Winter's Coming!

This will only be a quick update, as I've taken on extra work to build up a bigger and faster nest egg. I'm also spending a lot of my free time pouring over old economic data for patterns.

However, I've started to pull some of my european investments and switch for cash in preparation for the coming big R. I remember the previous recession incredibly well. In fact, it has scarred me for life - thankfully! In my case, having very clear memories of the year or two leading up to it means that I notice those same patterns when they repeat themselves. When one or two repeat, it gets my attention but the issue normally resolves itself. But right now, all of the economic data is pointing towards a nearing cliff edge. So I'm getting myself ready.

I'll freely admit, I can't predict how quickly each domino will fall. Every recession behaves a bit differently. 2008 was fairly quick to happen and slow to recover. In fact, those of us who started our careers in 2008 still haven't recovered. But we are also hyper aware of changes in the economy, which is to our benefit.

There are multiple signals that I look out for, but the main ones are:

The Housing Market

Property prices have stagnated this year. In most places, they haven't started to decline yet. But London tends to be a catalyst for changes elsewhere and the London market isn't looking great right now. Outside of London, new buyers (the GenY/Millennial/Gen Z crowd) are too strapped down with student debt, low wages and high rents to consider house purchases. So as the older owners are starting to downsize or die off, fewer young customers are queuing up to buy from them. This problem isn't unique to the UK. Australia, Canada, America and elsewhere appear to be suffering the fallout from the same generational divide in wealth. Their housing markets are starting to feel similar pressure. In fact, many are predicting a downright crash and advising clients to stay away for now. Foreign investors in the UK market have started to pull away, leaving only 5% of housing stock owned by overseas buyers rather than 12% in 2010. It could be argued that a decline in house prices is a good thing, as those in their 30s waiting to buy a home and start a family will finally be able to. However, when viewed in conjunction with other economic signs, it suggests a not-so-rosy near future.

Debt Levels

Debt is always something I pay attention to, regardless of how the economy is doing. I have an abnormally old fashioned view of debt compared to most people (all debt is bad), which I don't expect the rest of society to follow. But while I assume there will always be some state, business and personal debt, there is a scale from 'bad' to 'worse' to 'unmanageable'. At present, the Eurozone is nearing the 'unmanageable' end once again. Several debt figures should get people's attention. Individuals already have more debt, credit companies are lending out more debt and state spending is up (and a growing population means that spending will only increase further).

Unemployment Figures

These are interesting, as the data currently shows generally low unemployment. However, the total figures hide the fact that wage growth has flat-lined (as an example, I haven't had a pay rise in real terms in almost 20 years) and 'employed' includes underemployment (forced part time or unskilled jobs), zero hours, temporary contracts, those who have stopped looking for work or claiming job seeker benefits, those classed as self employed (even if not earning), and anyone else who may have simply fallen into the gap. I would be far more interested to know how many people are in full time, living wage or above jobs. And by 'living wage' I mean a salary that can cover basic rent, travel costs, food, pension savings, healthcare, other everyday bills, money to save for a house deposit within 5-10 years and repayment of the average student debt. I don't think those numbers would be so high!

Stock Market Drive

Last year saw big gains for those who were lucky enough to have timed the market correctly. Both the UK and US markets crashed and bounced back up following Brexit and Trump's win and they have continued to soar upwards ever since. The S&P 500 has broken multiple highs and is currently on its way to 2500, and the FTSE 100 has been bumping around the 7500 mark following a similar pattern. There was a market boom just like this before the 2008 crash. Markets were reaching new highs amid cheers from investors, lenders relaxed their standards for lending to buyers (oh, hang on),  the housing market began to cool off, panic set in as the number of mortgage defaults increased, then the problem spread outwards to other parts of the economy.

Today, we have the added problem of massive student loans (small mortgages in their own right), Brexit, the myriad problems in the EU (which has only very recently come out of the 2008 recession), China acknowledging their own debt problems (albeit a different situation) and a new creature in the form of subprime car loans in the US. This all feels like déjà vu to me. With the added fun of already non-existent interest rates, backing the BoE into a corner.

Good luck everyone and see you on the other side!


* EDIT: Shout out to the owner of Spicer Lemonade Stand at the Lovebox Festival and her parents for encouraging early entrepreneurial skills! I started my working life selling home-grown tomatoes along our street with my brother and sister and it was an excellent way to learn the basics of business. I hope to see you on Dragon's Den in the not too distant future!

A Quick(ish) Lesson On Finance

I've wanted to do this for a while, as I know a few of my family now read this blog and many of them have little understanding of what finance is or how money works. There are several brilliant in-depth essays out there that explain the process in far more detail than I can in my five minute posts. But I'm also aware that the individuals with the least understanding are also the ones least likely to sit and read through a long essay with lots of technical language and numbers (don't beat me).

So here's the bite-size version with pictures!

- Currency -

Traditionally, 'currency' consisted of gold, coins, shells, buttons... more or less anything that could be used as an I.O.U when two or more people agreed to exchange goods or services at different times. It was essentially a store of value that could be redeemed in another place and time and from any other person that agreed to accept the currency.

It didn't really matter what was used as long as it was difficult to replicate and easy to store (for example, apples would be a terrible currency to use as they rot very quickly). Salt was apparently a favourite in the Sahara and East Africa during the Middle Ages. The word 'salary' actually comes from the Latin word 'salarium' (the root word 'sal' means 'salt') which, according to the Oxford dictionary, was the money paid to Roman soldiers to buy salt (my English degree is totally relevant to finance, dad)! People also liked gold and it's still considered valuable today since it's in fairly limited supply and (so far) impossible to create from scratch. 

- Banks -

Banks were initially invented as a way for wealthy people to store and protect their gold, buttons, or whatever currency they used. Smaug's lair in J.R Tolkien's The Hobbit is the image I always have when I think of old-school banks. A giant creature defending a huge stash of treasure from people wanting to steal it! A small fee was paid in return for the bank's service and a receipt was given out listing the amount deposited.

- Money -

Physical currency is only a fraction of the money supply today. Eventually, people started trading the receipts instead of the currency itself, and as a result the banks decided they could earn more by issuing loans backed by the currency they held in deposits. The loans were essentially I.O.Us for I.O.Us of real value.

(This is the point where I like to quote Lewis Caroll's Alice In Wonderland: "You used to be much more...'muchier.' You've lost your muchness.” I think that just about explains finance from this point onwards.)

- Interest -

Things got a bit boring for a while and then the people cottoned on to the fact that banks were making money out of the currency they had entrusted to them. So 'interest' was invented: an I.O.U to pay an I.O.U based on the I.O.U the bank was earning from the original I.O.U in their vaults. Simples. The interest paid to depositors was less than the interest paid by borrowers, so the bank was still earning a living even though the amount of currency they were storing hadn't really increased.

- Inflation -

Considering there were now more I.O.Us in the system than actual goods/services (look up 1931 gold standard for more info), the value of the I.O.Us dropped in real terms as more I.O.Us were printed on the I.O.Us. I found a nice graph for the UK to illustrate my point (everyone likes a good graph):

To clarify; if tomorrow everyone took their money to the bank to reclaim the promised currency at the same time, there would be many many disappointed customers. Money follows the very basic economic rule of supply and demand - if we've got more, it's worth less. That £5 note that bought you 10 loaves of bread in 2001 now only buys you 3. The amount of currency you need to purchase the same value in goods has now inflated. In 1920's Germany during hyperinflation, Reich Marks were literally worthless as currency and there are various reports of people burning money to keep warm as the paper it was printed on held more value as fuel. Inflation is also affected by how difficult the items are to grow, make, find, etc. More I.O.Us or less items mean inflation goes up.

- The 'credit crunch' -

Unfortunately, this system of borrowing on borrowing on borrowing value has expanded even further due to the continued threat of economic system collapse if it ever stops working. When an entire global population is reliant on a system to work, then it is in everyone's interest to keep it from falling apart (regardless of how ridiculous it seems). Runs on individual banks have happened in the past - Northern Rock comes to mind as a recent example of what happens when too many people panic at once and try to reclaim the value of their I.O.Us.

The same thing occurred on a global scale during the so-called 'credit crunch' a few years back. Governments and companies lend I.O.Us to each other as well as the banks, and if too many players ask to exchange the I.O.Us at once then it causes a knock on effect. Everyone suddenly panics that there isn't enough to go around and starts to demand their share of the value. I personally don't believe the issue was ever a lack of I.O.Us, as the banks have the ability to create an almost infinite amount of digital currency these days. It was likely mass confusion over the redeemable value of the currency, causing all the major players to halt production of any more I.O.Us of I.O.Us. Which, if you think about it, is very silly considering all the original I.O.Us no longer hold the same value they did to begin with! If that didn't make a lot of sense, don't feel bad. Most economics undergrads struggle with the concept. Fortunately, the very clever people in charge printed a lot more I.O.Us, which will TOTALLY fix everything (lucky us).

- Value vs Population -

Most of the money in circulation today is a giant ocean of I.O.Us with a few tiny islands of actual value (land, food, water, materials, workforce, etc) dotted around. I imagine it looks a bit like the universe, with lots of dark matter and a few clusters of stars and planets gradually drifting apart. Oh yeah, pretty deep stuff for a Saturday afternoon! Here's a nice picture of part of the universe:

In the UK, the average debt per household is around £13,000 and the average in savings about £3,300 (www.aviva.com/media/upload/Family_Finances_Report_July_2013.pdf). This doesn't include mortgage or car loans. That's a lot of I.O.U-ness (sorry, I said there wouldn't be lots of numbers). According to mainstream media, we are now recovering from the recession and well on our way to sustained growth. The stock market is thriving once again, unemployment is falling, business is growing. Yet the amount of real value redeemable per person is shrinking due to inflation.

There are various ways of calculating wealth. I'm old-fashioned so I tend to consider mainly those things that a human needs to survive on this planet - shelter, food, heat, etc. Anything else is of secondary importance and useful only as a store of value to trade for the really valuable items that keep us alive and healthy (basically, more I.O.Us).

So let's start with land. Land is quite useful for growing food, providing materials and space for shelter. Or it can even be used as shelter itself. Ask any military bod. In the UK, there are 260+ people per square kilometre of land (going by the World Bank figures). This is increasing by the year. Less land to go around, and that's assuming the land is shared out equally to begin with - it isn't. In fact, you're not even allowed to fight people over it like they did in Medieval times, for... reasons (which I think is completely unfair)! I'm not going to discuss house prices in any detail here, as I believe they are artificially inflated right now due to government intervention. But I would expect the natural costs to be on the increase regardless.

Food is another important one. Intensive farming methods have kept prices lower than they would otherwise be. However there has still been continual inflation in this area (if you're not used to graphs, bear in mind this one shows the percentage increase in price, not the price itself):

Fuel - again, your I.O.Us buy less fuel today than they did last year or the year before that. I mentioned rising utility bills in a previous post:

So... the I.O.Us are worth less and less actual value. The best way around the issue for the average person, as far as I can see, is to focus on obtaining value first and foremost. Collecting I.O.Us only benefits you when the potential redeemable value is increasing (when I started this blog I was just seeing how much money I could save up for the sheer hell of it, but these days I want to own a house/land outright and plan to put that money into something of value when I have enough). I'm not a Marx groupie, but he was right when he pointed out that the ruling class own the means of production. Everyone needs to eat continuously during their lifetime and there's a good reason that the richest people own the most land (and for the record, a mortgage does not constitute land ownership - until you pay it off, the bank is technically the owner). Sort out the basics like land, shelter, food production, textiles for clothing, fuel, tools, and then worry about flashy cars, swimming pools, and the latest fashion.


n.b. Alice In Wonderland is a brilliant novel full of amazing advice that everyone should be forced to read at gun point. How can you argue with wisdom such as 'if I had a world of my own, everything would be nonsense. Nothing would be what it is, because everything would be what it isn't. And contrary wise, what is, it wouldn't be. And what it wouldn't be, it would'? Very sensible words!

Also n.b. This is all just personal opinion. I quit my Economics degree in year 2 because I thought a lot of it was very clever-sounding b*llocks that further complicated an already over-complicated system. I get paid a pittance to organise other people's money now, but still find economics and finance interesting. By the time I reach 30, I hope to have discovered the world's largest chocolate coin.

A New System?

Following on from a debate we had at work this week, I'm going to add a more interactive post this month. Mainly because I'm curious to know what other people think (partly because I only have a few minutes in which to update this blog)!

Is the current economic system broken? Does capitalism work any more in today's world? Is our current system even true capitalism any more, considering that many people start life with a huge advantage over other humans? What alternatives are there aside from a communist, socialist approach? Would you endorse socialism? Why? WHY? Or would you do away with an organised system entirely and go back to anarchy in the wilderness?

(oh, and I've added a couple hundred £££ to the pot!)