

The Wales coast path had some remarkable prehistoric monuments, and we encountered these bad boys with curved crimson bills. I have never seen choughs before.

Chough, Manorbier Bay, Pembrokeshire

One downside of Saundersfoot beach and walk is it is dog-infested. Despite the council’s fond belief that dog owners can read, my experience is they don’t give a shit about signs, and assume everybody is as delighted to come across their precious pooch as they are. “Oh he won’t bite” they exclaim lamely when two barking rows of drooling teeth jump up at you.

Dogs not allowed on that side of the beach. Except for these ones, because they are special.

The photo, taken around noon on the 11th May, shows that these dogs were special, and rules didn’t apply to them. Neither the rules saying no dogs on that side of the beach, nor the rules saying keep your mutt on a lead, because it’s so much more fun for Fido to race up and down the beach, other beachgoers be damned. That’s bad on the beach, it’s really quite unpleasant in the tunnels.

crisis, what crisis?

I come back after about a week away and Monevator’s Bonfire of the Vanities seems to indicate that it’s been a tough time in the markets of late. GBP investors’ ability to shoot straight is handicapped by the falling pound, which flatters apparent returns.

Looking at my iWeb ISA, it didn’t look so bad, though of course that’s in falling pounds. I sold out a fair amount a little before the turn of the year, because I had done reasonably well coming out of the Covid crash and unicorn shit is on the rise. There is a lot of gold in there, because I had a plan to sell out gold from my ISA and rebuy it in my GIA, and buy income in the ISA with the liberated cash. Because: income tax and inflation.

Although discharging capital gains is a pain, with a gold ETF I can swap some SGLP for a gold ETF run by Wisdom Tree or SPDR, which would harvest capital gains for the cost of the turn.

As it was, I started buying gold in the GIA, but then Putin switched from exercises to war, and although I had started buying income ITs by selling gold in the ISA, I didn’t sell the rest of the gold for cash, so I rather increased my total exposure to gold. I will continue to hold my capital in the ISA as gold rather than cash, selling gold only just as I am buying. For some reason you don’t seem to have to wait for settlement in an ISA, so other than the £5 transaction cost there’s no advantage to selling it for cash ahead of the purchase.

I will admit to a fair amount of schadenfreude about tech, which I viewed as vastly overvalued before, and other than my exposure as part of VWRL didn’t really have much exposure. I do take the point that this will have given up return although I wasn’t quite as heavy on dividend paying equities as GFF, VWRL is my largest equity holding and pays almost diddly squat in yield. 1.56% isn’t going to make anybody fat. One needs £600,000 to capital in VWRL to earn £10k in dividends. I am some way off that.

Tech darling SMT versus VWRL. I gave up that return by not buying SMT. Looks like SMT is giving up that return all by itself now

Oddly enough it is in my Vanguard ISA index fund holdings I recognise myself in Monevator’s observation:

In contrast every active investor I know – including the UK-based ones who invariably fish in the mid and small cap arena – has been dragged through a hedge backwards.

Yeah. There was too much VFEM and VMID in my Vanguard index ISA. I still feel these dogs will have their day, but probably not for a couple of years yet, because I clearly jumped the gun. The increasing cost of capital will hurt both. I also bought a load of VWRL in that account, and took a minor bath on that. Trust me to balls up passive investing 😉

But in my main ISA and GIA, not so much crisis. Despite the somewhat active approach. At the risk of being classified as Monevator’s house troll

Important exception being the faultless Monevator house troll who will tell us in the comments he sold everything and put it all into shares of BP on 3 January and who can doubt him?

I did buy BP, though later than January. It’s up 10%, thanks 😉 Riffing on the get a yield from the energy theme I also bought ORIT which has done OK. Slightly denting my house-trolldom I bought TRIG which is lacklustre, and IUKP which is a 10% bust. The Ermine and property don’t really get on. I should suck up my 10% loss in IUKP and build up my stake in this falling knife as I have zero commercial property other than this small stake, though higher interest rates do not bode well for property. Sometimes you have to buy in what you don’t believe in. Particularly in bear markets, which presumably this is, judging by the breast-beating and keening noise.

Crypto – that is about a third down. It also transpires that should Coinbase go bust I will lose everything. So I will limit the total cash I have contributed to £2000, which gives me a more few bites at the cherry into the suckout. I can afford to lose £2000, I have seen a lot worse in equities.

I could address the Coinbase going bust issue by using a personal crypto wallet, but that seems to either involve a mobile phone, which has serious security problems of its own, or complexity issues. Perhaps I do need to run a machine that is airgapped from the internet for financial stuff, but that’s a lot of pain and capital cost to accept to safeguard £2000. DeFi is all very well but all of a sudden you have a serious IT management problem to try and hang on to your crypto. We invented banks for a very good reason, carrying shitloads of tokens of wealth about is a great incentive for ne’er-do-wells to steal them from you. I am not sure I have Monevator’s passion for crypto never mind Finimus’s talent, but it is an interesting ride. Much better than matched betting, which I loathed doing with a vengeance, though the return was better for me. I’d rather go back to work than do that again.

I hadn’t really ever thought about that risk with phones and financial apps. I am considering moving all financial apps to my non-phone tablet. I don’t find it valuable to do anything financial on a phone out and about, because I don’t carry a mobile phone routinely. I don’t need to take this extra risk when I do. I am happy to use cards.

Oddly enough, Vanguard haven’t closed the old ISA from last year, although it is totally empty now. The transfer to HL in specie went smoothly, taking about a month. I have deliberately not contributed to a new ISA yet, so I believe my HL ISA is not part of this year’s ISA. If the Vanguard ISA remains open for another month or so I may use it. I ballsed up transferring my old Charles Stanley ISA to Vanguard, because I ended up paying percentage fees on well over 80k which is bonkers. What I should have done was open Vanguard as planned, but only drip in my 20k contributions as I bought over the year. That keeps percentage fees low, because the balance is low. And I should have moved the Charles Stanley ISA to HL last year. That would have capped my fees to £45 at HL and less than £30 at Vanguard. However, at the time I was overly hung up on having the flexibility of Vanguard’s ISA.

Vanguard are cheap on transaction charges to buy, a lot cheaper than HL, so I may use them as a feeder account and transfer out in specie to HL again next year. I need to stick with buying Vanguard ETFs because the £45 cap on HL only applies to shares (which ETFs are) and not funds, but this is not a hardship for me. It is a neat combination, that gives me 1+1 platform diversification against iWeb and low purchase costs. I have been happy with Vanguard’s batch order buying of their ETFs, which eliminates transaction costs.

Rust never sleeps

At the moment the stock market hasn’t been the major threat to my networth, though that time may yet come. What has been a threat has been inflation. RPI at 7.5% has already overtopped the 5% cap on my pension. This makes me permanently poorer by 2.5% regarding that income. This is cumulative.

The amount of steam coming out of my ears about that was somewhat reduced by observing my colleagues in a different part of the scheme on an uncapped CPI rate were increased by 3.1%. This could catch up with me next year, but there is an argument to be made that the difference in RPI and CPI could compensate for the odd hit of the cap.

Unfortunately unlike some I don’t believe that inflation will drop after a couple of years. That’s probably due to a more pessimistic outlook all round, and hell, the bear case always sounds smarter. I think that the inflation we are experiencing the result of never repairing the damage of the GFC in 2007-9 but running away from it with artificially low interest rates. The can was kicked down the road, and won’t be kicked any more. There is also the whole Western secular decline issue – while the likes of Putin perhaps over-egged the pudding, he has some point. Xi seems tacitly on Putin’s side, not that he would necessarily have picked that specific fight. It is a useful heads-up on where China might want to make their financial system more resilient and dollar-independent. That may have a knock-on effect on the dollar as a reserve currency, it’s hard to envisage that changing, but history shows China plays a long game. The loss of reserve currency status will have interesting effects on American prosperity, in a curiously Chinese way.

On the other hand, what Xi is doing in Shanghai seems bonkers. Perhaps it is a pissing match showing he can dominate the population. I can see that sort of exercise of power and making millions of people do your bidding must make you feel big and powerful inside. Stanley Baldwin was right. The bomber will always get through, Xi just ain’t gonna win that fight given the way the rest of the world is carrying on. The battle will start again on the first incoming international flight.

The shutdown in itself will have a chilling effect economically on the world. At best the cost of living will get worse before it gets better. At worst it just doesn’t get better. This is what secular decline looks like. However, you can always fiddle the inflation figures.

Apparently the Government is consulting on a proposal to reform RPI to align it with CPIH, with the change happening sometime between 2025 and 2030. So I am going to hope that is closer to 2030 than 2025, which should hopefully let some of the steam out of the pent-up inflation 😉 I am also grateful to my slightly younger self, who took a look at the quite heavily promoted “exchange some DB pension index-linking for a higher initial pension” and thought “bollocks to that, if it’s good for them it’s probably bad for me”. High inflation early in my retirement career, like now, would have made that a spectacularly poor deal.

I have high hopes for a delay to the demise of RPI – I have benefited from Government sloth before. As I finished work ten years ago I was fearful that they might terminate Class II National insurance rates – where if you earn a small amount you get to pay about £150p.a. to get an added year of State Pension rather than the roughly £700 for Class III voluntary contributions. They bottled on that decision. Class II NI is an absolute steal – an index-linked annuity for 97% off commercial rates, and doing it that way for eight years saved me about four grand in the difference between Class 3 NI and Class 2. I am done with NI now. Until they add it onto income tax…

A day of reckoning for the early FI/RE movement

GFF’s post on those who live by the SORR will fall by the SORR resonated with me. The early FI/RE movement has changed significantly from the people chasing FI in the early days who crawled from the wreckage of the GFC in 2009. Those people were shit scared of the stock markets, and had to fight their instincts to buy into it, albeit with some notable exceptions leading the charge from the low-water mark. There was a lot more about frugal living while you were working to build up a stash. Many of these voices have disappeared from the Web, as they passed over the event horizon of retiring, or perhaps concluded the wall was too high to climb.

Nowadays, there is less about frugality and more about returns, in some cases massive returns on capital with tech or crypto, or NFTs or memestonks. Crypto is pretty much speculation, relying inherently on the greater fool theory – it is tulip bulbs, not farms and factories producing things people want, or tech looting people’s heads and making them buy shit they don’t need to impress people they don’t like. At least tech is extractive, like mining, if not productive. The low cost of capital and increasing financialisation has distorted prices and incentives for thirteen long years. Nowadays retiring at 50 is lacking ambition, 40 is the new 50 as the time to clear the workforce.

The long term (multi-decade) return from the stock market seem to be more like 4 to 5% and that sort of thing needs RIT-like levels of Saving Hard, or starting out with a lot of capital to be able to retire in your forties. Of course you can be lucky – but if you rely on something like crypto to make your stash, then as soon as you have enough, get it out of that unproductive volatile asset and put it into either a much less volatile unproductive asset, or shift it into a productive volatile asset and hold it. If you are extrapolating a 13 year bull market and think that equity balance is your net worth, then look at the bottom line in GBP. Now halve it. That’s probably how much it is really worth 😉 You may be retired for 30-50 years, you will see those dark days at some point.

If you have enough ill-gotten gains then you have won the war. Now get the hell off the battlefield. GFF’s example redditor was somebody who didn’t clear the battlefield, and got to pay for the ride

Short-term meme stock pump-and-dump traders can win for a while. But eventually most pay for their ride.
Indeed a lot of newer investors are getting off the rollercoaster feeling a bit sick and wondering where they lost their wallets.

Easy come, easy go… It’s hard to cash in your chips after a winning streak. Getting out of speculative assets into productive assets is key. In a long bull run some element of speculation has its day, because a rising tide lifts all boats. Bears tend to bash the more speculative stuff first, where the valuation isn’t supported by fundamentals, or the valuation is lifted by speculative expectations of jam tomorrow.

I do get the irony of this coming from someone holding a lot of unproductive gold. Compared to a bitcoiner or memestonker I am at the widows and orphans end of the investing spectrum. I also don’t expect to be holding that high a proportion of deadweight in three years’ time. Hopefully the bears do their work by then. An improvement in valuations, particularly at the tech end, is long overdue, and improving valuations is what bears do, by mauling prices.

It feels much more like the real thing compared to 2020. Unlike the Covid bear market, I am not tempted to short this one, because if it is snapping at the heels of what has been a very long bull run, it feels like the processes of internal decay and decline are finally beginning to overwhelm the irrational exuberance that tolerated valuations only surpassed in the dotcom boom. Covid was an exogenous shock, this seems much more like an honest bear, munching its way through the fat of irrational exuberance.

one fellow managed to send out the bat signal at the low-water mark in the GFC Take a bow, Monevator.

It is hard to invest in bear markets, because nobody rings a bell at the bottom.  You buy shares for perfectly good reasons, and see the price mauled. Then you get to do it again in a month. And again. And again. How long is this going to go on for? Is this a one year bear market, six months, three years, or a long slow slog like the grind out from the dotcom bust? Somehow you need to live with that and continue to buy, because although the purchases you make in a bear market will make you feel awful in seeing the short-term losses, when you look back from a few years hence, some of those will have been your best buys, buying you a steady income for years and years at a low cost of entry. Bear markets are the time to build a HYP. Mine was built largely before 2015.

There be trouble ahead, particularly in the cost of fuel. I responded to some of that by buying BP and some renewable ITs. At this stage it is difficult to qualify how much is peak oil, how much Putin, how much Western decline, how much Covid shock. But I can see that at some point I may want to supplant my pension with income from either the ISA or the GIA. I have been adding HYP like investments to my GIA, to target enough income to consume my dividend tax allowance. This is only £2000, so at an example 4% yield I could park £50,000 in my GIA. Since this is a use it or lose it allowance it’s worth having, until such time as I have uncommitted ISA allowance left over. It roughly matches anticipated rises in the cost of fuel. In the ISA I am drip-buying index stuff for now, because I’m not sure this bear market has really got its boots on. If it does, then perhaps the amplification of IT discounts may mean we see these days again.

financial markets are not the only fruit

Some investments are non-financial. The house owner-occupiers live in is probably the commonest non-financial asset, inasmuch as the usufruct of the asset stops you paying rent at market rates. There is some dispute on the non-financialness of owner-occupied housing but I am not convinced, in the owner-occupation case. A Rachmanesque BTL crammed full of students is a financial asset.

Other non-financial investments include energy saving measures. Given energy is a rising cost, we have decided to spend capital on replacing a gas fire with a wood burner. The gas fire was valuable, inasmuch as it doesn’t require electricity unlike the central heating boiler, but since we use a gas boiler it doesn’t give us diversity of energy source. The advantage of wood is that it is often local, and can be stored on site – we are also spending some capital on constructing a log store.

In the last house we had some fellow who had started up his own business making garden furniture and bits and pieces. He did a great job for us for just over £200. This time we get to do the job ourselves and the cost of raw materials is nearly £500. The log store is about twice the size, however, since we have the realestate. You can do it a lot cheaper using pallets or IBC frames, but we will have to look at this damn thing every day, we are not so hard up as to use pallets as we did for the extension to the old log store. So I took some inspiration from these guys, I find their energy tiring, they have moved more times as owner occupiers than I have! I can only presume there aren’t any ankle-biters in their breathless European journey. I upscaled the thing bigly and used FreeCAD to simulate it, because I am not a real carpenter able to picture a design in my mind’s eye.

I am probably too old to chop wood myself these days. So we will pay people to deliver it, not owning a hedgerow full of old trees, although I am not above cutting pallets up with a reciprocating saw. I trim the resulting planks with a circular mitre saw.

The Guardian has had a persistent hate campaign on wood-burning. Particulate pollution is clearly an issue. The Government is more measured as is Which magazine. The manufacturers, unsurprisingly say it’s all tickety-boo, nothing to see here. Mandy Rice-Davies would probably like a word.

We decided to take this risk, despite it being really hard to qualify what exactly it is in the cacophony of conflicting opinion. We had a log-burner before without experiencing problems. The diversification of fuel and local storage is valuable. Energy is going to be a problem in future, and should we end up being forced down the heat-pump route in the long run, domestic heat pumps have a low peak output capacity ¹ without using larger radiators, so the boost on very cold days will be welcome. An air-source heat pump efficiency falls as the outside air gets colder, so like a flawed sword, the damn thing will fail you when you need it most. They are more efficient at heating in midsummer.

Another investment I made was reactivating the gravity-fed shower fed from the hot water tank. Before we bought this house it was rented out to three people, and they must have struggled with the hot water capacity for the shower in the morning, because somebody took great effort to add on an electric shower. How the landlord got away with the 1970s open burning gas fire beats the hell out of me, I am sure that sort of thing isn’t allowed these days. We half expected the log burner surveyor to condemn it and isolate it as soon as he saw it 😉 I don’t like electric heating, these are big loads and you are carrying more load of the green crap. The Energy Saving Trust already admits a heat pump doesn’t save you energy costs on a gas boiler because of that. I am clearly on the wrong side of the right-thinking zeitgeist but I don’t want to pay more for my energy so other people can pay less, and a good place to start is don’t heat with electricity where you have an alternative. There will, of course, be some incremental gas consumption, but heating water with electricity in Britain is a mug’s game because of all the green levies. These parasitic costs are about 60% of the cost of electricity and 40% of gas. At least I am now paying less towards insulating other people’s houses.

To qualify this I bought an Efergy Engage hub. Inquiring minds might want to know why I don’t take a smart meter, but I am of the view that the longer I can hold that sort of thing off the better. A smart meter offers me a display until I change supplier, but offers them the option of remotely cutting me off, either through intent or through the battery failing. Being a recalcitrant old git, I don’t see why I should take either risk to make their life easier, so I have responded to all offers of smart meter installs with a polite form of go forth and multiply. I am happy to monitor using my own kit. If the battery runs out I can change it, but more importantly, I don’t lose power randomly, I just lose data. It’s not a hard choice to make. I confess to being totally confused why a smart electricity meter has a battery that needs replacing. A supercap would be more than enough to keep the memory over a power cut. They can shut down the measurement circuitry and the reporting back to Big Brother via the mobile network in a power cut, because you’re not consuming electricity when there ain’t any.

The Efergy system has enough time resolution to qualify short high power loads properly. At first from a gut feel I didn’t think that a five or 10 minute shower would be a particular hit, but the instantaneous load is horrendous – 9.6kW peak, more than the fairly antiquated electric cooker roasting a chicken for an hour and a half, at a guesstimate roasting a chicken is about 2.8kWh, whereas a ten-minute shower would be 1.6kWh. The difference is we don’t roast a chicken every day. There is nothing else in my house that takes anywhere near that amount of power. The implied current consumption of 40A is scary in a domestic setting.

Restoring the gravity-fed shower was reasonably easy. I paid a little extra for a smooth-bore shower hose and a Mira single-function shower-head, to minimise resistance. Thankfully the previous owner had done the work of raising the cold-water tank onto a platform in the loft by a metre, which is the easiest win to get a decent flow rate from a gravity-fed shower in an upstairs bathroom.

I did consider switching to gas for cooking, but an electric fan oven does a much better job IMO and replacing it with a double oven and induction hob is probably a better way to go, since we don’t normally fill the oven for just two of us. Plus there’s the Putin effect on gas, I don’t want to increase my liability. Plus at one stage they will shift more of the the green crap onto gas. It’s not just equities where diversification is in order.

One more non-financial investment was getting a 250W motor front wheel mod for my pushbike. Although I am of the view that most local places I want to go are within two or three miles so perfectly walkable, there are some destinations in the three mile plus region where a bike scores, and it also scores carrying modest loads. It’s hard to say whether I will ever recoup the cost of the £500 mod, but it makes cycling a better experience, because I can ignore wind to a large extent and the hills are more tractable, though most of the area I cover is on the level. The downside is at the moment I have lost all front lighting capacity because there is no space on the handlebars. It also feels a little bit bonkers to piddle about with battery lights when I have 36V@250W on board. The supplier looks the other way and points you indirectly to how to mod the software to can the 15mph upper limit, but I haven’t bothered, because 15mph is quite fast enough for me on a pushbike with rim brakes thank you very much. This is probably a recreational/quality of life win rather than an non-financial investment.

We are entering strange times, and there will be a winnowing in the FI/RE space, with the rotation from speculation towards investing, and perhaps some good old-fashioned frugality and saving. Fundamentals start to matter as the tide goes out. I remember the shift well from the dotcom bust – dividends were irrelevant trash, it was all about rapid share price appreciation and the promise of jam tomorrow. Then a long, hard rain began to fall, from 2000 for several years of sideways grind. Presumably those people still standing were grateful for dividends again across the intercession, as share price appreciation disappeared 😉

Don’t they know there’s a war on?

If the inflation and energy prices somewhat frighten me, who has more resources behind me than many, it’s curious that Johnson’s crew don’t even seem to bother pretending they giveashit. They seem to wear the Nasty Party badge with pride. Obviously I don’t want to subsidise the power prices for the poor by paying more than I have to, but I’m not asking them to vote for me, so I don’t have to pretend to give a shit.

I can find the difference in price, and allocate capital to reducing the price/improve resilience. More than one in ten Britons was in trouble paying for energy in 2020, and I guess this will be worse this winter. We’ve seen this rocketing energy costs movie before, with a different cast of characters, in 2012.

We are funding a proxy war with a significant worldwide energy supplier, and like in 1973, when you do that fuel prices tend to rise. It is sometimes necessary to put up with privation to live your values, although the price rises mean the punch on the snout for Putin is rather offset by the increase in value of what he can now sell to China and India, though gas is a more local sort of thing.

A little bit like with changing the RPI definition of inflation to make it look less bad, the Government have opined that

In February 2022 the Government projects that fuel poverty will continue to decline in England in 2021 and 2022 despite very large increases in prices. This is due to a number of different factors including how fuel poverty is defined in England, a lag between when prices rise and when they are included in estimates and the impact of the energy bill rebates.

So that’s all right then. Let’s all whistle a dancing tune, hope there is no recession and party on. Nothing to see here. Honest. Shit will not go down this winter. It’s a bit like Lee Anderson telling us that the food bank he was at isn’t really necessary, because

You’ve got generation after generation who cannot cook properly. They can’t cook a meal from scratch. They cannot budget.

Well, maybe, but as a government you really ought to pretend to care a little, rather than telling people they are incompetent nincompoops who Must. Try.Harder. Or not, perhaps politics is so tribal now that in the same way as Donald Trump claimed he could shoot someone on Fifth Avenue and not lose voters, Bozza can’t be arsed with pretending he gives a toss.

I will buy my logs in Summer, following the good guidance of the old boy Thomas Tusser

From “Five Hundred Points of Good Husbandry”, Thomas Tusser 1580 (link to Google books scan of reprint from 1848)

because I am not so convinced the war will all be over by Christmas. I accepted the risk of a windfall tax² on BP to get the energy-related yield because I didn’t think that the government gave a shit, but I didn’t expect them to go full Rhett Butler on the proletariat. MSE’s Martin Lewis found himself unamused, though I suppose if I were to invest enough in energy companies it’s good to be aware Ofgem is on the industry’s side rather than the side of us hapless consumers 😉

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1. Yet another area where there seems a range of opinion. Here,  here, and here seem to indicate yay, and this seems to indicate maybe. ↩
2. The risk of a windfall tax has somewhat increased since I bought the shares ↩