Hamster Wheel Economics and the Property Game

The Council of Mortgage Lenders recently published data equivalent to the who's who of lending. There are few surprises and perhaps further evidence of the 20/80 Pareto rule. The bulk of lending was provided by about 20% of lenders, who secured about 80% of debt. The "big six" in order are Lloyds Banking Group, Santander, Barclays, RBS, Nationwide and HSBC. Collectively they provided loans of £110.8bn which is a reduction on the previous year (2009) figure of £119bn. Collectively they hold 81.5% of the market.

In short, this is a problem. I'm not a fan of economics that relies upon debt. Yesterday I heard some quite ludicrous statements from a leading home builder on the radio that went completely unchallenged all of which results in property prices being kept unnaturally high and inflated out of the reach of many people - the vast majority of us could not buy our own homes if they were up for sale today, even in this "depressed market". It doesn't matter where you are on the property ladder, the inability of others to buy a home is a problem that eventually impacts us all.

Any market where 6 companies control the bulk of funds is troubling. The over-reliance upon them making good decisions is a flawed scenario, particularly as for the majority of the time they compete with one another and effectively mimic each others decisions. When you consider that all of the top six have acquired other lenders in recent years this merely evidences that market share can be bought and with significant market share, significant power follows - sufficient to "buck" the market.

Naturally the banks (and Building Societies) need to lend responsibly, but these figures demonstrate that lending has shrunk since 2009. I would normally suggest that this is a good thing (sensible lending) but given that the money has really been used to repair their own balance sheets (with the exception of Barclays) this does not help the wider population.

Houses are overpriced. The link between income and borrowing levels is tantamount to insanity. Building companies "helping" people with a deposit may on the surface look like a "nice"gesture but in practice merely fuels the overpricing. Think about it.... a builder offers you 15% of the purchase price (a price set by the builder) so the borrower only needs to find 5% and the lender stumps up the rest. The Builder makes on the sale and on the financing (which is a loan), the lender makes money on the financing and has the first charge over the property.  The borrower actually has a 95% loan on a property that was valued by a builder and endorsed by a surveyor who bases prices on "market value" which is a strangely hamster wheel-like scenario. 

Thankfully the number of repossessions in the first half of 2011 fell by 7% against the same period in 2010. However this is still 18,100 repossessions in the first half of 2011 or 3,016 a month - about 100 a day. Those in arrears numbered over 320,000. But what do I know! I've been saying for years that property is overpriced and little has really altered and anyway, the CML point to an improving trend and suggest that the mortgage and property markets are improving.

Russian Roulette Retirement - Six Bullets

I apologise in advance for the tone of this piece, but find myself outlining some broad details which many will find akin to teaching grandma to suck the proverbial egg. I'm also conscious that having an image of the poster from the 1978 Robert De Niro film "The Deer Hunter" is stretching the point and I don't wish to offend anyone with the image.

Let me begin with an obvious statement. We don't get to decide when we are born. As a consequence we don't get to decide when we become 65. If you are "lucky" you will be 65 at a point in time when the economic cycle is good, when the markets are rising. Many however, will find that 65 comes at precisely the wrong moment. Many people are playing a game of Russian roulette with their future. You can only control so much - so what can be done?

1. Review your pension and investments. It is vital that the investment strategy ties-in with your planned need to draw capital or income (or both) from your portfolio of whatever. This sounds rather obvious I know, but this is a very common mistake that people make. In essence, the closer you get to the day you need your funds most people will want to have a high degree of certainty and not worry about the state of the global markets. As a result the investments should all be in low risk/low return holdings, possibly cash. Most people do not appreciate that their pension or endowment or whatever has a range of funds, OK often very small, but never-the-less there is a range and invariably this includes low risk funds. In an ideal world you should gradually apply "investment brakes" in a 5-year run up to the date you need the proceeds.

2. Consider what retirement will actually mean for you... many people find the transition from work very difficult, some leave high profile positions and describe life in retirement rather like "being invisible". There is nothing to stop you earning money/working after a certain age. Certainly much will depend on what the role is and your state of health, but this is something that is within your control. It is important therefore to reflect on what you are likely to do in retirement and what income (if any) you need. By way of example, Robert De Niro turned 65 in August 2008. To date he has worked on a further 14 films since then.

3. The State pension age is being moved around all over the place at the moment by Governments that are unable to deal with maths, economics and social planning. The amount of the pension is being "reviewed" as are the qualification rules. The principle is that everyone (UK domiciled resident taxpayers) should get a full State pension, but quite who qualifies and how much tax or exemptions apply is open to debate. I suspect that for poor reasons, the State pension will one day become means-tested.

4. Ignore the impact of inflation at your peril. Good planning means attempting to maintain your purchasing power. In reality basic utilities, transport and food costs all seem to rise faster than any government approved statistic for inflation (you have been warned).

5. The goalposts keep moving. This is of course meant to be a source of great joy to Financial Advisers and Accountants as it means important things have happened which need explaining. I don't find myself feeling this way, indeed quite the opposite. The BIG new rules are pretty much these:

5.1 From April 2012 your pension funds must not be worth more than £1.5m. There are some exemptions but all come with a catch. This is known as the Lifetime Allowance.

5.2 The amount paid into pensions per tax year per person has altered. £50,000 is the allowance, but you can use up "2 previous unused years". Those earning good salaries in defined benefit/final salary pensions also have a complicated formula to calculate the amount that their pension increased by over the year which will restrict their allowance and in some case exceed it leading to a further tax charge. This is known as the annual allowance.

5.3 The need to buy an annuity (annual income for life) has been abolished. That said, most people will end up with one. Whatever you do, DO NOT accept the annuity quote that your pension company sends you. There will be others that are MUCH better. An adviser will sort the best for you. It may be that you have a poor medical history - or smoke, this will lead to a better annuity as, to be blunt, you have less chance of reaching the average age of death.

5.4 If you don't like the idea of an annuity (giving up some or all of your pension fund to an insurance company in exchange for an income for the remainder of your life and possibly that of your spouse) then you can also now defer taking the annuity - potentially for good (known as DrawDown). You can instead take an income similar to that of an annuity and leave the fund invested. The fund almost certainly needs to grow, so you will have to expose the fund to investment risk. The amount of income is determined by your age, gender, size of the fund and the Government Actuarial Department.

5.5 If you have guaranteed sources of income for life of £20,000 which can include your State pension but not earnings or income from investments, then you can strip all the fund as income if you wish, simply paying the relevant rate of income tax at the time. This is known as Flexible DrawDown The £20,000 limit implies that you won't return cap in hand to the State once you blow the lot - or if you do, you won't find a sympathetic ear.

6. Finally (yes I cheated a little with the 5.1-5.5 didn't I) make sure that you have thought about what you want from life. Generally we don't control the date of our death, so ask yourself some soul searching questions. Having an enormous pension pot that you worked hard to build, depriving yourself of many "good things" only to die three months into retirement is not a good result. That's why a good financial planner will ask some pretty personal questions. As I have probably said many times before only "magic" in financial planning to to attempt to ensure that your money does not run out before you do. This of course will prompt some very deep and big questions.

A good financial planner is perhaps a little like Joseph - who managed to make sure that enough was saved  from the years of plenty for use in the years of famine, which ended up saving the entire Egyptian nation. A great financial planner will ensure that you handle the question - how much is enough? 

There is no need to play Russian roulette with your future.

Small is beautiful - Great Service Reminder from The Bradley

Every once in a while I come across something really good that leads me to wonder and hope that my clients have a similar experience of my service. If you were in Britain for the August bank holiday weekend, you will be aware that it was a fairly miserable reminder that summer came and went in April and that we are now firmly in Autumn. I spent the weekend with my family in Cheltenham, taking the opportunity to visit my brother who lives nearby as well as our annual trip to Greenbelt, held at the racecourse.

I know myself fairly well and am not good to be around if I sleep badly. Whilst I quite enjoy "proper" camping (by which I mean strapping stuff to your back and hiking - or finding a properly set up camp site) the option of camping on a racecourse is not something that leads to good results for those with me. So for the last few years we have stayed at hotels in Cheltenham.

This year we tried a new hotel, in truth this was partly due to the previous hotel being fully booked (four months in advance). Anyway, we stayed at a delightful boutique hotel - The Bradley. An otherwise large home turned small hotel. There are some people that are simply gifted in "hospitality". Its not simply being organised, but a genuine warmth that puts guests at ease. This was displayed in buckets by the hosts and owners of this charming boutique hotel. Fantastic breakfasts, lovely little touches and a high quality experience. We had a fabulous stay. The Bradley is not a state of the art, top of the range 5 star hotel with all the features of a plush west-end pile - but manages to achieve what so many supposedly "great hotels" invariably sadly fail to deliver. The Bradley provided a comfortable, thoughtful, friendly, professional, personal and stylish service that felt more like a good family welcome than a good attempt to conceal that you are just another punter. This is a great small business that knows what it does well and plays to its strengths. Chris and Sue provide a great welcome and run a great business.

As a firm of financial planners, I take a similar approach, but marketing material, however clever fails to really communicate what it is that we attempt to do. It may sound twee, but I do actually care about our clients and want to ensure that they benefit from great financial planning. To be a small business that knows its strengths and provides an excellent service. It is always helpful to be reminded of the difference between good and great service and that size does not matter when this is achieved. Regrettably in many aspects of a normal working day my team and I have to deal with the failings and general folly of many very large financial organisations that seem to have a great reputation, but we're all left unclear about how they earned them. Having a good financial planner on your side is helpful, having a great one - is an enormous advantage that dare I say even makes the experience of financial planning rather enjoyable! This is what I hope, plan and work to achieve for our clients.

How to master disaster

You may have gathered that I'm not one to think that life is a breeze and I can't resist a great story of triumph. Last night saw airing of the "Walking With The Wounded" charity on BBC1. This is an amazing and fabulous story of courage and triumph over circumstance.

Imagine if you can being a soldier in the British Army, physically fit and able to do just about anything that is required of you physically. Then the horror of a serious wound and the realisation that not only is your career over, but your life has changed considerably.

This is a tale of 4 servicemen back from the war zone, supported by two senior expedition leaders, overcoming the lack of limbs to walk to the North Pole, assisted by the highly amiable HRH Prince Harry who really is "one of the guys" having seen considerable action in his service.  

Last nights episode is now on the BBC i-player and will continue on the BBC. The challenge is enormous and a timely reminder that attitude, not altitude is everything. It is a fabulous story and tremendous organisation.

How to ruin your children - Mildred Pierce

I wonder if you saw the television series "Mildred Pierce" that recently ran on Sky. I am one of those people that likes to see things through to the end, despite my feelings that perhaps this was one of the dullest dramas that I have seen for some time, I struggled with it to conclusion. Sadly, even some of my favourite actors could not salvage this from being a very heavy handed series that could and should have been an awful lot shorter (by half!). Too much of the idealised mother in the writing and editing. Sadly, this trailer is probably what got such great actors involved with the project, which is otherwise as slow and painful as watching paint dry. HBO should have taken a knife to this and cut it down by 60% or more!

The basic plot line was of an American woman (Mildred Pierce) played by Kate Winslet who struggles to come to terms with the disappointments of her life. Her husbands failing business exposes their own marital problems and Mildred is left to find work to provide for her family. No easy task during the great depression of the 1930's and a society that values people based upon how much and how old their money is.

Mildred becomes something of an entrepreneur, setting up a restaurant which flourishes and multiplies in California. Her business is based upon understanding what the customer wants and providing this with little fuss. One might say - focus. The irony of her inability to successfully understand and parent her children is not lost on the audience which results in possibly the most selfish and grotesque spoiled daughter (Veda) since Scarlett O'Hara.  Mildred constantly attempts to buy her daughters affection and is unable to let her go/grow up which is surprising given how ungrateful Veda is.

Mildred gets into a financial mess by over-stretching herself and some poor but creative accounting. As a consequence she is forced to face a few truths, which she largely ignores and eventually turns to protect the source of her financial ruin, but in doing so finds her daughter (now a prima donna in every possible way) taking her betrayal to its conclusion.

So why do I bring this to your attention? Sadly, wanting something does not make it happen. Mildred wanted to avoid poverty and initially succeeds but failed to think about the life she really wanted to live. She wanted her children to have a better life than she had, but failed to appreciate the difference between capital wealth and emotional wealth. She wanted a good marriage, but failed to invest in her relationship. She wanted a good business, but failed to take the advice of those that cared about its success.

The flush of early success can be enchanting for many, but how to wisely handle wealth is a skill that does not come quickly. Our culture tends to view the accumulation of money as the measure of wealth and success, yet we all know that this is a very flawed measure. Cast an eye on many of the wealthy despots around the world. Emotional wealth and security are vital ingredients in understanding how to handle money well. This is something that a good financial planner will prompt for thought and perhaps discussion. This is not a terribly "British" topic, yet we can observe the evidence of a history of lives in ruin of people that seemed to "have it all". This is why I believe that to achieve great financial planning, I need to understand the values and aspirations of my clients. I do this without judgement, but I may challenge assumptions and motivations so that everyone is clear about the purpose and objective behind the plan.

So if you want to ruin your children, spoil them rotten and teach them as little as possible about the value of money or hard work. Keep them in the dark about how finances impact decisions and above all give them everything you can and ideally everything you never had yourself. This is not a strategy I would advise.

***

On Sunday 18th September 2011, Kate Winslett won an Emmy for her role as did Guy Pearce both for their acting.

Turmoil Continues

The global markets remain highly volatile and values have fallen further this week. This is primarily driven by fear that it will take longer than expected to return to economic growth. The media glibly use terminology that is highly inflammatory and loaded with sensationalism. The reality is that we are in a global recession, we have not and had not left this behind us. The graphs may suggest a "double dip" but in reality this is merely a valuation chart and little more. The economic data has been weak and I think we are all aware that Governments around the world have also been somewhat insipid in their ability to restructure economies.

When I was on my holiday in America in July/August I was struck by the general folly of American politicians and the lack of retail activity. Admittedly my ad hoc sampling of the shopping experience (which was deliberately limited) was hardly scientific, but I was struck by how few shoppers there were. Consumers are generally very concerned about budgets and affordability (not before time!) this filters through to slow retail sales and lacklustre growth.

The current turmoil is sadly a reflection of a lack of faith in the ability of economies to recover quickly or Government's to make a difference quickly. Gold has continued to be a "safe-haven" and prices continue to rise making it expensive. Cash is currently providing a guaranteed loss (interest rates below inflation rates) so investors are stuck with what appears to be a lose-lose choice. Bonds are normally a helpful low risk investment, but essentially being issued by Governments, remain a risk due to the ability of Governments to meet their liabilities.

What will help? frankly reform of the system - particularly the tax system which needs to properly address the question "how do you raise tax revenue without alienating the population and dis-incentivising them?" Answers on a postcard please.

Lessons from the past - The Help

I was at a special showing of a new film that is on release in the US at the moment. "The Help" which stars a great ensemble cast is about small town American bigotry in the 1960's. The film is based on Kathryn Stockett's 2009 novel which has reached 5m sales. Not bad for a debut novel. I think she even has a cameo role in the film.

The story is about life in Jackson, Mississippi during the 1960's. The marketing of the film is that this is from a black maid's perspective. In truth it is really a white woman's attempt to understand her perspective and experience. A story of courage, friendship, dignity, peer pressure, social conformity and love. Whilst in reality this is this a new story (written in 2009) it is still all too staggering to believe that this was only 40-50 years ago in America's recent past.

As our media currently gets itself into a tangle about the where, why and how of the recent rioting this is a timely reminder about the pernicious nature of the failure of people to speak up and to demand a fair and just world, because of their own inability to listen, understand or to accept that their version of life may not be completely accurate. Martin Luther King's words still call us to "not be judged by the colour of their skin but by the content of their character".

If there is any doubt about my position - I'm with Mr King every time. Sadly the film is not released in the UK until 28th October 2011. Its a great movie with powerful portrayals and one that ought to be shown here  earlier to remind people what a real cause is all about, but also to remind us that courage and friendship are the foundations towards peace.

Email - technology failure

At the risk of sounding like Victor Meldrew, I am experiencing some technical problems with my email at the moment. Our IT people are working on fixing this, but in part the issue resides further along the food chain. You can email me using info@ or of course phone (020 8542 8084). Email for other team members seems fine, which is all rather odd. Alternatively, Debbie Harris my PA does not have a problem with her email and she can be contacted debbie@solomonsifa.co.uk. Sorry for the inconvenience caused - it is a nuisance.

Market Updates

I know that not everyone has access to the internet or an email account so today I have written to all clients regarding the current turmoil in the markets. As I write the global markets are reflecting a more positive day, never-the-less the nervousness across global markets is unlikely to reduce considerably in the short-term. If you have any questions or thoughts as a result of my letter please do get in touch. 

Monthly Market Report

For consistency, the latest monthly figures to the end of July 2011 are made available once again via our website in the news section. These are of course now out of date. Markets have fallen sharply. It will however be interesting to see the mathematical impact on longer-term returns at the end of August and how the current chaos is reflected in the figures. I also wish that I was providing better news!

Sign for the Times

As I was driving past my local hospital this morning I reflected on the signage for the hospital. Those travelling to a hospital are often stressed, perhaps due to anxiety about an appointment or visiting a relative. There may be other reasons too, perhaps being rushed to A&E or maternity. In short the sign that effectively says "there is a hospital here" is accurate but missing the point that because there is a hospital here, people in the vicinity, on the way to or from it, may be in a heightened state of anxiety. As a consequence they may not be as focused on their driving, parking or walking as much as they normally would be. The sign then becomes a warning to others in the vicinity to also take more care as a result. I know that as many of you work in a hospital, that this will be all too familiar and indeed the trip to your place of work may also be fairly stressful.

Today is simply another day, but today's context is different from a couple of weeks ago. Today there is further cleaning up of damage, there is some reflection on how we reached this point as a society. The stockmarkets around the world remain highly volatile and nervous, we have deep seated economic problems. The world is not as it "should be". It would be rather helpful if the stockmarket came with helpful signage - or indeed our society. So we look for other signs, which is really what investors are currently attempting to see. There will be further volatility, there are no certainties, sadly that is part of life. However, we are not impotently standing by, but continuously reviewing the situation and acting with caution and I am doing my best to protect clients from making poor decisions. Hindsight is a gift only to those that live in the past, so as the media noise rumbles on, remember that to date nobody has successfully predicted the future consistently. The market is essentially a place where different (perhaps opposing) views are given shape in the form of a price, not value. So as you listen, read or watch reporters attempt to make sense of what is going on, remember the Hospital sign.

Perspective - we are fortunate

As the media and "experts" digest and attempt to understand the rioting in several of our cities, it is important to retain a sense of perspective. In our country, in my lifetime, we have not experienced famine, we have not experienced devastating earthquakes or tsunamis. Yet these are very real for thousands of people in different parts of the world.

Imagine your company suffering a 99% reduction in profit. That's what a household name car manufacturer has just announced. Toyota's quarterly profit (net income) reduced from £1.51bn to £8.7m or 190bn Yen to 1.1bn Yen. This is largely due to the earthquake in Japan, but also due to currency changes. Let us not forget that whilst we are quite right to demand and expect safe streets, some people in the world are having to rebuild their lives, families, businesses, communities and country.

Business Updates - presentation is everything

The media world is one that perplexes me. I still fail to understand why broadcasters insist on increasing the volume every time an advert break comes along - and I'm also baffled why (to my knowledge) nobody has shown an advert in slow motion (as most of us fast forward through them, it would seem that this approach might actually make sense). Anyhow, despite my misgivings about the effectiveness of advertising ITV have announced that they will now finally pay a dividend in December. The first time since 2008. The "troubled" broadcaster has seen an increase in revenue of 4% to £1,027m. It would seem that ITV has become very cost conscious and worked hard to reduce its debt and reduce expenses, this strategy has had considerable success for the company's financial data.

Two big players within the financial services industry are continuing to struggle and adjust to the realities of a harsh economic environment, punitive fines and the new rules for advice giving in 2013. Barclays have announced 3,000 job cuts and HSBC are cutting 30,000 on a global basis as part of a £2.1bn cost cutting exercise. Barclays have actually been doing rather better, although a huge amount (£1bn - that's a US billion and actually £1,000m) has to be set aside for PPI claims. Total income net of insurance claims reduced to £15,241m from £15,730m. Profit before tax was up from £2,963m to £3,678m which is a significant increase of £715m or 24%, although the statutory figures are almost the reverse with gross profit of £2,644m compared to £3,947m the year before, a reduction of £1,303m or 33%. This may be a case of how the data is presented.

Now is the time to make real the promises of democracy

These are disturbing times. Stockmarkets are now in panic with most having lost over 10% in recent weeks. European and the North American politicians have failed spectacularly to address any of the credit crunch problems effectively. Economic growth is meagre, unemployment is rising and now there are youths and criminals looting various streets of Britain. One has to wonder where we are heading.

There are of course lots of connections, a plethora of reasons. To my mind, the common thread is that of self-interest and greed. Sociologists may have good explanations for the disaffected youth of today (some of the youth). Some will point to the greed of the super rich who are equally as disconnected from the rest of society. The behaviour of some our politicians, some journalists and some police as well as some “role models”. In the same way, the actions and practices of some well known corporations fail “to be decent”. To some it will be the breakdown of the family unit, the lack of community connections and a general “I want it now” disposable society. History has some lessons to teach us, unfortunately similar scenarios that appear to lack confidence and strong leadership can create a vacuum into which some fairly unsavoury characters have stepped.

This is the time for a calm head and a clear mind. It is not the time for panic and fear.

Clearly we do need to reflect on what sort of society we really want to live in and work towards creating that. Later this month, the Martin Luther King Jr National Memorial will be unveiled in Washington. Few people have spoken as powerfully and his words seem just as apt today.

We refuse to believe that the bank of justice is bankrupt.

Back to Basics

I am now back from my summer holiday - which was fabulous. I took my family on a "holiday of a lifetime" to California, doing a fly-drive from San Francisco to Los Angeles and then home to London via a 4 day stay in New York.

It was certainly an interesting visit, I took the opportunity to visit Wall Street and kept up to date with local and international news. Sadly, the current turmoil in the market is based upon some very real concerns. I saw nothing that convinced me that America is any better at managing an economy than anyone else. The problems that Obama is having to get through the necessary changes is widely reported. It seems that American politicians are now as loathed as our own and whilst some agreement has been achieved, frankly little real substance is behind the deal, hence the downgrading of the US from AAA to AA.

All this is of no comfort to investors who have been nursing losses for some years and despite the reality of where problems are located, all parts of the world are dragged into panic selling. As you may know, we reduced US holdings dramatically a few weeks ago, but this is of little real benefit when everything else gets sucked down.

Bull on Wall Street

My observation is that America is still very much in denial of the significance of the problems caused by the credit crisis. As yet, little has altered in terms of how Investment Banks behave or how they are regulated. Economic denial of reality can be lethal. Politicians must put the right measures in place and those that won't should not be in positions of power that impact us all. It is said that we get the politicians we deserve, I sincerely hope that this is not correct.

As for the moment, sit tight. Markets are in a spin and investors must consider the long-term nature of investing, which is not easy when all around you are loosing their heads.