what can you do to preserve capital these days

Money performs two roles in the economy, One is to provide a medium of exchange and intermediation. If I have a goat to sell and exchange it for pounds, I can buy a loaf of bread from the baker even if he doesn’t need a small piece of a goat at the time 🙂

For most people, who earn money, and (ideally) spend what they earn but no more on their lifestyle, that is all they need money to do for them. It lets them transfer the value they gain from selling their services to their employer to paying out to whatever they need to support their lifestyle.

However, since I am trying to save to give to my future self, I need money to perform a second role. That role is one which the Great British Pound Sterling seems ill-suited to perform for me. That second role of money is as a store of value. If I forego a £100 worth of bread now, I would like some mechanism to be able to buy the same amount of bread in the future.

In theoretical terms I did quite well last year with global index ETFs, even after the hammering of recent weeks I am still about 20% up, in pound terms. However, against that I have to allow for the corrosive effects of inflation, currently at 5% and rising. I experience RPI-X as I have no significant housing costs being mortgage-free, so I experience higher inflation, as housing costs are artifically depressed by Government action on interest rates. Fuel and food in particular have gone up seriously over the last year.

I chose L&G’s global ETF in an attempt to diversify out of the UK, for in Britain we have been living beyond our means for almost a decade and these chickens seem to be coming back to roost.

RPI - 5% and rising
RPI-X - 5% and rising

However, we seem to be entering a dangerous period of probable monetary inflation, as a result of printing money, euphemistically called quantitative easing round these parts. That looks like being coupled with a nasty dose of asset deflation as the stock market rally falters or starts trading sideways, for the reason that there don’t seem to be any good underlying reasons for the rally to continue, other than providing a home to park some of that government-issued money.

So the question is, really, what can a chap do to store value? What I need is real stuff that holds its value, preferably something which can’t be printed by the government to devalue its debts. Commodities and land are the obvious choices, and yet both are lethally illiquid, and land is not fungible either. Preserving capital looks like it comes with some nasty baggage.


Kudos to Nat West for not shafting its previous ISA savers this year

It’s usual for banks to quietly trash the interest paid on older accounts, on the principle that most people can’t be bothered to move and the bank gets to keep the money they’d pay out in interest. so you end up with some derisory interest rate of 0.5%.

So hat tip to Nat West. I was getting ready to shift last year’s cash ISA, and looking mournfully at the paltry 2.75% that the best buy ISA accounts on Martin Lewis’s site offer for new business. Then I looked at the current rate I am getting, and so far, touch wood, they have retained the interest rate at 3.01% even though the account isn’t available for new business. That’s better than I could get if I shift it. So I get to save all the aggro of moving the ISA and get a better rate.

What’s not to like… oh yes, it’s that the RPI is skyrocketing at 4.5%, so at current rates I am losing 1.5% a year in purchasing power. Mind you, last year I was getting 3% when RPI was negative, so it wasn’t all bad. But this does not look like it’s going to a good place in future.

RPI - looks like 4.5% and rising. Yikes

Weekly roundup – some of the best posts I’ve come across this week

New to me, Consumerism Commentary on Start The Decade off Right, Do Something You Love. Doing something you love is supposed to be the holy Grail of work-life balance, but it sounds like a great way to turn a passion into a drudge to me.

Financial Samurai’s incendiary Don’t Have Children if You Can’t Take Care of Yourself is exciting, I salute his courage. The title pretty much says it all, and I’ve often been amazed at how some folk don’t consider the financial hit of child-rearing before they experience it.

RetiredSyd on No More Performance Reviews is inspired. I despise the annual (and increasingly quarterly) charade of performance reviews.

Monevator reminded me that I need to keep sight of why am I doing this with his Don’t Forget Your Can Opener post. It doesn’t sound too bad, “you could end up surrounded by pots of money and no clue how to use it – or even how you got there.” But it’s easy to lose the thread of living with intent amongst all the noise of living day-to-day.

And finally, I predicted a riot earlier this week. I didn’t expect it to come so soon.

whither manufacturing, and whatever happened to leadership?

There’s an election going on, and what strikes me most is that, quite frankly, all three leaders strike me as weeds.

In Britain, we’ve spent all our money, and then some. We have got fat and lazy on a decade of easy money. We need leaders who have the cojones to upset people, and stand by what they say and do. Brown’s cock-up wasn’t so much slagging off that woman in private, it was the craven apology that made him look weak to me. I don’t want nice, I want effective. We need to learn to save before spending, on both a personal and collective level. Cameron came over as somewhat more competent on the telly last night, but it was hardly barnstorming.

Some of the proposals seem downright harebrained. Everybody seems to have discovered a love for manufacturing industry. Guys, wake up and smell the coffee. Last time Britain did any serious manufacturing was in the 1970s before Thatcher, ably abetted by the trade unions, destroyed it. Or perhaps it was the unions, ably abetted by Thatcher. Either way, the result was the same.

That was over forty years ago. A generation and a half has grown up since then, and wisely targeted their learning away from science and technology on the grounds that it was harder to pass in these subjects and there was limited chance to apply the skills in the workplace. I have been working in this field and I’ve seen swathes of British engineering firms go bust, including some I never thought would go. Plessey, Ferranti, GEC, Marconi, where are they now? Unlike previous generations, today’s graduates had to take significant financial risks to go to university, so who can blame them for avoiding tough STEM subjects. As this University World News article says

Countries around the world are trying to prevent a continuing decline in interest among students in science, technology, engineering and mathematics or STEM – the so-called key vulnerable subjects. Professor John Holman, director of STEM subjects at the UK National Science Learning Centre, said Britain was not alone among advanced economies that had experienced shortages of graduates in these areas. While other EU countries, Japan, the US and Scandinavia were also suffering, the picture was different in developing nations.

We are hosed. Exactly who is going to staff these engineering and manufacturing companies? Are the few able young scientists and engineers going to have to call the ageing greybeards away from retirement to swell the ranks, or will science and engineering be put on the list of special skills that the UK border control will accept? And even if they are, will we offer enough money to attract enough people in without hamstringing the companies with labour costs.

In case we and our politicians hadn’t noticed, in the intervening four decades, the Iron Curtain has fallen, two generations of hard-working Chinese have joined the global workforce ready to work for a damn sight less than the National Minimum Wage, capital controls have been removed and all sorts of other things have happened. We are never going to manufacture as much as we used to relative to the rest of the world, because other people will do it cheaper in other countries.

It’s payback time. Living standards are going to fall for most people in the UK. More of us are going to have to get used to doing crap jobs again. We may not like the City slickers and Masters of the Universe but the money they sucked into our economy paid for us to decide that we were happy to look the other way while other people picked our vegetables for less than minimum wage with some of us on the dole. Now most of us are going to have to pay a bit more for our veg and have them picked by Brits, hopefully on the NMW at least. All sorts of other things that used to be beneath us are going to have to be done by Brits again, because we just aren’t as rich as we thought we were before 2007.

We haven’t got enough money to decide that certain jobs are beneath us – we either get to do them or they don’t get done. Labour did a good job of fixing much of our infrastructure which was run down and knackered after years of Tory cost-cutting, and hopefully they built it well enough that it can last at least another term of neglect.  I am old enough to remember what the Economist meant when they  reminded me of what Britain was like before 1997

voters have forgotten what Britain’s “public realm” looked like before 1997, even as their expectations for it have become more demanding and consumerist. The once-crumbling physical infrastructure of schools, job centres and hospitals, […] has been thoroughly renovated.

The paint will be peeling again and the hinges will squeak after the election, regardless of who wins. Well, perhaps with our newfound passion for engineering then somebody will oil the squeaky hinges. I feel a bad moon rising and this track seems to fit…

what happened to the middle class in the UK?

Reading the Daily Torygraph ranting about how higher earners would be £18000 a year worse off as a result of various dastardly tax changes  I was struck yet again by the Telegraph’s curious concept of middle class. Don’t get me wrong, I’m all for people avoiding tax as long as they keep it legal, but it was this quote

said that the changes would be significant for many people. “£175,000 is a good salary, but it’s not one of those banker salaries that makes people horrified,” said Jane Beverley, its head of research. “These people will be losing 16 per cent of their take-home pay, and that’s not money that can easily be replaced.”

Diddums. My heart bleeds. Really it does. The Telegraph generally carries on as if a six-figure  salary is a typical middle class salary. They need to take a reality check. I have swiped this image from this TUC report on the income distribution in the UK. Okay, so they have an axe to grind, but this wikipedia article corroborates it. You can find your own place in the pecking order/rich list at the Institute of Fiscal Studies Where Do You Fit In page.

Income distribution in the UK
Income distribution in the UK

Let’s just say that these poor saps who are only earning £175k aren’t middle class, certainly if income is used to define middle. They’re perfectly entitled to be hacked off at losing 18k, and they might like to know that there is an election on if they want to push their views 🙂 The real middle class in Britain seems to be running on the 20-30k p.a. mark.

The TUC report does show what happened since the 1960’s  however.

The six decades since the Second World War have brought dramatic changes in the social and class structure, resulting from the process of de-industrialisation and the emergence of a service economy. Thus the proportion of people working in manufacturing fell from 25 per cent in 1971 to 11 per cent in 2006. The effect has been an upward drift in the class classification of households, with a steady fall in the size of the traditional manual working class and a steady transfer from factory jobs to clerical and white-collar jobs.

which explains why so many people are described as middle class now – we held on to the job classification description, and outsourced most of our working class jobs to India and China. The Americans, with some of their delightfully straightforward honesty, follow the money, and as a result they don’t screw up like this when thinking of the middle class.

Figure 1, however, based on income rather than class, points to a very different interpretation of the shape of modern Britain. It shows that households are heavily concentrated within a narrow range of incomes in the bottom half of the distribution. Indeed, almost two thirds (65 per cent) have an income that is less than the national mean. […] Indeed, one group of academics describes Britain as ‘onion-shaped’ – with a few at the top, a bulge of people below the middle and fewer at the bottom, though more than in the diamond shape.

So it follows that a middle class salary isn’t what it used to be in the pecking order.

On the other hand, those moving up the class ladder have not progressed to income levels enjoyed by the middle class. Instead there has been a rise in the proportion of the population living on incomes below the mean. Those who have risen through the class hierarchy to swell the ranks of the ‘lower middle class’ (clerical and administration workers, supervisors, lower-tier managers, owners of small establishments such as corner shops), have mostly ended up in a lower position by income distribution than where they would have been as members of the skilled working class a generation earlier.

Thus the explanation of the Telegraph’s position is that they are adopting the 1960s job position definitions and applying it to the current position, ie defining middle class by where those jobs would now be. We’d now call them upper middle class.

I observed this first-hand. When I started work, the relative living standards of people who were working at the level I am now were much higher compared to others than I would say I am now. I’m not asking anybody’s heart to bleed for me, because the absolute living standard I have is considerably higher than they had, with the possible exception of housing because I chose to pay my house off rather than run a larger mortgage for a longer term.

What has changed dramatically, however, is the work environment. Efficiency in using capital is bought at the cost of a certain degree of relentless inhumanity.  The power balance between capital and labour has shifted towards capital and away from labour, resulting in a polarisation to the top of the wage scale, the fat cats, heads of pretty much any organisation etc, and low-end jobs which can’t be outsourced (cleaning, care, etc)

change in availability of jobs at income points - middle ones have dropped between '79 and '99

In the 1970s wages were 65% of GDP, whereas in 2007 it is 53% according to page 25 of the TUC report. This represents a shift of over 10% in favour of capital. And capital is even more unevenly distributed than income, a net worth (including unmortgaged house equity) of more than 270k puts you in the top 5%. So the power shift from labour to capital, the increased concentration of income around the lower end to compensate for astronomical salaries of fat cats and the low net worth of people in Britain point to Danger Ahead, Hard Times coming.

I predict a riot at some point…

trying it on with the car insurance company after they tried it on with me

It’s one of the sad facts of modern life that companies fight like cats in a sack to win new business, then treat existing customers like crap.  So you have to keep on chopping and changing.

The AA tried this on with me, car insurance goes up from £220 to £300. Necky so-and-sos, so I ring them up and tell them they have to do better. The first customer service droid hemms and haws and gets it down to £250, but with strings attached like having to join the AA for an extra £26. I don’t want extra breakdown insurance, so I tell him to try again, maybe see if third party fire and theft is better.

That was to prove their undoing, as he comes back saying that third party is more expensive. This tells me two things – one is that they are lying sacks, as there is no earthly reason why covering less risk should cost more. And that they are overpriced too 🙂

So I tell him I’ll walk, and now I get all sorts of stuff about the retention team, and can I tell them what I’ve been quoted. I figure that last year’s price isn’t so bad, I haven’t had any accidents, so why should it change?

Well blow me down with a feather – the retention team quote me £213 for exactly the same insurance. Next time I must remember to take a debit not credit card as I get soaked 1.5% extra for the privilege of using a credit card, but the total is still a tad less than last year.

So the AA may be a comparative site for new custom, but they were prepared to try it on and overcharge me £80. Well, two can play at that game. Next year I’ll see if I can get them below £210 fully comp. £80 isn’t bad for half an hour’s work.

Interest only mortgage – Do you feel lucky, punk? Well, do you?

Monevator has a good post about using an interest-only mortgage as an investment tool. You have to live somewhere, and if you have the discipline then it’s a great way to build up an investment portfolio over the term of the mortgage which will pay off the capital.

Hey, where did I hear that before? Ah yes, as a late-twenties starry-eyed young pup in the market for his first mortgage. Abbey National’s estate agents at the time, Cornerstone, sold me a mortgage. I went in wanting a repayment mortgage, like my Mum and Dad used to have. Lovely LAUTRO saleswoman, Sue she was called, gorgeous green eyes…

“You can do better than that. with an endowment you just pay the interest, but look at this Friends Provident with profits fund. Look at these lovely growth figures. At the end of your 25 years you’ll have twice as much in the endowment as you’ll need to pay off the capital”

Sucker. I was had. These were the years of Gordon Gekko, Greed is Good. Beware pretty saleswomen promising the earth. I was single, so the one benefit of an endowment, the life insurance part, was worthless to me or anyone I cared about. But 100% profit in 25 years, well, that had me. That’s the takeaway message I got, I am sure somewhere in the fine print there was the usual past history is no guarantee yadda yadda. But I was lost to the green eyes and the promise of lots of moolah. I hope it was the moolah that swung it rather than the eyes…

A few years later, the house underwater on the mortgage, Friends Provident demutualised and I got seven grand. Which, having gotten wiser, I paid down to the capital. On the principle that there were now nasty shareholders rather than cuddly mutuals so I would be ripped off and enjoy poorer with profits performance, so I better at least use it to reduce my interest payments.

Then the letters came saying “sorry old chap, but we were a tad overoptimistic in our predictions it seems. You, mate, will be lucky to get half towards your capital, so you better raise the amount you’re putting into our rotten with profits fund to catch up. Ta-ra”. Or words to that effect. I saw red and wrote the MD of Friends Provident a stinking letter telling him their salesperson had promised me a guaranteed return. He, or rather some lowly grunt on his behalf, wrote back after a while saying “no we didn’t, but you can moan to us, then the Ombudsman if you like”

So it was that after moving I ended up with an interest only flexible mortgage from those nice people at Birmingham Midshires. Nobody wanted to sell me a repayment mortgage in those heady days of the dotcom boom.Every year I’d pay off a lump I’d saved to reduce the capital.

Some lengthy time later, Friends Provident settled with me to put me back in the position I would have been had if I’d taken a repayment mortgage, which was sixteen big ones they’d lost me in ten years. I paid this towards the capital of the new house. No foreign holidays, kitchen refits or cars were involved here 🙂 Having screwed up royally in the dotcom boom I learned, do not churn, sit on your hands, and continued to pay down the mortgage. From 2003 I changed tack, and started investing in a dead boring Legal & General tracker fund, using some of the money I’d otherwise be putting into the mortgage capital repayments. That did help me steal a march on the mortgage, and it 2006 I reduced the mortgage to the minimum BM would allow me to have. This was a flexible mortgage, so I could ring them up, and they would transfer to me any amount from 10k up to my overpayment into my bank account by BACS.

People often advocate an offset mortgage, where your savings with an institution are offset against your mortgage, so if you have a mortgage of 100k and savings of 50k you only pay interest on 50k. That sounds great, except in the credit crunch. Because the small print says they can forcibly use your savings to pay down some of the mortgage. So the general rule is never hold your stash of cash with the same organisation or banking group that holds your mortgage. This happened to someone I know, which screwed them royally.

I liked the disconnect of the flexible mortgage. Although I used shares ISAs to save my capital (effectively doing myself what Friends Provident had so miserably failed to do on my behalf) I never tackled this with the intent and savvy that Monevator proposes. But I can vouch that it works, I paid my mortgage down with about 10 years left to run. And paid the mortgage company  less than a tenner a month while I mulled over whether I wanted to discharge it. Monevator would make a good case that I shouldn’t have, I could have invested in 2008 and made a mint, and indeed could have had 11 years more use of this cash, currently at rock-bottom rates. But I don’t have his edge and ambition, and in the end I wanted my house to be truly mine.

2007 mortgage  statement.
2007 mortgage statement. BM didn’t get fat off my back that year 🙂