Yellowtail Blog

Going back to my earlier post on measuring economic output per person or capita, Bill Mitchell on his website obviously thought that ranking Olympic achievements on a per capita basis was going to be fairer than the overall picture presented by the conventional medal table.

As he says, “I consider [the per capita ranking] to be more meaningful than the official rankings which just reflect world power derived from economic might.”

Bill has an interesting taken on the data, but be warned he uses the unique-to-the-US ranking style, tallying the total number of medals, rather than the number of gold medals ranking used by the rest of the world.  Coincidentally Team USA are ranked first in the world on a US ranking only, not in golds won.   

The report today that the UK economy is grinding to a halt, based on the release of Gross Domestic Product (GDP) figures by the Office for National Statistics, reminded me of an interesting article in the Economist about GDP.

According to the author the conventional view is that America’s economy has been more buoyant than Japan’s in the last few years.  The rate of growth in GDP backs this up, with annual real growth in GDP of 2.9% versus Japan’s 2.1%. 

There’s more to the story than the headline figures though, and the article argues “the single best gauge of economic performance is not growth in GDP, but GDP per person…a rough guide to average living standard.”

Looking at GDP growth per capita as it’s known between 2003 and 2007, Japan has actually done better than America because Japan’s population has been shrinking. 

With countries where politicians take credit for booming economies such as Australia, figures look less flattering through the lens of GDP per capita because population has grown rapidly at the same time.  In the 5 years to 2007 the Japanese and Australian economies have expanded at the same rate.

If we agree that GDP per person is a better measure maybe we should apply the same thinking to the Olympics – gold medals per capita anyone?

Want to live rent free in London?  I read an interesting comment in the property section of London Lite yesterday.  Yes, I know I shouldn’t be reading that rag, but it’s difficult holding my investment management textbook open on a crowded tube!

The Director of a property search company was talking about a few lucky clients who are now living rent free after selling their property.  She went on to say that her clients have, “put their money in the bank at six percent interest, and that pays their rent, so some of them are effectively living rent free.” 

I know what she is thinking – my wife and I have had the same discussion.  If you can live on the interest, you still have the capital left, so in effect you are living for free, right?  Wrong. 

Unfortunately it doesn’t work that way.  When you lend your money to a bank they will pay interest, this partially compensates you for delaying the purchase of something else with your money (new Porsche anyone?).

Go back to 1975 and we find inflation touching 25% a year.  Suppose at the start of 1975 you had £10,000 on deposit after selling your house.  With that money you could have bought 4 Porsche 911s.  But the bank is offering you 25% interest so against your better judgment you put the Porsche brochure in the sock drawer and use the interest to pay your rent.  You decide to live “rent free.”

At the end of the year, you’ve received £2,500 interest which you’ve given to the landlord.  But every time you look in the sock drawer the Porsche brochure grabs your attention and after a year you decide to dip into your savings to buy that Porsche you’ve always wanted – you saved for a year right? 

Unfortunately for you Porsche workers demanded more money, the price of oil and steel increased and Porsche were forced to raise their prices - now your £10,000 only buys 3 Porsches and a tank of petrol…oh and your landlord has decided to put up the rent, the price of his Porsche has also gone up.

Inflation isn’t as extreme today, but the same principle applies.  You can save your capital and spend your interest to live “rent free,” but the longer you do this the less you will be able to buy with your remaining capital.  And even if you save the interest the value of your money is eroded, as over the longer term the interest you earn after tax is less that you need to beat inflation.

If you are currently renting and can’t rent for free you should be praying for property prices to drop by more than your rent.  But that’s another story… 

Dennis Hall wrote an article containing Top Ten Tips for Worried Investors.

Are you worried about the markets? Thinking of cashing in your chips at the investment casino? It’s been a dreadful year for most investors, and the last few weeks have been particularly dire.

His advice is to stay calm and bear his points in mind.  You can read the rest of the Top Ten Tips for Worried Investors in the articles section of our website.

It’s tough out there for the banks and the building societies, not that I have a lot of sympathy for their self inflicted troubles, and there are increasing signs that they are resorting to underhand measures to shore up their balance sheets. In the last few days I have been called by several people concerned about changes being made by a number of banks and building societies to their savings accounts. In effect each has received a letter from their bank or building society telling them that the interest rate on their account is being reduced, and in some cases reduced by more than 80%.

The wording used by these institutions is somewhat interesting, take the following from Birmingham Midshires: Regardless of the balance in your account your rate will be fixed at 1.00% gross per annum, so no matter what happens to the bank of England base rate in the future your rate will remain the same. It then goes on to show that the last base rate move was down, from 5.25% to 5.00% per annum.

They write as though they are doing their savers a favour, reducing the interest rate from 3.66% to 1.00% - only now it is fixed in case the Bank of England base rate plummets from 5.00% to under 1%.

And the Nationwide are no better, closing certain accounts and reducing the interest rate to a paltry 0.3% (according to the letter received by one of our clients). This is from the building society that has based an entire advertising campaign on treating its customers fairly, no big hook rates to lure in new savers whilst excluding existing savers. In Nationwide’s case they simply reduce the interest rates for all savers, new and old.

So why are they doing this? Inertia perhaps? If there is a large slug of money that will not move from the old account to a better paying account, then the bank or building society suddenly finds itself sat on several millions where it only need pay a very low rate of interest, thus helping to boost profits. If it can do this enough times to enough accounts who knows exactly how much money will be stuck in accounts that pay a minimal amount of interest.

If you want to get an idea of just how frequently banks and building societies change accounts, take a look at their websites and look for closed accounts. This appears to be a business within a business, and must be quite lucrative overall otherwise why would they do it?

There’s nothing like a spot on national radio to help focus on the issues of the day.

Yesterday the inflation figures were announced alongside Mervyn King’s open letter to the Chancellor about why inflation has moved to 3.3% year on year in May, and what he proposed to do about it. My job was to put all this into words that the regular listener to any of the GCAP Media radio stations (Capital 95.8, Classic FM etc) would understand.

That’s not an easy task when talking in sound bite sized chunks. Added to which this isn’t inflation driven by exuberant consumerism, so the traditional cure of raising interest rates isn’t going to work that well. Looking through the numbers, the largest contributors to the increased inflation figure comes from rising prices for food and energy, which includes motoring costs. The prices of these are outside the control of the Bank of England, and raising interest rates is merely going to add to the worries of ordinary consumers who are beginning to buckle in larger numbers - I read also that the number of repossessions has risen significantly this year compared to last.

It has been an extremely busy January, I suspect a result of New Year Resolutions being put into action and keeping our telephones busier than usual. We also began the inevitable rush toward the end of one tax year and the beginning of another - no matter how much we reduce the level of last minute activity we’re unable to eliminate it completely.

It has been a busier start to the year in relation to our press activities, and a couple of Money Makeover in the Times have also garnered some new clients, as well as the attention of other publications keen to get our views. Yesterday we were asked for some comment about the quarter point cut in the bank base rate, which ended with the pithy comment that investors seemed more comfortable investing in Banksy than in the Bank!

Earlier in the week I had been one of the 500 or so people tightly squeezed into Bonhams New Bond Street showrooms for their first ever Urban Art Auction, which was a resounding success. Banksy, being the most well known urban artist, commanded the highest prices, and “lots” were routinely selling well above the estimates. I had tripped along to see if I could get my hands on a “Kate Moss” print in the style of Warhol’s Marilyn Monroe pictures, but the estimate of between £20,000 - £40,000 was easily eclipsed as it went on to sell for over £80,000 excluding commissions and artists royalties.

The art world it would seem is the place where fortunes are being spent, and for some, where fortunes are made. Banksy one assumes must be laughing all the way to the bank, so long as it’s not Northern Rock. But that’s another story.

HIPS, the much maligned Home Information Packs will finally become a requirement for all residential properties marketed after 14th December. They were originally scheduled to be rolled out in full on 1st June 2007 but were initially restricted to properties with more than 3 bedrooms.

With increased talk of a property slowdown, and even some saying there will be a meltdown, is the government merely exacerbating the state of the property market, or does it have something else up its sleeve?

The threat that sellers may be reluctant to put their property on the market because of the costs of having a HIP may be playing into the government’s hands. After all, a slow down in supply of property would mean that the dwindling demand remains buoyed up, and prices would perhaps hover rather than crash.

Yes this is a cynical view but remember that we’re dealing with politicians. These are folk that would like very much to avoid an economic collapse on their watch. So much bad economic news around, such as Northern Rock and the loss of 25 million people’s personal details, means that the government wants to avoid any more PR disasters. A property crash would be the end for this government, roll out the HIPs they cry.