Monday, 27 November 2017

Brexit and Game Theory

I have recently discovered Epsilon Theory with Dr Ben Hunt and his use of game theory to analyse life and markets. I have to read the notes at least three times and the same with listening to the podcasts, but I definitely feel smarter after I’ve done so! The Epsilon Theory manifesto is really interesting I would urge you to read into it further.

One game theory game which features frequently is the common knowledge one. Read his note on this, it’s a million times better than what I could do, but in summary the game works by having a truth or a notion, which is known internally by the population but it’s not shared amongst the people in the game until someone comes along and starts articulating this fact openly, and it is only when this common knowledge becomes publicly shared and accepted that behaviour changes. The information is articulated by a “missionary”, someone who has enough clout, influence and respect to be taken seriously enough to facilitate the behaviour change.

So, Brexit. The negotiations aren’t going well because of… well, lots reasons really, but don’t worry because… German-car-makers-will-make-the-EU-give-us-a-good-deal, so that’s okay…

The current state of play is that growth forecasts are down, inflation is up, earnings growth is negative when adjusted for inflation, the UK savings rate is about 2% and the economy plods on because of consumer spending. A chunk of significant tax payers will start leaving soon and a chunk of low paid people who staff the NHS will not move here which will cause a fairly nasty build-up of bad headlines in the next year or so.

Cabinet Brexiteers are therefore capitulating on their red lines to try and get over to the trade deal, or show any sign of ‘making a success of Brexit’. David Davis stood up and said that there would be a meaningful parliamentary vote on the final deal but a ‘no’ would mean no trade deal and calamity… or, as it could otherwise be put; a bad deal is better than no deal… which is a bit of a change of tack. Add onto that the border issue in Northern Ireland and you have to be a serious glass half full person to think it’s all going well.

I think Brits know it and feel this slow down more because they also see the rest of Europe, if not the more developed countries in the rest of the world all outpacing the UK economy. Naturally enough when Europe does well, we want to be part of it. The reverse of which was seen in the period after the Great Recession and the Leave vote when Europe was struggling under comparatively large levels of unemployment and the UK economy was rocking along – did Brexit cause this reversal of fortunes? Not by itself, but it would have contributed.

The OBR downgraded the growth forecasts in the budget last week, potentially because they had been over optimistic in the past, so maybe this time they’ve under-cooked it and the economy will do better… history is no guide, but its interesting to take a look at the Monetary Policy Committee’s forecasts for GPD growth in the run up to the Great Recession – recency bias, maybe? Forecasting is a mugs game but there’s previous when it comes to being behind the curve on the way down.

Along with the general gloomy economic backdrop there’s how an average person might be feeling:
-       I’m feeling poorer and I’m struggling to pay for the car I bought a year ago on credit.
-       That £350m a week for the NHS and promise of an easy and quick trade deal are ringing very hollow / complete BS.
-       That Boris Johnson, David Davis and Liam Fox team aren’t really smashing it out the park and all their positive predictions are failing to materialise.

Yes there’s austerity, maybe some antipathy directed at the EU for not immediately caving in, but I think a lot of people are seeing the proof that the UK’s utopia will not be created quickly and easily by leaving the EU and it would only take a small percentage to switch their way of thinking to turn the tables.

But how do you go about turning those tables. If this change of view is happening why isn’t there a clamour to reverse course? Going back to the Common Knowledge game who can shout loud enough that the Emperor has no clothes? There was a half-hearted shout in the snap election in June when May lost her majority seeking a mandate for a ‘hard’ Brexit but equally the electorate couldn’t vote in Comrade Jezza and the issue was confused. There is no missionary able to communicate with enough authority to support such a change of behaviour.

Politically, Labour are led by a Brexiteer pretending to be a Remainer, the Tories are led by a Remainer pretending to be a Brexiteer whilst also being split down the middle and the Lib Dems are AWOL. The SNP, another pro-EU party, suffered at the last election and aren’t the force they were a few years ago. Parliamentary remainers across the board won’t and can’t oppose it because of their political diversity and because the Brexiteers have a good line in not trashing the Largest Mandate Ever Received.

Who else is trusted enough? The Bank of England was part of Project Fear so is discredited, newspapers are tribal and increasingly shrill, foreign heads of state would be painted as biased and interfering, the Queen can’t and won’t get involved in politics. Celebrities and business leaders might have the clout but would probably be seen as biased as many stated their preferences before the first referendum. Even if Boris, Gove and Davis said it shouldn’t be done the needle might move, but they would just be consigned as failures and traitors by those who hold true to The Way.

It seems the only group powerful enough is the British public and another referendum.

Look at Greece a few summers ago. The party in power were voted in to stick it to the EU and stop the large payments being made which they argued were holding the country back, the EU held firm (sound familiar?) and the resulting deal on offer was too difficult / politically toxic to be taken by Tsipras alone so he went for a snap referendum advocating a rejection of those terms, effectively falling out of the EU... yes, there many differences, but it is not too much of a stretch to see this happening in the UK in the next 12months or so if the economy does go downhill.

Maybe there will be a resurgence of UK economic activity and Brexit looks more rosy, though I don’t hold out much hope of that. So when we get to the sharp end of Brexit the view may well be: is that we're about to pay a huge amount of money now, against a backdrop of hated austerity, to have a relationship that is similar to, but fundamentally not as good as, the one you are trying to leave with still spurious benefits of leaving. With those facts established, rather than the never never of the first referendum campaign, how many people would still stick to their original Leave vote?

Wednesday, 13 September 2017

Lunch time walks

I sometimes get a funny feeling when I leave the office at lunch time. Nothing to do with using cheese past it's use by date for my sandwiches, but its about the habit of leaving the office.

I try to take lunch in with me when I can, sometimes it's a few left-overs, sometimes something more substantial. When its a larger meal I then don't need any top-up from Tesco, but I don't just want to sit at my desk, so I go for a walk. It's then, when leaving the office and hitting fresh, un-conditioned, air that makes me want to buy something.

I think it's the process of leaving the office, so often it is to get something else to eat, or pick up something I need, but it follows the same routine; I leave the office, walk for a bit, buy something, return to office.

I left the other day, stomach full and no need of anything for the house or myself, I just wanted to get out of the office, but I felt the habit of buying something quite a pull. I started thinking of things I could buy; maybe just a chocolate bar, only 50p or so... but my inner Mustachian, or what have you came to the rescue, "you don't need chocolate and there's cereal in the kitchen if you get hungry, that would be better anyway, walk on."

I resisted in the end, I know, I'm a hero! I could try and overplay it, that by eating more I'll be getting fatter and needing to buy new clothes or endangering my health... or that I'll be pushing back when I can retire by spending all that extra money... it's not that dramatic, but I was surprised by the pull of this innocuous but very present habit.

Now I've noted it, I can avoid it by thinking of a specific route to walk, so I leave with a separate purpose.

P2P - month 4

Probably the last one now, but here it is!

Total in FC Invested Cash Paid in (new capital) Fees Losses Total no of loans
 £     2,057  £      2,042  £     15  £                       -    £      2  £        -   85

Tuesday, 5 September 2017

The purest FIRE film

The Escape Artist has done a few posts on this and I haven't spotted this one listed, but having re-watched it the other day, I think the purest FI film goes to, the absolute classic in it's own right:


Forrest Gump.

Watch it again, it deserves it. No lifestyle inflation, has trusted friends and positive, after a while, influencing people in his life. Rich, but still takes the bus... he even cuts the grass for free because he enjoys the work!

Honourable mentions to A Good Year and The Family Man, but Forrest has it down for me!

Thursday, 24 August 2017

Great post

The mentality is the hardest thing to get right, but the emergency fund definitely helps ease the worries. I remember walking up and down a high street around 2008 or 2009, looking for a retail bank to switch my current account to because the feeling was that any one of them could fail at any time. You forget how bad it was and I didn't fully know or understand what was going on.

Tuesday, 22 August 2017

Mirco finance

I like the idea of micro-finance. I would sign up to a clever little app which rounds up purchases to the nearest pound and then either invests or adds the difference to a savings account. It appeals to me as I like to think I'm hitting a lot of the targets of being financially conservative but if there's something else which can help me along the road, then I'm open to it.

From top tier priorities such as overpaying the mortgage, maxing out the company pension contribution or ISA's. Mid-table staples like reviewing all household costs to keep regular spending to a minimum to the small fry of making a note of what I spend day to day. 

I round up to the nearest pound on my spreadsheet. So when I saw an advert for the Moneybox app I looked into it as it seemed that it did everything I wanted. The good news is that it does, it rounds purchases up to the nearest pound and invests that into an ISA for you. The bad news is that the fees to do so aren't great at the fractional level I was thinking about.

To give them their due the website provides a sliding scale showing the total fee percentage you would pay depending on how much you invest, but all it does for me is completely turn me off the idea. You need to have £1,000 or more in there to get the fees less than 2% and the amount that I would be interested in, a couple of hundred, the fees are c6%. No thank you.

As I'm already watching fees levels on a lot larger sums than £1,000 there is no way I would use this app. I would go further to say I hope those its targeted at, mid twenties 'Millenials', ignore it too. If they are struggling to save as much as the media portrays then something like would be actively harmful. Equally, if you had £20k to invest you should sign up to an online dealing platform, go direct to Vanguard, do not pass Go and do not pay any more fees than you have to.

I appreciate that they have to earn some money somehow, but I feel this is a missing market - no point at the low end, vaguely worth it between £1.5k - £3k, but above that you should be moving on to a platform which provides more transparency and offers a wider more involved service.

As you may have guessed I won't be signing up, so I haven't gone through the whole process. On the main page of the website you only get the choice of adventurous, balanced or cautious. I can't see if there's any discretion within these choices once you sign up.

As I write this I realise the similarity to the Funding Circle where shortly, only two options will be available. Good point. However, the differences here are the fees and the fact that it's a different investment vehicle. The fees on FC are lower and you are gaining access to a market, lending money to smaller businesses, which isn't readily available elsewhere. This app invests in Vanguard, Henderson and Blackrock - all of which are available from a free / no fees based investing platform.

I don't think I'm being unfair, if I've missed anything, let me know!

P2P - month 3

Total in FC Invested Cash Paid in (new capital) Fees Losses Total no of loans
 £     2,042  £  2,029.00  £     13  £                       -    £      2  £        -   82

This month's update from last week, 14th Aug.

Funding circle are changing the way you lend and taking away the option to manually decide what businesses you want to lend to. The first time I put money into FC I quite enjoyed having the ability to review the accounts (limited though they were) and consider the business, what the money was for and the likelihood of getting it back. I was playing around a bit, not putting any serious amounts of money in, it was more of an intellectual exercise. Not that I don't care who I lend to now, but the game has changed. The benefit of diversification has taken over and having a small amount of money in each business does mean there's less pressure to analyse each debt... and I confess with the automated function, I don't review any of the loans I've taken out, but at £20 a loan and over 80 in total, would you / have you?

Presumably a country wide, or larger, recession would cause a general downgrade and increased failure rate across the board, but that's why I haven't put a lot more money into the platform.

The changes mean that FC are now just doing two options, balanced or conservative, targeting returns at 7.5% and 4.8% respectively. Apparently selling debts will be easier too - which takes away one of the reasons I invested so lightly in this platform in the first place - as soon as a company defaults no 'man on the street' lender will take that off you. So on the one hand you're losing a little return, but the in theory, the risk of recovering your cash, is lessened and that's a fair trade, even if you don't necessarily want to move down that way down the risk : return see saw.

It will depend on the new user experience, but on balance if the changes make it more of an index experience, so easy to buy, easy to sell, loads of companies to spread risk then I would be more likely to put more money to work here.

It also renders this little experiment slightly redundant! I doubt I'll get information summarising how many loans I have any more. It will just be an overall summary - £2000 invested at 7.5% earning £150pa gross... but we'll see how it goes!