It is Obvious

Chris Rick has got altogether too much to say

Archive for January, 2011

Owwww – that hurts

Posted by chrisrick13 on January 28, 2011

It is obvious: a lot of the obvious stuff isn’t

There seems to be two ‘truths’ about the economy at the moment that nobody questions.  The first is that increasing interest rates will be harmful to the UK economy and the second is that we can manage without the cuts/tax increases.  I wonder that the coalition has not done more to bring these ‘truths’ out into the open for a full examination.

I ground my teeth listening to the BBC, yet again, asking the man in the street rather than someone with deep knowledge.  They were asking about petrol prices.  The instant expert said that the government ought to cut the taxes on petrol.  I agree.  Not only do I drive a lot of miles but many of the goods and services that I use travel a long way, not least food.  The next question they didn’t ask our instant expert was that as the government is spending more than it gets, any taxes not gathered in from petrol have to be gathered in from somewhere else.  Where was he proposing that the income should come from?  Maybe close every second hospital?  Perhaps stop Motability for disabled people?  Kick half the prison poulation back out on the streets?  Not bother with police?  These bleats taken in isolation are really people saying that they don’t care how the government deals with the deficit as long as it does not affect them.  The coalition will cut and tax, on the whole, even handedly.  But there will be a bias towards the people who voted for them.  In a long term play for a lengthy period in power the Labour party has abandoned its voters.

The scenario is very simple.  The government has to cut the deficit.  The deficit is the overspending that is increasing the national debt.  If it gets too big then UK will default on its debt and a bunch of accountants at the IMF will be running the country.  If that happens the proposed cuts will look
like mild grazes compared to the slashing that the IMF will do.

Why would we want to increase interest rates?  This is how inflation is conquered.  What is wrong with a good dose of inflation?  For a start it makes our debts to the rest of the world disappear as if by magic.  The problem is that the rest of the world and in particular those that lent us money are not stupid and have long memories.  The other problem is that I am a net saver.  In common with all net savers, inflation makes my prudence a waste of time and rewards the profligate.  In common with all net savers I have a long memory and intend to  be around voting for some time to come.  But why will it hurt the economy?  Why will it ‘de-rail the fragile recovery’?  What recovery?

Suppose that interest rates were moved up with a clear intent from the MPC that they are on an upward trend.  The pound will rise and imports will get cheaper.  This will help inflation and balance of payments – foreign stuff gets cheaper.  It will handicap our exports…what exports?  Our cost of production is already so high that foreigners are only buying our stuff because there is no alternative.  Our exports are not sensitive to the value of the pound.

What else happens.  Borrowers have less money to spend in the economy.  But at the same time savers have more.  Rate increases will dampen the economy, but not much.  What happens to the extra interest payments?  they either trickle through to the people who lend money or they go to the banks as extra profit.  Where has the UK government ‘invested’ more money than a year’s GDP…the banks.  Maybe these investments will come closer to profitable liquidation?

What else?  A lot of people will default on their mortgages.  I cannot apply logic and work my way through that scenario.  There are too many branches of possibility.  A few things are predictable.  House prices will fall.  But if they do then perhaps a lot of people unable to afford houses now will be able to.  Maybe a proper market will develop as the prices reach the long term ration of wages to price?  One group of people will be kicked out their houses and suffer and another group will move in.  The banks will possibly be at the stage where the mortgagees have sufficient equity in their houses that on repossession they will make only small losses.

There lies the problem.  Between here and an economy that has few debts and is growing at sustainable rates with a manageable balance of payments, there is a period of pain, but that pain will not be evenly distributed.  The government has to create the pain, manage those who suffer and hope they can keep the country stable until the pain abates.

It is obvious: a lot of the obvious stuff isn’t, but it is inevitable.

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Trigger pulled?

Posted by chrisrick13 on January 25, 2011

It is obvious: don’t just do something

For people such as myself with a, to say the least, pessimistic view on the economy of this country, the GDP figures are an “I told you so” moment.  It is too early though.  There is plenty of bad news out there, but it is too uncertain to say that it is yet the beginning of the end.  I find it amusing that a bit of snow might be the trigger that I have been talking about though.

The spin is out on these figures.  They will be revised.  That is true.  Does not happen a lot but down is an option.  One month of bad weather will not cause a change in economic policy – quite right.  What happens if we have two?  February has had more bad snow than December over many years.  The most problematic part of the numbers is that the consensus was for GDP to go up by 0.5%.  So all the ‘experts’, in the full knowledge of the snow and its effects, with many retailers reporting already, were out by 1% in their estimates.  I suspect Paul the octopus could do better (RIP).

I find I am repeating myself a lot no matter where I start from.  I will not apologise for that and will issue two repeats here.  First is house prices.

The GDP number, if ignored for what it is but looked at for its unexpected nature, has made all economic forecasts more uncertain.  It has added uncertainty that will further mitigate against house price rises.  Taken for its actual value it will have made another group of people unwilling to commit to a mortgage thus reducing demand from where it was just yesterday.  It will also cause another group to act further to reduce its risk from mortgage lending: the banks.  Expect borrowing on a mortgage to get more expensive and more difficult to do.

I am repeating more than BBC1 and Dad’s Army with my second point.  The rule of 70.  All economics is based on running economies with growth.  We are relying on cuts, increased taxes and growth to get us out of our economic mess.  The IMF has predicted 4.4% global growth for this year.  Chinese growth at over 8% is considered too high. A shrinking economy is not good.  Something like 2% is considered optimal.  With growth at 8% an economy will be doing twice what it is doing now in a little over 8 years.  China will not manage that.  But what of 2% growth?  This is something we aspire to.  Were we to achieve it then in a little over 8 years the economy would be close to 25% bigger than it is now.  Tell me what is going to happen for us to be doing 25% more of anything in 8 years time.  It simply cannot happen.  Push out to 18 years for a 50% increase.  Simply, it cannot happen.  We have to get used to 1) a period of economic pain while the nation’s spending is cut to the point where the nation can reduce its debt burden 2) living in an economy that has low or no growth 3) finding a way to manage a zero growth economy.  The best answer that I can think of is that we improve the efficiency of everything we do rather than just trying to do more.  That needs the whole population to change the way it thinks.  Given that the evidence is that not many of us are thinking at all, that might be tricky.

How about a revision to 0.1% shrinkage and then GDP for the next quarter coming in below zero?  In case you didn’t realise, that is a double-dip recession.  We are half way there.  Start reading the words of people who have been predicting double-dip.  Then get yourself some strong sleeping tablets.

It is obvious: don’t just do something – sit there…

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Tiger country

Posted by chrisrick13 on January 25, 2011

It is obvious: house prices are interesting

1.  House prices track the average wage.  The lines diverge during bubbles and slumps.  But long term there is a strong relationship.  This relationship is defined by the rate of interest on borrowed money.  However this is easily normalised.  At the moment house prices are a long way high of the long term line…about 30%.  A full correction or the usual over-correction is unlikely any time soon, but 10% looks promising.

2.  The average wage is falling.  Not many people are getting pay rises that even beat inflation.  A lot of people have lost jobs, moved to lower paying jobs, taken to working part time.

3.  There is a shortage of supply.  In any market demand that exceeds supply resolves to higher prices.  Trouble is that there may not be enough houses to put all exisiting families/people into their own houses but that is not where the shortage lies.

4.  Banks are not lending to people.  They are, but only where the lender can service the loan now and be in a group that is likely to be able to service it at interest rates many times the current one.  So the shortage in the market is buyers not houses.  This is the other side of the market: if there are no buyers then prices go down.  This is a slow response as people hang on as long as they can but there are those that have to sell.  This is a case of banks only lending money to people who don’t need it.  Who can blame them with the amount of potentially defaulting mortgages already on their books.

5.  The rental market runs alongside the homebuying market.  If it is a lot cheaper to rent than buy then rent a place and save.  If buying is cheaper than renting then borrow and buy.  Landlords also run in this market with similar equations.  However they are mainly interested in timing, buying when prices are low, servicing the loan on rental income and selling when prices are high.  Except that the major payer of rents is HMG with housing benefit.  This is about to be reduced (with lots of spin).  This will depress the rental market and house prices will follow.

6.  We are in uncertain times.  We are always in uncertain times but they are more uncertain now than they have been for a while.  We are at risk to a number of global factors that we can do little about…at least now.  We do not have the export industry that we had in the past.  The pound has been reduced to make us more competitive (but not necessarily competitive).  However the people that might like to buy our goods and services are not in expansive mood.  Europe consists of basket cases and thriving economies.  The thrivers are exporters.  So our biggest market is not buying much.  In particular Ireland.  Places such as India and china and even the US do not buy much from us though the US through its buying does drive others to buy.  So exports are not likely to help us for some time.

7.  We are fast running out of oil.  We are a net importer.  Our alternative fuel strategy is poor and the provision is derisory.  We are at the mercy of  oil prices.  This is a market and prices will rise.

8.  To say that we suffer from government debt and deficit is maybe just another expression of the factors above.  If the deficit is not removed then it will increase our debt to the point where we get into a debt/default cycle.  Default becomes inevitable.  If we default then we will suffer much more than if we suffer to cut the deficit and it will be over a much longer timescale.  The Conservatives are cutting the deficit relying on pain over a short term and then recovery in time for the election.  Labour want to cut it slowly and have us suffer over a very long period.  Indeed their ‘scorched earth’ policy in the days leading up to the election looked like an attempt to maximise our suffering either way.  So the government, for right or wrong, must be working to a, now, four and a bit year timescale.  Putting uncertainty over whether they can get it right to one side, they clearly intend us all to suffer to get the economy into ‘health’ over at least two and probably three years.  You can go to the bank on that one (sic).

9.  Completely ‘out the box’ and already running screaming over the horizon what about birth rates?  I wonder how our population is doing?  This has to  be something that lags, but if it is in place then it sits there and waits for a generation.  We are at the end of the baby-boomers.  There are a lot of people stopping working and dying.  We are rapidly approaching the middle of the bell-curve.  I have just sold my mums house.  One group of my baby-boomer friends consists of 4 early retirers and myself about to.  Houses are coming on to the market in increasing numbers and the spending patterns of the baby-boomers are changing radically.

10.  There are monsters under the bed.  I am always moaning about bad information and missing information.  These have two close relatives: rumour and speculation.  I hinted above that there is a lot of rumour and speculation that the bad news that we know about banks and even nations is nowhere near all of it.  Banks are still reluctant to lend to each other…because they each know how bad things are for themselves.

11.  Blast: I have more than 10.  Inflation is at 5% ish.  Ignore the new versions.  Something will be done about it as it rises and that will be to increase interest rates.  As economic news gets worse so does the proximity of interest rate increases.  There will be a balance point where the wisdom of those in charge will be that the damage from not doing it will be worse than that of doing it.  The consensus is that that point has moved closer on recent economic news.

All a bit circular but it illustrates my thinking.  There is little to push house prices up and much that could and will push them down.

It is obvious: house prices are interesting but I want them to be boring.

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Quick, find a feather

Posted by chrisrick13 on January 18, 2011

It is obvious: my licence fee provides for quality tv

The government is about to introduce minimum charges for alcohol as a way of combating binge drinking.  I think I agree with the sentiment.  Make people pay full measure for the things they want to do that are in some way detrimental to society and the well-being of others and themselves.  I don’t know if that is effective.  I drank a lot as a student.  After a(long)  while I realised that there was  much more fun in being sober than recovering from being drunk.  Those that didn’t come to that realisation kept drinking.  However after time most made the realisation or their body persuaded them to stop.

I have often complained that the tv companies turn to the man in the street for a view on news events.  One or two or two hundred is not a good sample and I had hoped that my licence fee brought experts to the studio for some knowledgeable comment.  I can find plenty of idiots for a biased uninformed view on anything without paying a licence fee.

So to my amazement on 24 hour news the reporter found a couple of drunks to interview!  There was a good minute of incoherent babble before they went to another item.  I sat there in shock.  All was well though, I was able to test my sanity as they repeat themselves endlessly on the 24hr news programs.  Sure enough an hour later we had the two drunks back on tv.

I am still in shock.

It is obvious: my licence fee provides for quality tv…poor quality.

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Anyone got a pump?

Posted by chrisrick13 on January 18, 2011

It is obvious: I know best

How long does something temporary have to exist before it is deemed permanent?  In my mind is: ‘inflation above the BoE target’.

It is cruel because the MPC can only increase the base rate to combat inflation.  However if the base rate is raised then the economy will crash.  This is a catch-22.  Broadly, interest rates will be left low and savers will be hit, or interest rates will be pushed up and borrowers will be hit.  As far as government is concerned they are all voters so they might as well toss a coin.

I have a view that increasing interest rates will eventually lead to a short period of pain and then an economy that might improve.  Doing nothing means just as much pain for us, if not more, spread over a long time.  I would say to any politician that the baby boomers are just starting to retire in significant numbers and on-trend interest rates are important to them.  They are all voters and mostly do.

What is my view worth?  It is just about as good as the BoE forecasting over the last few years.  The problem is that my view is only something in a blog.  The BoE view informs (sic) the government about where economic policy should go and has a major hand in it through the MPC.

Did you notice my spin in the first paragraph?  I said that an increase in interest rates will cause the economy to crash.  Unless you were on your guard you accepted that.  I have no basis for making that statement…and neither does anyone else.  Given that nobody seems able to predict economic futures why is everyone running scared of an increase in interest rates?  I think it is that inaction is relatively blameless while action always has a culprit.

I heard Stephanie Flanders say on the BBC that ‘they’, with no definition of who ‘they’ are, are relying on low wage settlements to restrain inflation.  So the strategy is to let inflation remain high and damage savers, while keeping wage increases low thus damaging workers.  So the only people to benefit are those with no savings and no jobs.  What a way to treat your population!

I try to be balanced here.  The logic is undeniable, or at least I hope it is, my spin is the logic I choose to talk about.  But I also try to look for good news.  There were two bits in the press today.  A big splash across one of the tabloids declared house prices to increase hugely this year.  The other said that firms were looking for more graduates this year.  Note that these are not solid numbers but surveys.

I am almost speechless enough to refrain from comment…no I am.

It is obvious: I know best and it is mighty difficult to disprove that assertion

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Vote – why?

Posted by chrisrick13 on January 17, 2011

It is obvious: you can fool enough of the people enough of the time.

You might remember that the first attempt at a treaty for the EU Constitution was spoilt by the French and Dutch rejecting it.  I should emphasise my point by saying the French people and the Dutch people.  That killed it off.

Then the treaty of Lisbon was created.  It did much the same as the previous one.  It was couched in different words.  A more organised effort was put into getting it accepted by the countries that had to vote on it.  I’ll emphasise again, the people of those countries.  I’ll acknowledge the bias in my words.  If you believe in something then it is appropriate behaviour to try to promote it even if it disagrees with my views.  There is a difficult line between knowing what is best for everyone and trying to get that to happen and a dictatorship.  As I said before, democracy is too important to be left to the people (I cannot accurately attribute this – it is not mine).

Then the Irish voted and rejected it.  Clearly they had got it wrong so after a campaign of persuasion the vote was called again and then they got it right.  I wonder that they didn’t have another vote on the same principle.  Maybe they should have done best of three…or five…or seven.

I wonder what the Irish people think of their membership of the EU now?  I also wonder that nobody stood up and shouted foul!  In other countries there would be rioting in the streets…perhaps that comes later.

It is obvious: you can fool enough of the people enough of the time and if you don’t, enough of them are stupid enough to let you keep going until you do.

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The Emperor’s old clothes

Posted by chrisrick13 on January 17, 2011

It is obvious: here there be…

I just read an article by Ambrose Evans-Pritchard.  Another of the mult-talented people that I seem to keep bumping in to.  He was on a similar theme to Notayesmans about the Portugese debt and statements by the people in charge.  They seem to be modelling themselves on the actions taken by the Irish so as to maximise their pain.

He also mentioned the EU mechansims in place to support ailing economies and talked of them being able to cope only with the ice above the water.  This I have heard before: Notayesmans, Flanders and Preston to name but three.  Everybody knows that the EU/ECB/IMF can keep Greece, Portugal and Ireland going, but that there is no possibility of doing that for Spain and/or Italy.  Yet still those who can stand on podiums before others and the press continue with the fiction that they can manage the situation.

We all know that Spain and Italy are likely to move to the state that they need serious help and that nothing can be done to save them.  Indeed there are many who say that Greece, Ireland and Portugal will fail and it is only a matter of time until they do.  All the kings horses and all the kings men are only mopping up yolk.

The euphemism I hear is that the markets will test…whatever action is taken.  It is such a good excuse for those in charge.  They are doing the best they can for everyone and suddenly an evil monster rears up out of the undergrowth and chases them off.  It is not their fault they are above reproach…and stupid.

What is a market?  It is a lot of people acting to get the best result for themselves that they possibly can.  If they don’t they lose.  It might be their job, their home, their life.  It is survival of the competent.  The fittest always survive but so do those that act in reasonable fashion.  For investing it is always a balance of reward against risk.  If the EU takes away risk then expect people to invest as much as they can at the insured rate.  If the EU says that it will insure risk and the market monster does not believe it can do it then the cost of the market’s investment goes up.  (We are all very interested in this as most of our pensions come from ‘the market’.)

The cost of the debt of the nations mentioned above is steadily going up.  It is only a matter of time until someone shouts: “Naked”.

It is obvious: here there be…Markets – grrrrrh.

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PhD in shopping?

Posted by chrisrick13 on January 15, 2011

It is obvious: they are out to get you.

Food shopping is not an activity of choice.  Just the two of us now so we do it every 2-3 weeks with small stuff in between.  Trying to diet so we don’t need bread.  Drink green tea so we don’t need milk.  When my sons were at home we had games to make the shopping bearable.  Curling was a favourite.  You have to push the trolley the length of an aisle without touching the sides.  That was too easy so we added the requirement of a 360 degree turn.  We did the two trolley trick moving stuff between a hidden second trolley so my wife was never sure what she had got and not got.  There were others.  She knew that banning us from shopping was a defeat so had to endure nearly twenty years.

Now it is just me  I have to take part.  My reward is getting it over quickly.  I have taken to calculating unit prices on the different sizes of items to fill in the time.  Largest is not necessarily cheapest.  The problem with different brands is that you are not comparing like with like.  Things like shower gel are easy though.  It cleans me and surprisingly little is needed to achieve clean – it does not matter what the brand is.  The Sainsburys brand is about a fifth the cost of branded ones.

I had to pause at the meat though.  There were two 500gm packs of lean mince for £5 and next to them were two 700gm packs of the same stuff for £6.  It took me a moment…actually several moments…actually a lot more moments than it should have.  The 700gm packs were the better deal.  The easiest way was to say that for a pound I was getting 400gm more.  However they are destined for bolognaise that will go in the freezer so we can throw them away in 5 years.  I know that we won’t get more meals, just larger ones.  So where was the benefit in the 700gm packs?

When we got to the checkout I realised that we had well over £100 in the trolley.  When you pay they also print out vouchers and one that I often get is that when I spend £50+ they give £5 off the next £50+ shop…provided it is within a week.  As I said above, we shop every two or three weeks.  I never claim the discount.  But I had an idea.  When the checkout total got to £55 I put a divider onto the conveyor belt.  I paid and sure enough got my £50 voucher.  I got a very odd look from the checkout lady as we ran the second half through.  Again £55 and I proudly presented my voucher and got £5 off the shop.  YESSSSSS!  I now expect them to add a ban on using the voucher on the same day as receipt.

I hear the question: why don’t you buy more and shop less often?  (I could have said ‘fewer times’ but could not remember if it was less or fewer.  ‘Fewer’ sounded right.)  Perhaps we just need a little more organisation to increase our storage.  That would be more efficient.  At times of high inflation we would be investing in food futures.  The trouble is that you have to buy the appropriate amounts of stuff that you consume over the same time period or you are forced back to the shops when the first things runs out.  A nice problem though and counteracts the supermarket just-in-time supply model.  I will have to sit down and calculate relative consumption rates.

I’m harmless, well, mostly harmless.  Time on my hands and an active brain.  I wonder how many people over the coming months are going to find themselves with time on their hands and smart brains who are not harmless.

It is obvious: they are out to get you.  You are not paranoid.

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This is interesting

Posted by chrisrick13 on January 14, 2011

It is obvious: I know little about economics.

The excellent website Notayesmanseconomics thundered in today on inflation.  He has been warning for a long time about inflation being a problem.  He has pointed out the moves in various futures contracts (which I don’t understand) that indicates that the financial markets (which I will carefully avoid having to define) have factored in an interest rate rise.

This is a problem for the UK.  There will come a point where the MPC cannot ignore inflation.  It seems to me that there is only one way to combat it and that is to raise interest rates.  This slows consumer led inflation and I assume that the consequent rise in the value of the pound will help with import led inflation.  Alas this is not the case if everyone else puts interest rates up.  I will carefully ignore the effect on export performance from increased interest rates and increases in the value of the pound.

If interest rates go up then I will be happy as my cash might start to retain its value under inflation.  Anyone with debts will be unhappy.  That implies a lot of people will not be able to service their mortgages.  This is mitigatged by many people having fixed rates for a number of years.  So any effect might be delayed.

This will be the big effect.  No small trigger.  If the cost of a mortgage rises to the long term average then house prices will fall to the long term average.  Versus salaries that average is 4 times and currently it is over 5 times.  House prices will drop 20% on that basis.  I will play silly games here, but suppose that the average salary of those with a mortgage drops by more than that due to some of them not having a job or moving to part time or lower paid work.  This might push the average mortgage back up to 5 times earnings.   So after the first 20% fall there might be another 20%.

I’m a pessimist so don’t listen to me.  If I put on my optimists grin can I see anything out there that is good enough news to make house prices increase?  Over the next year?  Over the next two years?  Don’t forget that interest rate rises are coming alongside the job cuts.  If you are thinking of buying wait if you can.  It will be clearer in a year and the money you have will go a lot further.

I also think it unlikely that there will be big drops.  There is too much working to counteract the cliff-edge effect.  What will happen is that homeowners will be ground down over a long period…but at nearly 5% inflation it is not that long, as, in real terms, the price of an average house has dropped by about £12,000 over the last year.  Roll in the rule of 70.  At last years rates the value of a house halves in under 10 years.  You need to be looking at that all the time.

To any first time buyer I would say: make sure you can afford the mortgage at 10 times the base rate, make sure that you have good prospects of retaining your job, be very sure that the house is somewhere that you would be happy to live for the next five to ten years.

Notayesman finishes today’s article with a good question.  The 0.5% interest rate was an emergency measure…introduced 22 months ago, so are we still in an emergency after all this time?  I would like to add my own: if we are in an emergency what has been done about it over that period?  If anyone feels equipped to answer I might then ask when will we see the results of that action.

It is obvious: I know little about economics and in common with a lot of people I seem to have a better grasp on reality than those who do know a lot and are in charge.

Posted in Economy, Houses, Uncategorized | 1 Comment »

I wonder

Posted by chrisrick13 on January 13, 2011

It is obvious: the sun will go nova one day and we’ll run out of oil.

Have you noticed the price of oil?  It has gone up.  The main way that we feel it is in petrol prices.  However most of the cost of a gallon of petrol is tax so the price is not so sensitive to oil price changes in the UK.  We are at or near peak oil production and refining capacity is limited and not easily increased even if the desire was there.  Increased demand means oil price rises.

Does this mean that the price of oil will provide an automatic limit on economic growth and growth rates?  As economies grow, so does their oil consumption.  The oil price goes up as supply cannot be increased and dampens economic growth.  They certainly are linked.  Alas an increase in the price of oil also means an increase in inflation.  Again though governments will (one day) respond with an increase in interest rates, again dampening growth.  There is little opportunity for oil producing nations to increase oil production to stimulate world economic activity.  Few of them want to decrease it.  Not heard much from OPEC recently though Saudi Arabia is expected to take some action soon.

Can we just leave economics to market forces for natural resources?

It is obvious: the sun will go nova one day and we’ll run out of oil but only one of those will happen in my lifetime.

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