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.)

Docx

This wretched format is really a massive step backwards for Microsoft.

First of all, it crashes Open Office. I am not going to invest in a £350 software package to read two or three documents a month, so I tell people; if it's not RTF or TXT, I'm not touching it.

Secondly, it's not even compatible with other versions of Microsoft Office. Now that is really dumb.

Suppose I have 1000 employees and I give 50 of them new computers, with the new version of Office. Either

(1) they all have to turn OFF the default option for saving documents, which is docx, so that other employees can actually read what they are writing, or

(2) I have to spend thousands getting new software for the other 950 staff.

In either case it's going to be a PITA, which does not stand for an oval shaped type of bread that goes with doner kebabs.

I've noticed an increasing number of publications now saying that they will only accept RTF or a specific flavour of DOC file - they are actually specifying 'Microsoft Word 97' or whatever.

Which means RTF is practically becoming the default. And 'Microsoft Word' is no longer a gold standard.

Microsoft has managed to destroy its own currency. That is not clever.

Overpay? A misselling scandal in the making

I've been told a number of mortgage lenders are advising borrowers to use the low interest rates they're getting to make overpayments on their mortgages.

Normally, I'd say fine - it will reduce the total interest paid (though are all these lenders calculating the monthly payment on a daily basis, or will they apply the proceeds only at the end of the year?).

But in the current economic climate, householders with small equity and small savings should avoid it.

If you lose your job, I doubt the bank will take 'but I overpaid last month' as an excuse for missing a payment. Borrowers could lose the house - AND the overpayments.

Far, far better to put the difference in a savings account, even at minimal rates of interest. At least then, if redundancy does come, there's a few months' mortgage payment in the pot.

I almost wonder whether non-personalised, general advice to repay constitutes a misselling scandal in the making.

Why do so few people understand markets?

There's an awful lot of comment in the papers and elsewhere at the moment that demonstrates how many people who are quite economically literate still don't understand markets and the way that they behave.

For instance, a number of commentators have noticed that 'affordability' criteria according to the house price / income ratio have now got back to 'normal' historical levels. Therefore, they suggest, the housing market will now stabilise.

Now, I reckon there are several things wrong with this assumption anyway.

• If I'm a first time buyer but I don't have a 25% deposit, the house price to income ratio might tell me I can afford to buy a house, but I can't get a mortgage.
  
• If I'm afraid that I'm going to lose my job, I don't care about the house price / income ratio - what I care about is the worry that the 'income' bit might turn out to be nowt rather than owt. Look at consumer confidence indices and they do not tell you that everything is going to be hunky dory.

But for me, with 15 years of market experience, the thing that's really wrong with this is the assumptions made about market behaviour. These commentators believe that markets are rational, and accurately reflect conditions in the 'real' economy.

Excretory product of the bovine herd!*

Benjamin Graham got it right when he invented 'Mr Market', the manic depressive. Markets will always tend to overreact. In a boom, property investment trusts will trade at a premium to their net assets on the basis that 'they'll be worth more next year', and houses will be gazumped. In a bust, the market overreacts in the other direction - trading every stock as if it's about to go bust, buying assets at a huge discount (because 'they might still go down'). It's like an elastic band - as every schoolkid knows, if you extend an elastic band over your forefinger and stretch it, it doesn't 'stabilise' once you release the pressure!

The housing market will not stabilise in an orderly way because houses reach their 'right' value. It is likely to overshoot considerably on the downside. Until I see houses selling on a house price to income ratio that is much less than that prevailing during most rising markets - that is in the lowest quartile previously achieved - I will not be putting funds into that market.

On the other hand, 70% discounts on commercial property stocks are making me feel modestly bullish. That discounts a further 35% fall in values this year. It will still be important to pick the right portfolios - outside the City and without too high a retail component - but I'm feeling that things might not get a lot worse. I see Hammerson is raising a rights issue, too - usually a sign of the bottom of the trough. And the yields on commercial property compare very well with other sectors - most of the true 'defensives' have been heavily overbought - so it may be time to diversify back into commercial property. (I sold all my property shares in 2005 and 2006 - a bit early, but better early than never!)

By the way, can I have a little rant about the way the words 'property market' have come to be interchangeable with 'housing market'? It is as if a major national newspaper used the word 'people' to mean only men, or 'stock market' to mean only banking shares. The property market includes office space, land, industrial buildings, and retail - which seem hardly ever to be reported on. A 12% fall in the housing market needs to be compared with a greater fall in the property market as a whole - 30% plus, according to most, already, with many trusts and property stocks trading at a 70% discount to net assets.



* bullshit

Bond Bears

I've held off from the temptation to buy corporate bond funds, despite the appealing 7-9% yields and recommendations from people whose recommendations I normally trust, like Mark Dampier at Hargreaves Lansdown.

Now I tend to be a bit ahead of the market in my timing. So it was that I lost my money when in 2005 I made a bet against house prices, in the shape of a covered warrant. So it was that I had to sit through six months of inactivity when I called the bottom of the tech market just a tad early. Yet again, I'm sitting watching other people make money...

My worry is that UK bond funds look good right now, with low inflation and low interest rates. But can low interest rates last?

Let me state the bear case briefly.

• Low sterling has reduced the euro value of our money. So far the press has talked incessantly about how European holidays will cost more. They're missing the real elephant in the room - imports from Europe. French Golden Delicious, Dutch tomatoes, German software will all cost more. That puts pressure on inflation. (Incidentally I'm amazed how inflation is continuing to hold up despite the fact that mortgage costs have fallen dramatically and energy prices are headed downwards. There is some real cost pressure there already, and the sterling impact hasn't been felt yet.) We are importing inflation. Not a good thing to be doing.
  
• Increased government borrowing requirement will lead to increased gilts issuance as well as a perception of higher risk. If the government wants to fund more, riskier debt, it's going to have to increase the amount it's willing to pay for it - in other words, it will have to pay a higher interest rate. That's the case in the US as well. Most of the arguments I've seen for buying corporate bond funds focus on the spread between government debt and corporates. But the bulls' assumption is that corporate rates will come down (and consequently the price of the bonds will rise). I fear it's more likely that government rates will rise.

Now I started thinking this about November last year. And now, at the beginning of February, I'm beginning to see a few fund managers crawling out of the woodwork with the same ideas. Intriguing.

Tech companies - a quicker death

If you doubted that this is a real recession, unlike the stock market mini-crash of 2001-2, one thing should change your mind.

In 2001-2, despite the high levels of competition and failure to create revenue, tech companies kept staggering along as long as they could. There was continued investment in online from 'bricks and mortar' businesses. And while valuations fell, many online businesses continued to see high growth - and gradually extricated themselves from the red ink.

This time round the thousand flowers are not being given time to bloom. Scoopt has just closed. That was the site that provided amateur photographers with a chance to sell their snaps as photojournalism. Great idea - citizen journalism meets business smarts - but didn't work. Quickly and effectively closed down.

HeadlineProperty, a service that distributed PR around property journalists, has also closed. Needless to say the property market is hardly easy right now; a number of clients have not renewed accounts, and the service has become unprofitable. Centaur Publishing launched it on Feb 15, 2007, so it has been slaughtered before it gets to two years old.

I wouldn't mind betting on consolidation and closures among some of the Web 2.0 businesses, either. The winners will be polarised - either huge all-encompassing networks like Facebook, or really, really niche ones, together with those like Last FM that have a special appeal, something they do that others don't. LinkedIn might survive; eCademy might not.

In media, I don't think we're seeing increased integration between print and online media for any idealistic reasons. It's purely a matter of cost cutting. No one can afford to produce separate content for separate media any more. We'll see more of this, I am certain.

But it's going to be very difficult for online businesses to survive on their own. The knives are out.

The moral effect of bailing out borrowers

I worked for fifteen years in the City to make enough to retire in my forties.

That's not a huge amount. I never got a mega bonus. I earned a bit more than middle managers in British Telecom, but often not much. But by dint of moving out of London and living fairly carefully, I've managed to go freelance and run my life the way I want to, without having to earn a wage.

Now I could of course have done what Gordon Brown seems to want us to. I could have said: This is not enough. I NEED a bigger house in a posher area. I NEED a bigger car. I NEED a second house and I even need to pay £3.50 for a pint of Greene King IPA. So I'll borrow, and I'll carry on working till I'm 68, so that I can reflate the economy, and when the chickens come home to roost, I'll depend on the government to stop the banks repossessing my house. And you know? It would have worked.

We had an unsustainable boom. Now, the concern is how do we make it happen again.

The problem is the moral hazard of rewarding stupidity. If we bail out the borrowers - if we insist that mortgage rates must be lowered to help the borrowers - if we insist that the banks must lend to businesses on the brink of going under - what are we doing? We're saying - spend, spend, spend, the government will sort out the bill.

Conversely what we're saving to savers is simple. Don't bother.

So Gordon Brown, you are on notice.

I am going to spend my savings. I am not going to work. I am going off on holiday. Saving the British economy is not my business.

I am not going to earn money, because I don't need to. I am not going to lend my money to banks at 1% and then pay tax on that to bring my total income to about half a percent. I am not going to stick money into the stock market.

No, I'm going to spend it having a good time. Having a good time at cheap prices. And having a good time somewhere else, because in the UK it rains, it snows, it's cold, the hotels are too expensive and the service economy doesn't have any service left in it.

And just try to bloody tax me on the income I'm not making.

Now this is an extreme attitude and actually as editors and PR people know I'm continuing to write articles, and I have a novel coming out this spring, and I haven't given up entirely. But if every saver in the UK is now feeling like this - and I think many of them are - how are we going to increase the savings ratio? Which is one of the major structural changes that needs to be made in the economy if it is to recover on a long term basis.

We have reached the point at which no one thinks it is worth saving.

• after Equitable Life, the stock market collapse, and the collapse of a number of occupational pension schemes, who trusts pensions as a savings vehicle? Besides, if you are one of the lower quartile of private pension savers, there's evidence that suggests you will be worse off, because means testing means you will only have managed to replace the minimum income guarantee - effectively you've paid for something you would have got anyway.
• after the 2001 tech collapse and now the 2008 stock market collapse, no one trusts the stock market with their savings.
• and now we have banks collapsing, and property prices collapsing. Which leaves tins of baked beans as possibly the only alternative to keeping your cash under the mattress.
  
• Worst of all, why bother putting money in a bank to get a measly 1%?

Yet look at a number of issues and the government still expects us to save. We ought to be putting money in our pensions, we are told. Oh yeah? We ought to be saving for our old age. We ought to be saving for care homes when we're old.

Well, there's something wrong with that strategy, isn't there? When you punish the savers and then you tell them they ought to save, which of those policies is real and which is moonshine?

Independent still doesn't get the web

I tried to put a comment on an Independent article today.

It required me to create an account.

It required an email address "so we can send you important information."

No opt-out. No definition of what is important information.

Some people for instance think it is important that I should know about their willingness to marry me. Mainly Russian women.

Some people think it is incredibly important that I have access to the important information of where to buy the cheapest Viagra.

And some people want to send me interesting adverts for ski holidays. Oh, that was the Daily Telegraph.

For the record; I hate snow, don't ski, and have no desire to sit in a chalet with a load of Daily Telegraph readers.

The Independent also states that "by law" I am "required" to give my date of birth.

What law? Is the Independent now a pornography site?

By the way, this is a newspaper whose journalists frequently write about issues such as, er, liberty, freedom of information, why we shouldn't have a national citizen database, and why we shouldn't have identity cards.

Well, would some of the journalists like to try talking to their database administrators?

Interest rates and savings

I can't help thinking that everybody is trying to solve the wrong problem.

We have an economy with several structural issues. Most of these arise out of an asset price bubble that has now definitely burst. Let's summarise the two main problems.

• The savings ratio is way too low to support investment. Households have incurred huge levels of debt.
  
• Banks see high risk, and are disinclined to lend.

Okay. You don't think it's worth saving money. What's the answer? I'm going to reduce the interest rate. Look! You didn't think it was worth saving money when you could get 7 percent in the bank! Now the interest rate is one solitary per cent! It's worth it! Isn't it....?

Try the next one. Dear Mr Banker, you do not want to lend money to Mr Not Very Gainfully Employed, a self-certifying self-employed man with previous bad debt, on a house that is worth 15% less than it was last year and will probably be worth another 15% less this time next year.

I tell you what. Instead of charging him 7%, why don't you give him a 2% tracker mortgage. There! Doesn't that make it all worth your while?

This economy actually needs high interest rates to solve the structural problems. Instead of which, we have low interest rates driven by the politically perceived need to restate the bull market 'com'era, dov'era'. And low interest rates which, by the way, keep driving sterling down. (As a Brit living half the time in France, I've certainly noticed it.)

I can't help thinking we'll see interest rates up again - and I suspect, when it happens, it will be very sudden.

Time to buy to let?

Apparently the yield on terraced houses is now running around 6-7 percent - the highest of any type of property apart from detached houses. (Flats yield significantly less; so do semis.)

Now that's not at all dusty compared to the Bank of England interest rate at 3%. Could it be time to buy?

Well, possibly not. There are some quite good counter arguments.

• Prices of houses are still dropping and expected to fall further as the economy declines, with low consumer confidence and increasing unemployment. (Compared with cash - inflation is at 5.2% and expected to decline; that's the diminution in the value of your cash, so to compete, property prices would have to fall less than 5% over the next year. Most forecasts are for significantly more.)
• Though the Bank of England rate has been cut to 3%, it hasn't really affected the interest rates being charged in the retail market. You can still get 6% on notice accounts and fixed rate bonds. Equally, you won't get a mortgage anywhere near 3%.

But it does seem that price falls so far in the residential property market have driven yields up to the point that property is once again competitive with better rate bank accounts, rather than - as happened in 2006 - yielding considerably less. Smart purchasing could drive initial yields up to 10%.

But I think before I jump into residential property again, I'm going to wait for yields generally to approach the 10% level. That's the point at which the market represents a real bargain - and though we're on the way, we haven't got there yet.

Blithering idiots

Can you count to 13?

One.
Two.
Three.
Four.
Five.
Six.
Seven.
Eight.
Nine.
Ten.
Eleven.
Eleven.

Er?

Well, the Inland Revenue thinks that what comes after eleven is eleven. I am just doing the workings for my self assessment tax form and there is box W11 at the bottom of page STRG 21. Then there is box W11 at the top of the next page, with the rubric: "complete boxes W12 to W14".

I can't . There is no box W12. Just another box W11.

Fortunately, on a closer reading of the form, it appears I don't need to bother with this since if higher rate tax is payable, I need to fill in boxes W15 to W22 . That isn't terribly obvious either as the rubrics are very poorly drafted.

But what amazes me is that this form could go out with such an egregious error. The tax authorities have very extensive powers over citizens, sorry, SUBJECTS (and that is another sore point, but it certainly feels like it this year), of the United Kingdom. You would expect them to be rigorous in ensuring that their computations and the documentation issued to make these computations is correct.

I have completely lost faith in this government department. I do not believe they are capable of levying fair taxes. I have no faith in their computations.

I have an accountancy training. I keep good records for my business. I used to be pretty hot on business taxation and still cover it for a number of magazines and journals. And the process of filling in my fairly simple tax form (employment, self employment, dividends and bank interest) this year has reduced me to tears and taken nearly two weeks.

And this is 'simplification;'.

Ha ha bloody ha.

More Revenue madness

Now someone from the Inland Revenue has finally got back to me, and explained the difference between a dividend and a capital gain.

Yes, I am aware of the difference. I trained as an accountant. I have filled my own tax form in for ten years or more. I have worked as an investment analyst. I sort of figured out that there's a difference between a dividend and a capital gain.

"So which one do you need to know?"

Both!

Said person seems unable to grasp that if you sell part of the way through a year, you may have dividends paid on an investment and make a capital gain on it....

Somewhere deep in the innards of the 17 pages of notes to the CGT form there is apparently a mention of OEICs... but nothing on the notes to the short tax return.

Oh yes, the notes to the short tax return by the way aren't visible on the Inland Revenue site. It links to a page telling me what a PDF file is.

Frankly, Guy Fawkes was right. I feel like taking my remaining money out of the stock market and investing in as much gelignite as I can buy. Anyone want to join me on November 5th?

Interest rates and the price of risk

An interest rate is the price of risk. That's an economic truism.

Obviously, with stock market volatility at high levels, and the economy tanking, there are significant risks involved in lending or investing.

Therefore, the interest rate needs to be high.

Oh no it doesn't, say voices including the CBI, estate agents, politicians and rent-an-economists in the national papers. Reducing interest rates is the only way to get us out of recession.

Reduce interest rates, and force the banks to lend, so people can once again borrow stupid multiples of income, pay very little for borrowing it, and send house prices rocketing again so everyone will be happy.

Ummm... little bit of a problem. First of all, now consumer confidence is low and unemployment is rising, it's not going to work. People are cutting back. And the bet they're making is that if they hold back now, the house they're looking at today will cost them 30 percent less next year. Reflating the housing market in this environment? Impossible.

Secondly, though, the banks aren't buying it. The banks take their own view on risk - and have made their own views very clear. They are not reducing mortgage rates. Their view is that the Bank of England can do what it likes to its own interest rate - but they will take their own view on risk, thank you very much, and that view is that it's a bigger risk and they need a bigger price to take it on.

Look at the way equities like BT, Cable & Wireless or Enterprise Inns are trading on yields as high as 13%. Guess what - that reflects the perceived risk. The dividend might get cut. Enterprise might not be able to reschedule its loans. BT might not be able to fund its pension scheme without slashing the dividend. The yield (equivalent to the interest rate) is the price of risk - and it's the perception of risk which determines the yield.

So whatever happens, I suspect the credit crunch is going to continue. Because frankly, why would you lend money right now? Especially if someone's going to use it to buy an asset whose price is going down.

Specialists? Don't make me laugh

The Short tax form has been lauded as vastly simplifying taxpayers' lives.

Really? I wonder why there is no reference anywhere to what to do with unit trust dividends.

There is a box for "company dividends".

On the old tax form, of course, corporate and unit trust dividends were separate. You'd expect the notes would tell you whether unit trust dividends should be entered into this box. Nope. No reference to one of the commonest forms of investment in the UK.

Ring Inland Revenue. After giving extensive identity information I'm told the person picking up the phone can't actually answer any questions. He will put me through to someone.

I am put through to someone, after listening to Pachelbel's Canon (a piece of music I now loathe. I used to like it.)

This person says she can't answer any questions but I can talk to a 'technical specialist'.

I hold on for five minutes.

The specialists are all busy. Someone will phone me back WITHIN THREE DAYS. What?!!!!!

"You shouldn't leave it to the last minute then."

Er, this is not the last minute exactly. This is two weeks before the deadline for paper filings. And it is a simple question.

"Yes, but we aren't qualified to answer anything. You can ring back if you like."

Will I actually get hold of anyone who will answer the question?

Maybe. Maybe not.

What exactly is going on? No one I have spoken to at HMRC can actually answer any questions at all about the tax form and how to fill it in.

They just pick the phone up, take a load of information off you, and then tell you they can't help.

It's a con. My taxes go to pay for this 'help' line.

Some help.

This seems to be common across the whole civil service now. But I honestly despair of the tax office. I'm not asking for anything difficult here; I am simply asking WHICH FUCKING BOX DO UNIT TRUST DIVIDENDS GO IN?

You'd think I was trying to find out something very, very abstruse relating to trusts or inter-company transactions, or the foreign exchange rate I should use for imports from Botswana.

Call centre hell. And at the end of it, if they can't be arsed to answer the phone, guess who pays the fine for late filing of a tax return?

You guessed it. Me.

I do wish the bunch of overpaid and well stuffed idiots who inhabit Westminster - a place about which I am increasing coming round to Guy Fawkes's somewhat pyrotechnical views - would actually get their heads round the idea that we would like some service out of the civil service.