Wallflower at the party

I've not posted for a while, mainly through travelling and trying desperately to meet a couple of major deadlines.

But now I feel impelled to post. I've been left out of the great British House Price party. I am a wallflower. I am not making £50,000 a week owning a house in London. I haven't seen my investment in housebuilding shares double, because I haven't got any. I am not a buy-to-let millionaire.

What's happened in the housing market over the last few years is, I think, weird. We had a crash caused at least partly by the same issues in mortgage finance as the USA - credit being pushed at marginal borrowers, at higher and higher loans to value (even at over 100% LTV, which while not stupid, if it's correctly targeted, appears to have been far too common), on often marginal property. House prices were stretched - the house price income ratio is something I've been tracking since the 1980s, and at 5-6 times, it was unsustainable.

Yet though transaction volumes have shrunk, house prices haven't really fallen. Now, house prices are rocketing again, as a result of the government's Help to Buy scheme, though there's evidence that the effect is limited to major cities and the south-east, and in particular, London.

Contrast the US. There, house prices fell in almost every market by 20-30 percent, in some markets by a good deal more. The pain was taken. Residential real estate is now recovering, but, crucially, from a lower base.

I probably, with hindsight, should have piled into housebuilding shares. But I can't help feeling the fundamentals are just not there. What's keeping house prices up?

• A major electoral bribe. If in future that scheme is closed, the market will cede many of its gains. It's possible that it could set off a major correction, as the cessation of MIRAS (mortgage interest tax relief) did in the last property crash.
• Low interest rates. While the need for larger deposits has kept new buyers out of the market, existing homeowners and those with access to such deposits have been helped by low interest rates. There's a hidden effect - low interest rates enable sellers to stick out for a higher price, since there's a very limited cost to them doing so. 
• Forbearance. Banks and building societies have been told by government to be nice. Repossessions, trending down since 2009, surely don't reflect reality. Repossessions made have not exceeeded 50,000 a year in England and Wales, compared to over 70,000 in 1991, the nadir of the last crisis. Once interest rates increase, the number of mortgages in arrears will surely go up... and forbearance is likely to be stretched.
• Foreign investment in UK residential property, which has now eaten the whole of Kensington and Chelsea, and is rippling out into other London markets, suburbs and even country properties.
• Lack of supply. This is the only major factor that is fundamental and not, currently, likely to change. Both private and public supply of housing has been constrained, and is running far short of what is required.

That last factor does have quite a considerable weight. But I still can't quite believe that house prices are infinitely elastic. Unless London is going to become a Chinese and Russian enclave, with all but a few millionaires banished to the outer wastes of Ipswich and Basildon, either incomes are going to have to increase (which doesn't seem to be happening for the vast majority of the population), or house prices have to fall.

The most intriguing thing about the Help to Buy scheme, though, is nothing to do with the statistics. It's been the industry response. Let's face it, the introduction of a scheme that only applied to new property was a blatant handout to developers. Yet I heard a huge number of developers, estate agents, mortgage lenders and chartered surveyors - all people you would think had a vested interest in the scheme - expressing their horror at the market distortion it would bring with it. That's unprecedented. When property professionals start biting the hand that's feeding them, I get worried.

Honesty is the best policy

Hurrah for Nick Train. He warns investors not to buy his investment trust - at a 20% plus premium to net assets, it's just too expensive.

That might sound as if he's doing a Ratner. But it's more like a pop star saying 'Don't pay twice the price by buying my tickets from a tout.' The price of investment trusts is set by the stock market, not the fund manager.

Current market conditions have led private investors to dash for cover, and they're buying two things; one is income, and the other is gurus. Income - because equities at 3.5% upwards are just about the only way of beating the derisory bank rate (apart from property, which has its lovers, but is an inherently illiquid investment, and junk bonds, which may be caught in a gilt-derived bubble). And gurus - 'safe' hands, alpha-grabbers, because a 'name' fund manager with a good story is perceived as offering shelter against the chill winds blowing through the market.

That has left a lot of investment trusts trading at a premium. In other words, if you buy into the trust, you're paying more than the shares, bonds, and other assets that it holds are worth. Now, typically, investment trusts have traded at a discount. That's because there would be liquidation costs to be taken into account if you did actually flog off all the assets, among other things. You could argue for them trading at par - that's pretty much how unit trusts and OEICs are sold (through a different mechanism, not the stock market). But I don't see why you would pay one-fifth more than the assets are worth.

Look at it this way. I can sell you a share in Vodafone for 177p, or I can sell it you for 212p. Your choice.

Past history also shows that although investors are trying to head for 'safety' by buying Nick Train's fund, in fact they're taking a huge risk just because of the valuation. The trust has crashed and burned before. Even if the asset value remains stable, rerating the fund to par would give a 16% loss.


The article on Thisismoney.com is worth reading. It points out that other trusts, such as Edinburgh Investment, are also riding high. Almost any trust that includes 'income' in the name is at a premium, including several emerging market trusts that don't actually beat the index in terms of yield. But the article doesn't mention the trusts which I think are the most overrated - the infrastructure trusts. These trusts invest in public/private sector infrastructure projects, which deliver a contracted (and often RPI linked) stream of income over the long term. So far, so good. But as always, what matters is the valuation.

John Laing Infrastructure trades at a 5% premium; Bilfinger Berger, HICL, and 3i, all at nearly 10%. That seems a bit rich for me. Besides, I have a suspicion that the NAV is worked out by using an NPV model based on future income streams. That means, if the interest rate goes up, the discount rate in the model goes up, and consequently the NPV (equals NAV) goes down. With base rates practically nil, that gives the NAV nowhere to go.I also suspect these shares have nowhere to go in terms of growth - compared to, say, buying a tech stock with a 3% yield, and there are a few of those around.

Heading for safety? Be quite sure that you've analysed what 'safety' is first - because a lot of the things financial advisers are selling as 'safe' are anything but.

Journalism is only PR

I'm a journalist. I do carry a torch for some technologies (open source, cloud) and even some companies (Google, Pickering's Sausages), but I'm a journalist. I do research. I phone people. I do some thinking. Then I write. It's not guaranteed unbiased, but it is 'all my own work' as we used to say in Class 3b.

Now I know that in some areas of the trade press, press releases pretty often get printed without much rewriting if there's space to fill.

And occasionally you can tell that a press release has been reassessed a little, added to, then reprinted. The kind that hotels put out on 'interesting things left in our luggage room' or '101 of a Corby trouser press', or surveys that show that 3 out of 4 cats ate Whiskas when they were offered it. (Very often, the editors show a regrettable lack of basic statistical know how or scientific method; that last claim might mean '75% of cats prefer Whiskas', but could also mean the PR company's senior partner has four cats and three of them ate what they were given this morning. Don't we need to know the sample size and any controls used?)

However, this story (http://www.guardian.co.uk/technology/2011/may/12/facebook-pr-firm-google) shows that you don't need journalists to write a story any more. Chaps from the PR company will write your column, and won't label it 'advertorial'.

I hope the editors didn't bite. But it's worrying. I can see a few cynics in the industry saying "Why not just let the PR companies write the papers, you might argue, given that Trafigura injunctions will soon not allow you to print anything worth reading, anyway?" I just hope they don't go down the PR puff route.

These are the chaps who want you to believe that blogs are crap, and Wikipedia is crap, because they're free. Well, I beg to differ. At least this blog is written by a bloody-minded ex-techie curmudgeon who bothers to try to get a few facts before writing. And I won't be outsourcing it any time soon.

Meanwhile, PRs are welcome, as always, to have their input into the editorial process - but it stops before my fingers hit the keyboard.

Financial journalism gets it wrong

Financial journalism covers what exactly? Looking at the pages of most of the national papers it seems to be focused on two main columns; the market round-up - that is, the UK equity market, bonds and commodities not being mentioned at all (nor are ETFs) - and the stock pick (whether it's called Tempus, Questor, or whatever).

And it's completely wrong.

What is the key to portfolio returns? It's not stockpicking. It's not trading. It's asset allocation - and this is something hardly anyone reports on at all in the consumer press. Look at websites and you'll find again the emphasis on stockpicking and individual equities (an honourable mention has to go to Motley Fool here for having more discussion of strategic issues, even though I don't think Motley Fool UK is a patch on the US service).

Of course proper asset allocation treads on a lot of people's toes, because residential property and cash savings are part of the portfolio, as well as equity and bond instruments. The newspapers and 90% of the finance sites divide these up - 'investment' and 'savings' for instance are two separate things.

But it seems sad that there's no top-down, integrated view. And since there are no discussions of the overall subject of portfolio management in the press, people are left with the dumb idea that the route to success is picking a handful of 'tenbaggers'. Which is, admittedly, much more exciting than finding the right balance between different geographies and asset classes - but much less likely, too.

The blame game

There's been a lot of blame flying around recently. We have a recession - there has to be a scapegoat. And most of the blame has been targeted at the bankers.

Now, top bankers make up about 0.05% of the population, so they make an easy political target. Hedge fund managers are even easier to target.

But where is the politician who is willing to blame ordinary voters? Yet the speculative bubble of the housing market was not caused purely by estate agents, banks and building societies. It was caused by everyone who bought the idea of an ever-rising market, who bought a house for investment value rather than its use as a home, who borrowed more than they should to 'get on the ladder' - who got caught up in the frenzy.

And the fact that the savings ratio shot through the floor is not the fault of the bankers. It's the fault of everyone who, seeing their house price rising steadily, decided to live above their means. Private school for the kids, three cars, big house, holiday in the Caribbean - and all on a household income of £60,000? Really?

It was all unsustainable. But even the Guardian was putting £1,000 handbags in its style section. Reality check; the Guardian sells to social workers, teachers, council staff. I'd be surprised if its demographic shows significant numbers of people earning seven figure salaries.

The vilification of Northern Rock was particularly nasty. Northern Rock operated what was a perfectly valid business strategy - gaining market share by relaxing its loan criteria, and using wholesale funds to support a higher rate of growth than would have been possible had it used only its deposit base. It got it wrong, of course - the credit crunch meant it couldn't re-fund, and lower quality loans defaulted earlier than the higher quality borrowers at other banks; but getting it wrong is not actual proof of evil intent.

As long as we blame the bankers, there are going to be too many people looking forward to a resumption of the bear market - and wanting to get rich quick. The one thing that the cycle of boom and bust should have taught people is that getting rich quick runs the risk of getting poorer very quickly too... Until we stop blaming the bankers, we're not going to learn anything.

George Osborne doesn't get it

The Tory party promises an end to the 'money for nothing' culture.

I wonder where they have been for the last year. With 0.5% interest rates we are now in 'nothing for money' land.

The full impact of it hadn't struck me till I did the sums. Suppose I managed to save a million quid. Cash in the bank. Most of us would think that made us rich.

Except that if you tried to live off the income you would be making five grand a year. That's less than five hundred quid more than the state pension for a single person, which many believe is set at a poverty rate.

Now of course, as a millionaire you do have the option of dipping into your capital. (Mind you, most people who manage to save that much tend to be conservative with their money, and generally don't like the idea of touching their capital at all.) And most people with that much in assets probably have a mix of asset classes, not just cash accounts.

None the less, the figure shows just how difficult it is to get a return on assets at the moment.

And George Osborne tells us we all need to save for the future.

Exactly why? Sorry George - you'd like me to save a million quid so that I can live in poverty? And meanwhile you are bailing out middle class families with big borrowings for big houses and big cars and big school fees? Meanwhile you are supporting interest rate cuts to 'get business moving' which mean that if I do save anything, I won't get a return on it?

This isn't just a Tory thing. All the political parties are currently showing a disconnect between what they tell us we need to do, and their actual economic policy. The Labour party for instance tells us to save more, then reduces VAT to encourage us to spend it instead.

These guys really need to take a course in behavioural finance.

Degrees of credit

There's nothing the mainstream press hates more than Wikipedia.

Every so often there's a column in the Times which says: shock, horror, probe, not everything you find on Wikipedia is true.

Wikipedia is written by amateurs! They are rubbish! They are unprofessional, biased, and tell lies!

As one of Wikipedia's many contributors, I find that really quite offensive. I contribute on matters that I do know about and quite often spend some time checking sources before writing. Many of the other people I know who contribute to Wikipedia are scholars, journalists, or practitioners (eg investment bankers) who believe in 'giving something back' in terms of pro bono work.

Admittedly, they are probably contributing to a post on Robert Herrick, Wagner's Die Feen, cosmatesque marble work or the Black-Scholes formula, and probably not to one about Britney Spears.

Yes, there are problems on Wikipedia. But let's look at how it addresses them.

• Requesting references, whether from news media, authoritative web sites, scholarly research, or other publications.
  
• 'Talk' pages. I actually believe in some ways Wikipedia does a better job than other media. On the question of Western Sahara, for instance, publications like the CIA world factbook will tell you who 'owns' Western Sahara. But the Wikipedia discussion page tells you what the issues are. There is no 'right' answer - in that way I believe Wikipedia represents the real world more fully than many more authoritative sources. (And anyway - if we can't trust Wikipedia, what makes you want to trust the CIA?!!)
• Continuous editing. Okay, that can descend to flame war. But at least it means errors can be addressed in real time - not next time the book goes into print in a couple of years' time.

It's interesting that so many journalists refer to peer-reviewed academic publications as 'good' and 'reliable' when Wikipedia is referred to as 'bad' and 'unreliable'.

Hm. Like the Lancet, which was responsible for deeply flawed research on MMR jabs being published.

What is Wikipedia if not a peer-reviewed publication? It's just the definition of 'peers' that is different.

And quis custodiet ipsos custodes in the matter of peer reviewing?

(Let's remember that it was professional, accredited, peer-reviewed psychologists and psychotherapists in the 1950s and 1960s USA who defined homosexuality as a disease. Not just that - women who did not conform to feminine stereotypes were often 'treated' for their 'gender misalignment'. From today's perspective that looks like a mumbo-jumbo rationale for a full scale assault on the individual's human right to self-determination.)

I am still waiting for a mainstream journalist to point out the real truth of Wikipedia - which is that information cannot be polarised into 'good' and 'bad', but comes in an almost infinite number of degrees of creditworthiness. And that we should actually learn to interpret and evaluate information - not be encouraged to trust one source absolutely and distrust another.

Perhaps because, if we all learned to evaluate and interpret information, we might not trust what was in the newspapers...

For me, it's the fact that Wikipedia accepts its own fallibility, and signposts it by flagging up disputed terms and statements, that makes it such a potent force. (The only UK newspaper I can think of that does this is the Guardian, with its readers' editor. It's not a matter of 'corrections', right/wrong, as in other papers, but of 'How should we have reported this'... and it makes the assumption that readers are grown-ups with critical minds of their own.)