Risky business

Health and safety – Dangerous things conkers?


Whilst walking this weekend in the pretty town of Wansford, Northants, I managed to slip on a couple of conkers. It reminded me of the story that, due to health and safety fears, the game of conkers is banned in many schools.

Except, that the story isn’t true – and nor is the idea that schools were told to ensure kids wore protective glasses by the draconian Health and Safety Executive (HSE). In fact, the HSE has a sense of humour about it. On their site they write,

‘this is one of the oldest chestnuts around, a truly classic myth…..realistically the risk from playing conkers is incredibly low and just not worth bothering about. If kids deliberately hit each other over the head with conkers, that’s a discipline issue, not health and safety’


Conkering the world

Let’s hope that they had no such discipline issues in the cauldron of battle at Sunday’s  2016 World Conker Championships that were taking place in nearby Southwich (nr Oundle). Unfortunately, it was almost all over by the time I’d spotted the road signs advertising the event. But then, there’s always next year whether as a spectator or competitor.

For those of you craving victory in one of the more esoteric world discliplines, you can enter the 2017 competition here. If your name’s William, there’s an obvious title waiting for you.


Good and bad error culture

The HSE might not be worried about conkers, but their website has several papers relating to a type of procedural risk called ‘error culture’.

And the same topic is covered in more readable form in Gerd Gigenrenzer’s book, ‘Risk Savvy’. In it he compares how errors are treated in different types of organisation and how it affects their management of risk and safety.

The spectrum of error culture runs from negative to positive.  A negative culture is one where people fear making and reporting errors, whether good or bad. They therefore want to hide them and will be defensive against those trying to shine light on bad practice.

Conversely, a good error culture is one where everyone is encouraged to highlight mistakes and learn from them. The clear aim is to improve the overall level of safety and employ and review good practices.

As good and bad examples he looks at aviation and medicine.

In aviation he highlights the extraordinary safety record of an industry that is extremely complex. The engineering considerations alone are considerable. Aircraft engines, for example, need to function with blades rotating at 12,500 rpm. But they also have to allow for bird strikes, or as a friend who works for Rolls Royce told me, the frozen turkeys they use in tests.

This tendency in aviation towards a positive error culture, means that risks are assessed and communicated throughout the industry. And there’s a realisation that there’s always room for improvement. All changes are intended to lower risk, but they may lead to other unintended problems. The automation of processes such as fly-by-wire have made flying much safer. But are they making pilots dumber and less able to react in the rare emergencies they are called upon?

So in the US there is a program named System Think that reviews all the areas that combine so that a plane takes off at A and lands safely at B.  This level of cooperation also reflects how aligned the incentives in the industry are. The best outcomes for passengers also happen to be the best outcome for the pilots and crew and, given the costs involved, airlines and plane manufacturers. Bad outcomes are also far more newsworthy given the loss of life involved.

In contrast, medicine tends towards a negative error culture. And that seems to be true even with different combinations of private and public care. Gigenrenzer argues that risk management and safety is skewed by rigid hierarchies and the threat of litigation rather than the best outcomes for patients. Drug companies and the interpretation of drug trials only add to the complexity. And bad outcomes may take months or years to materialise even though the numbers involved may be significant.

Taken together, he argues, these are the result of misaligned incentives and poor understanding and communication.

His headline statistic comes from the Institute of Medicine in the US that estimates 44,000 to 98,000 patients are killed each year by preventable medical errors. In the UK,  the severe failures at the Mid Straffordshire NHS foundation trust have been well documented. And only last year Sir Robert Francis QC, who led two inquiries into those failures at Mid Staffs, released a damning report on whistleblowing called the ‘Freedom to Speak Up Review’.


Is the comparison fair?

In defence of medicine there are far more decisions made that involve acute and variable risk, whatever the error culture. And the outcome for the patient always eventually ends up in failure.

Medicine is also a victim of its own success. Keeping people alive for longer mean that half of us will end up developing cancer. And the treatment of cancer in the elderly has its own risk complications.

Some risks in medicine present themselves in a way that does not relate to aviation.

This was true of my father survived a triple heart bypass, but went on to develop an unrelated cancer.  The cancer required expertise from both a neurosurgeon and a haematologist. But neurosurgeons and haematologists can have different outlooks on risk.

Neurosurgeons are used to operating daily on patients with severely reduced expectations of survival. Haematologists are used to managing conditions such as lymphoma over much longer periods of time. The neurosurgeon will offer the long shot of a successful operation, the haematologist will suggest management of what they might see as an inevitable decline.

In such an environment can error culture help? How does a concerned relative really make an informed decision? There’s no bad practice in this case, just a difficult choice.

As another example, how would you choose between two surgeons if one of them had a worse safety record on paper, but was known to treat patients who were more acutely ill?

However, Gigenrenzer specifically refers to preventable medical errors. And as one example of the difference in approach of aviation and medicine he refers to the use of checklists. He asks, ‘why do pilots use checklists but doctors don’t?’


Checklists are only useful if you er..check them.

He gives an example of a hospital where infection rates were 11%. They had checklists, but they were being ignored in a third of cases by senior doctors. Nurses were then authorised to stop doctors during procedures if they witnessed them skipping an agreed step in the disinfection process. This challenged the existing hierarchy but infection rates fell to almost zero.

The NHS has clearly made great strides in this same area since the concerns over superbug infections in the last decade. In hospitals you’ll see anti-bacteria gel dispensers everywhere to give everyone a gentle nudge.

But recent experience with another elderly relative suggest that, even in basic communication, cultural errors still exist with our local foundation trust. Just getting on a waiting list can prove difficult because an anaesthetist hasn’t sent their report – for a month. And it doesn’t seem to be anyone’s responsibility to ensure that it’s done. The result is a lot of wasted staff and patient time.

So safety checklists are only useful if they are being enforced. At the bottom of the page I have highlighted an example of this working in practice that I used to witness every day on the train to work in Japan.


Checklists in finance.

If you work in medicine you might argue that the world of finance is more deserving example of bad error culture. And you’d be right. A lot of the blogs I write highlight examples where that is the case, without stating it explicitly.

Gigenrenzer does cover finance in his book, but only in relation to how to choose risky investments i.e. buy the index of leading shares because most experts won’t outperform it.  He doesn’t look at the culture so much.

In the next post I’ll specifically look at how the current culture in finance relates to issues such as Brexit and the recent fall in the pound. And it involves the need for the Bank of England to draw up a list of foreigners, which I know is a popular theme with the government at the moment.


An entertaining commute and why HS2 should take the Bullet.

Every time I travelled from Yokohama to central Tokyo, I’d get on the front carriage with full view of the driver. As the train left the station the driver would make some strange gestures and make a loud exclamation.

I never considered in the mindless fog of the morning commute what they were doing. I just thought it was a traditional gesture amongst Japanese train drivers. And being a father eager to embarrass his children, I occasionally used to mimic the whole process as I pulled away in our car. Actually, I still do – rarely, when no one’s looking.

What I was witnessing is known in Japan as the ‘pointing and calling’ safety standard. It’s part of a positive error culture that contributes to it’s labyrinth of railway lines having the best safety record in the world. And it’s used throughout Japanese industry.

It’s all about enforcing a safety checklist.  Japan is a reserved culture and by training drivers to make these elaborate movements and calls in full view of passengers, they are ensuring the checklist is completed.

For the trainspotting anoraks amongst you, the whole process is demonstrated in the video below. And as for why we should look to Japan for help with HS2, foreign exchange permitting, here is an article in Japan Today from last year. Japanese companies also have be able to demonstrate good behaviour. This weekend’s FT has an article explaining that the HS2 managment committee has a budget of £900,000 to spend on a team of behavioural psychologists to make sure all the consortiums bidding for contracts can work together.

That’s something quite separate to error culture and the topic for another blog. Makes you wonder how the pyramids were ever built.


Please remember:

  • past performance is no guide or guarantee of future returns;
  • the value of stock market investments can rise and fall over time, so it is quite possible to get back less than what you put in, depending upon timing;
  • this blog does not constitute financial advice and is provided for general information purposes only.

Pokemon Go – Gotta Blog About Em All

Pokemon deja vu

The second coming of over one hundred catchable Pokemon as a phone app has created a lot of excitement. And ‘Pokemon Go’ has sent the blogosphere into full hyperbolic overdrive.

I have to admit that even I’ve got a little caught up in the frenzy. Well if you can’t beat ’em, join ’em. And it’s a feeling of deja-vu.

Over fifteen years ago I queued up for hours at Nintendo’s Pokemon store in the Ginza district (think Oxford Street) of Tokyo to buy a Pokemon branded GameBoy. And then I did it again as they only sold one at a time and I have two daughters.

So last weekend, when my Pokemon loving eldest daughter returned home to celebrate her 24th birthday, I was feeling somewhat nostalgic and made her a Pikachu cake. And the theme continued when she arrived. She had her ‘Pokemon Go’ in hand and the first thing she told me was there are pocket monsters in our driveway.

And there’s the hook. Whether you’re a chartered wealth manager or a Phd student of atmospheric science, you can’t help but look.

To be fair, she said they were just the common ones; the pidgeys, zubats and rattatas. There’s no more merit in catching them than a cold. But, lurking in our Jurassic garden she also found an Oddish, Eevee and even a Jigglypuff which are far higher up the Pokemon gene pool.

At this point I’d ask all the Big Pokemon Game Hunters amongst you that, before entering our garden, could you kindly knock first? And please take a business card on the way out.

All right, it's not the best interpretation of Pikachu, but there are some worse ones out there!
All right, it’s not the best interpretation of Pikachu, but there are some worse ones out there!

Risk assessment needed

As delightful as the game is, it’s not without its unintended risks as one young man found out when his girlfriend checked his phone. The app’s tracking history showed that he’d been playing hunt the ‘Weedle’ and ‘Wigglytuff’ at his ex-girlfriend’s place.  Ouch!

But I’m safe.

It’s over 34 years since I had an ex-girlfriend. And I can’t play the game even if I wanted to – I have a Windows phone and there is no windows app. And that is a clue to what I am supposed to be writing about in this blog. The problem for investors surrounding the value of the Pokemon Go to Nintendo.


A roller coaster ride for Nintendo shares

Microsoft, the owner of everything Windows, has upset plenty of software firms getting to where it is. So some app developers won’t cater for its phone operating system. It also doesn’t have the scale of Apples iOS system or Google’s Android.

Nintendo, as a hardware and software maker, didn’t want to be in Microsoft’s position. To avoid a conflict of interest with Apple or Google, it spun off everything Pokemon into a separate venture.

After the wildly successful launch of Pokemon Go in the States the question then was, ‘how much of that venture does Nintendo own and how much money will they make from it?’. But the answer didn’t seem to bother those caught up in the hyperbole.  From July 6th to July 19th Nintendo shares more than doubled from 14,380 yen to 31,770 yen.

During that run a sobering assessment of Nintendo’s Pokemon Go earnings on July 13th by John Gapper in the FT was ignored.  But people did pay attention when Mr Gapper’s assessment was backed up by the company themselves on July 25th. Nintendo said earnings from the game would be ‘limited’.

On the Monday before that announcement one headline stated, ‘Nintendo breaks stock market records thanks to Pokemon’. After the company’s mea culpa there was a change of tone, ‘Nintendo feels pressure after biggest fall in 26 years’ and ‘Nintendo loses $6 billion in value’.

But as I write it’s still at 21,080 yen compared with 14,380 yen at the start of the month.


Keep calm and carry on

What happened to Nintendo shares this month is a demonstration of how emotive investing can be. And it’s not helped by headline writers stressing the most absurd comparative statistic without any constructive context.

And that emotion can lead to bad outcomes. I wrote about a variety of cognitive biases that can lead to bad decision making here.

The answer is to plan and manage risk where possible. From auto-enrolment workplace pension schemes to stock index investments to balanced funds to currencies, there are different ways of approaching all of them.


Please remember:

  • past performance is no guide or guarantee of future returns;
  • the value of stock market investments can rise and fall over time, so it is quite possible to get back less than what you put in, depending upon timing;
  • this blog does not constitute financial advice and is provided for general information purposes only.

Brexit – Welcome to Poundland

Letter to The Times, 24th June 2016

Sir,  It is now surely unthinkable that we can continue to call our country the United Kingdom of Great Britain and Northern Ireland. The only thing uniting us is our currency. Perhaps Poundland would be more appropriate

David Jones W11


Beware of the Bull

I sincerely hope that, whatever your views on the Brexit vote, you’ll appreciate the succinctness and humour of Mr Jones’ letter.

Succinctness and humour are not however words I’d use to describe aspects of the rival ‘Leave’ or ‘Remain’ campaigns.  I would not describe the sheer volume of analysis provided by financial companies as being a delight either.

A better description would be something I trod in while on a hike around the beautiful village of Braunston (nr Oakham). The sign in the picture gives you a clue as to its origin.




The first week after Brexit.

In my last blog I wrote,

It’s important to understand that, whatever the outcome of the referendum, that the world of finance is already very ‘stressed’.

And in the paragraph titled ‘Special FX’ I explained how in a world where central banks are managing interest rates (and indirectly asset prices), the only escape valves for economic reality are exchange rates.

In the week since the Brexit vote we’ve seen another example of what this can mean in practise with the sudden and abrupt changes in several currencies.

From coverage in the media you might think it was all about ‘Poundland’ and the fall in sterling, but there were also significant changes in the value of the yen.

Bank of America Merrill Lynch, referring to the foreign exchange markets, called Brexit day ‘the most volatile day in modern history’. And it’s easy to see why. While all the talk was of the pound falling I took this screenshot of changes in the yen against a variety of different currencies.

Brexit day yen crosses
This is a snapshot taken from Yahoo Finance once the Brexit result was known. The ‘% Change’ column shows the falls in the relevant currencies compared to the Yen.


Those are remarkable gains for the yen in one day, especially for a currency that its central bank wants to see weaken – but markets regard as a safe haven. And it highlights the bind central banks are in. They’re all pursuing variations of quantitative easing but they don’t all have the same economic fundamentals of debt, foreign reserves or balance of trade.

Perhaps the limits of quantitative easing are now being realised.  And that could eventually have an impact on the beneficiaries of that policy, namely asset prices.


How to react?

In terms of what the effect of the Brexit vote has on personal finances there’s not much point on me adding to this article on the BBC.

From a purely investment perspective, you might wonder what all the fuss is about. The FTSE 100 where 70% of company earnings come from overseas – and therefore benefit from a weaker pound – is barely changed from before the vote. Albeit with a bit of a wobble in between.

But, inward looking UK companies did not fare as well, the FTSE 250 index is down 10%. And there will be implications for government debt if the pound keeps on weakening as overseas investors have been the biggest losers this week.

The standard advice is ‘keep calm and carry on’, but it’s a lot easier to do that if you have a professionally tailored plan.

To repeat what I wrote at the end of my last blog before the referendum –

‘The mispricing of rates and assets also means that we have to take great care and be especially wary with any income investment strategy. This will be as true of the trustees of pension schemes as those looking to grow and drawdown income from their own pension.

And it’s not just about the risk of prices moving up and down. It’s also about liquidity risk, the ability to get to your money when you want to.

I’d add, for those of you who might have a significant foreign exchange risk now, or sometime in the future, please get in touch and I’ll explain some options that are available to you.

In light of the cancellation of withdrawals from three commercial property funds my constant banging on about liquidity risk remains a valid as ever. It’s not that you should avoid illiquid assets entirely just that you need to manage the amount of exposure and check if there’s a better alternative.

You also need to understand that the ease at which you can get money out of certain investments can change as it has with the commercial property funds. I remain very concerned about the p2p loan market for example.

More on that soon.


Please remember:

  • past performance is no guide or guarantee of future returns;
  • the value of stock market investments can rise and fall over time, so it is quite possible to get back less than what you put in, depending upon timing;
  • this blog does not constitute financial advice and is provided for general information purposes only.

Interest Rates: The Power of Negative Thinking 2


negative thinking 2

Stressed Out

While the main media is consumed with the economics of Bremain versus Brexit, I am going to return to the topic of ‘negative interest rates’.  It’s important to understand that, whatever the outcome of the referendum, that the world of finance is already very ‘stressed’.

And as a sign of that stress, we learned this week that over $10 trillion worth of government bonds and corporate debt now carries a small negative interest rate. In other words, in return for lending money for as long as ten years, you eventually receive a slightly smaller amount in return.

To put that last paragraph into context, the annual production of the UK is worth about $3 trillion. And the interest rate on the debt means that the associated bonds are the most expensive (i.e. good for the borrower, bad for the lender) in 500 years according to some data sources.

The problem for lenders is that they are competing with the leading central banks who via monetary policy are creating money to buy those same bonds. Last week I likened this evolving policy of QE to an old rugby song with the chorus, ‘next verse, same as the first – a little bit louder and a little bit worse’.

And the little bit worse this week was the beginning of a new programme aimed at buying corporate debt by the European Central Bank (ECB).

The stated aim of the ECB and others like the Bank of Japan (BoJ) is to create economic growth and moderate inflation. But the results of QE remain mixed and they appear to need to do progressively more to achieve less. And this medicine they’re prescribing is creating significant and worrying side-effects that I mentioned in the last blog.

It’s clear, however, that their intention is to continue on this aggressive path, while also considering more radical solutions. And they have plenty of backers. The Financial Times wrote an editorial this week endorsing such moves.

And the boat of alternative strategies that some believe would have restored credibility earlier has likely sailed. The restructuring of Greece, or lack thereof, is a prime example.


Will it work?

From my perspective I can’t know. The problem is I don’t think an academic economist working for a central bank can either.

Economic theory originally drew on the early laws of physics and it has serious limitations when you compare that theory with the real world.  This attempt to artificially maintain very low interest rates for a long time strikes me as more like the physicists’ concept of ‘entropy’. In other words, the more central banks seek to artificially set long term interest rates the more destabilised the system will become.


Special FX

As an example, when you ‘pressurise’ interest rates in this way the only escape valve for economic reality is via the exchange rate. This isn’t such a problem if all economic areas are in the same position as, but some are better and some worse.

If we compare the Eurozone with Switzerland, economically the latter is better. But last year the Swiss central bank did not want the franc to appreciate against the euro and hurt its exporters. So it tried to create an artificially low exchange rate, which ultimately failed spectacularly on one day in March as the franc rallied 25%. I wrote about it at the time here.

Fast forward to today and the Swiss are back to square one and trying to stop the franc appreciating again.  To do this they are making it less attractive to foreign investors by giving it a negative interest rate. And they’re also actively selling the franc and buying foreign assets. These assets are collectively known as ‘foreign reserves’ and are currently at the highest level ever for the swiss central bank.

China is a different story.  In some ways it is worse than the EU economic area, despite the official growth figures.  Like the EU, it’s trying to contain the interest cost of government and corporate debt through its own version of QE. But its overall debt levels are even higher than the EU’s and its currency has come under increasing selling pressure.

Fortunately, it already has huge foreign reserves built up via its positive trade balance with the world in recent years. And it can sell those to buy and stabilise its own currency – the opposite of what the Swiss are doing.  In the last two years its China’s reserves have fallen from almost $4 trilllion to $3.2 trillion.


What to do?

So while we rightly focus in the UK on Remain versus Leave, be aware that the tectonic plates of different currency zones are under a lot of stress at various points along their edges. If any volatility in the next month gets blamed on the referendum, remember that the economic backdrop is somewhat fragile in any event and prone to sudden adjustment.

The mispricing of rates and assets also means that we have to take great care and be especially wary with any income investment strategy. This will be as true of the trustees of pension schemes as those looking to grow and drawdown income from their own pension.

And it’s not just about the risk of prices moving up and down. It’s also about liquidity risk, the ability to get to your money when you want to.

I’d add, for those of you who might have a significant foreign exchange risk now, or sometime in the future, please get in touch and I’ll explain some options that are available to you.


Please remember:

  • past performance is no guide or guarantee of future returns;
  • the value of stock market investments can rise and fall over time, so it is quite possible to get back less than what you put in, depending upon timing;
  • this blog does not constitute financial advice and is provided for general information purposes only.

Interest Rates: The Power of Negative Thinking

A Song For Europe

 A long time ago in a bar far, far away (Yokohama actually) a former colleague introduced me to a song called ‘The cow kicked Nelly in the belly in the barn’.  The attraction of the song, especially to those with a little Dutch courage, lies in the chorus.

Next verse, same as the first,
A little bit louder and a little bit worse’

From an initial whisper, each verse grows a little bit louder and a little bit worse and eventually reaches a final crescendo at the limit of the singers’ lungs.

It is definitely not ‘Nessun dorma’, although the famous aria’s meaning of ‘None shall sleep’ is appropriate enough.  

And it’s not a very edifying sight. 

Which brings me to the financial version of the song being performed by the central banks of Europe (ECB) and Japan with others joining in.

We have already seen several verses of quantitative easing which are aimed at stimulating modest inflation and improving economic growth by lowering interest rates. But they haven’t been very effective. And it’s clear that central bank thinking is not that the policy is wrong, rather that not enough has been done.

So the ECB and others still want to be a ‘little bit louder and a little bit worse’.

And to achieve they are beginning to charge commercial banks for holding deposits with them. That charge is effectively a negative interest rate since the depositor gets a negative return on their money i.e gets back less than they started with.

In turn, the commercial banks are passing those negative rate costs onto their institutional and corporate clients with the largest deposits.

This BBC article by Andrew Walker does a good job of explaining what negative rates are and where they exist in a bit more detail.


Why push rates negative?

By imposing a cost on deposits, central banks are encouraging the regular banks and indirectly their largest clients to find better uses for their money, either in riskier investments or another currency. But it’s not that easy to find suitable debt or equity to invest in.

The earlier verses of quantitative easing have already distorted asset prices as returns have fallen due to artificially low interest rates.

As just one example of how this works, large companies in the US have gorged on cheap debt to buy either their own shares or those of other companies. That has supported equity prices to extreme valuations by some historical measures.  And with that extra debt there are now just two companies left that have the safest credit rating, triple A – Johnson & Johnson and Microsoft.

For banks, the problem is not just where to lend. There is the added problem that it may be difficult to pass their negative interest rate costs to all their depositors.  I explained in my last article that in order to implement negative interest charges with a bank’s retail customers you’d also need to limit access to cash, which is politically very difficult.

So profitability is likely to be affected at banks across Europe that are still repairing their balance sheets.

Negative rates and negative bond yields also change to whole basis of analysing how an investment performs over time. So they also affect those with long term liabilities such as a pension funds or insurance companies. And you’ll see that reflected in news of growing pension funding liabilities in Europe and elsewhere.

Germany is already pushing back against what it sees as an aggressive policy change.  But the ECB headed by ‘Super’ Mario Draghi rightly points out that it sets policy based on the whole of Europe.

He is also quoted in today’s FT as stating that low interest rates are also the result of a savings glut not just ECB policy. But by competing with that savings glut with the ECB’s own printed money he’s clearly and openly driving rates lower than they would otherwise be.  And the ECB hasn’t abolished risk as we saw in the collapse in the oil price and the debt of related companies.

So while to some the investing world might appear to be in equilibrium and seem like business as usual it really isn’t.  Central banks are playing a huge role in setting asset prices and they are still singing loudly.  And there are several verses of policy changes, some quite radical, that they could still employ.

I’ll cover those in a later blog.


The Chase

The danger for investors in this environment is that you start chasing investment propositions that seem to offer a reasonable yield, but where the underlying risk is not well understood.

The fact that something has worked well to this point or that the crowd is recommending it is not necessarily risk analysis. Nor is a fancy brochure or a nicely designed website with a fat investment return on it.

Unsecured retail loans, volatility trades, aircraft leases and catastrophe bonds, to name just a few, all offer yields that individuals can now get exposure to. But they are all forms of underwriting and proper risk assessment is very difficult. And I’ve considerable experience of debt and volatility trading.

It’s also important to understand liquidity, which is the ability to get access to your money.

Your current investments may prove to be far less liquid and more complicated and risky than you think. And that’s where serious errors can occur, either in unanticipated losses or your response to them.

The role of your adviser is, in large part, trying to make sure you avoid those mistakes.


Another ‘Song For Europe’

 I am sure there are worse ‘Songs For Europe’ out there…but here’s Father Ted’s spoof.

 Please remember:

  • past performance is no guide or guarantee of future returns;
  • the value of stock market investments can rise and fall over time, so it is quite possible to get back less than what you put in, depending upon timing;
  • this blog does not constitute financial advice and is provided for general information purposes only.

Taking Notes – 500 Euro Banknotes

Why the ECB has decided to stop issuing the 500 euro banknote by the end of 2018

the 500 euro note


Lost between the Panama Papers revelations and this week’s anti-corruption summit in London was the news that the European Central Bank (ECB) would no longer issue its biggest banknote from the end of 2018.

At the end of a blog concerning FIFA titled, ‘Sheikh, Blatter and Mole’, I mentioned the relative attractiveness of the 500 euro banknote for processing ill gotten gains.

Nicknamed ‘Bin Ladens’ from the time when we knew he existed, but not where, Europe’s largest note accounts for 30% of the value of all euro banknotes. And the ECB estimates that over 300 billion euros of its banknotes are held overseas.

That’s a lot of cash. If they were all 500s that would amount to 600 million notes, weighing 660 metric tons.

The BBC only gave the announcement a short report on its website. But it did explain the ECB’s decision was due to concerns the banknote could facilitate illegal activities. There was also a link to a Harvard report urging the removal of large notes to help tackle crime.  

And for a quote they turned to Peter Sands, former chief executive of Standard Chartered bank, who said the high-denomination notes were favoured by terrorists, drug lords and tax evaders.

Mr Sands is an interesting choice. He certainly knows about the difficulties of enforcing financial regulations.

Standard Chartered was fined $667 million in 2013 for major breaches of US sanctions against Iran and three other countries. His chairman didn’t help matters by referring to those breaches at a shareholder meeting as being ‘mistakes’. The next day ‘mistakes’ was changed to ‘willful’.

And then there was the apparent quote from one of their London based executives to US officials saying, ‘you f***ing Americans. Who are you to tell us, the rest of the world, that we’re not going to deal with Iranians?’.

Well, where there’s a digital record of a dollar transaction, they can do just that, as the fallout from the FIFA saga has shown. Whether it’s always just is another matter.


How much of a money laundering problem are large denominated banknotes?

To answer that you need to look at last year’s 54 page Europol report titled, ‘Why is cash still king?’

One anomaly it highlights is the number of 500 euro banknotes issued by the Banque Central du Luxembourg (BCL).

In the BCL’s own 2014 report it states that, to date, it has issued nearly 95 bln worth of euro banknotes. Of these 60 billion are the highest denominated 500 note – that’s a lot of cash for just over 400k financially active citizens.  Especially when one survey suggested that 56% of Europeans have never even seen the largest banknote. 

So, demand for the banknotes must relate to other clients of its banks and the concern is that, as elsewhere, some of this is illegitimate – but how much?

Europol explain their problem as ‘although not all cash is criminal, all criminals use cash at some stage in their money laundering process’.

And the problem involves more than just looking at which central bank issues what notes where.

The report gives known examples of large scale financial abuse, and describes a variety of laundering techniques with names like ‘cuckoo smurfing’.  But it doesn’t suggest a specific figure for the level of illegal activity.

Another problem is the lack of co-ordination within and between member states. There are also different systems of declaration, penalties, co-operation and enforcement.

Bank of Luxembourg
The top chart shows that Luxembourg is far from the largets issuer of large banknotes, but the lower one shows the scale compared to its economy. Source – Europol report / BCL

Even in member states that do have a system to confiscate money until its proved legitimate, they can only do so for a fixed period. This may be too short to process supporting documents, that may be in Chinese for example, and so release the cash anyway.


So, will restricting Europe’s largest note make any difference?

Europol immediately released a statement welcoming the announcement, but their own analysis highlights the problems of enforcement.  And existing notes will still be valid and presumably more notes can be issued prior to 2018.

Money laundering enforcement is like a game of whack-a-mole.  You can restrict the 500 note, but the 100 and 200 denominations will remain. And then there are alternatives such as the 1000 swiss franc note.

But that doesn’t mean the you shouldn’t at least have a ‘whack’.

Here in the UK, banks haven’t handled the 500 euro note since 2010 when the Serious Organised Agency estimated 90% were in the hands of organised crime.  And money laundering regulation and enforcement is high up the FCA’s list of priorities. It extends to this firm and its clients.

But, in fairness, the Luxembourg central bank might suggest that there are British crown dependencies and overseas territories that could equally do with a regulatory ‘whack’.


Why the delay in implementing the policy if the case for misuse is clear?

This is a valid question since the UK and other leading economies operate effectively with far smaller banknotes. And digital money is widely accepted across Europe – there have already been 3 billion ‘contactless’ payments this year.

However, in an ironic twist, the ECB’s own monetary easing policy is making legitimate use of large notes as a store of value more attractive to everyone. And this is creating strong political resistance against limiting the use of cash. Cash, by its very nature, limits the ability of central banks to force negative interest charges on bank deposits.

If your bank charges you to keep your money, why not withdraw it as cash?

As Andrew Haldane, Chief Economist at the Bank of England has stated, imposing negative interest rates on the public won’t work without restrictions on the use of cash. That means they will likely have to take a different route if the economy doesn’t pick up.

Japan is already hitting problems with negative rates. But, believe me, the central banks are all making plans.

More on that in another post.

If you find the idea of how banknotes are issued a little confusing here is a video on the Luxembourg central bank website that explains their legitimate life cycle.


Please remember:

  • past performance is no guide or guarantee of future returns;
  • the value of stock market investments can rise and fall over time, so it is quite possible to get back less than what you put in, depending upon timing;
  • this blog does not constitute financial advice and is provided for general information purposes only.

‘Back to the future’ Dynamic Retirement Planning

back to the future ii header

Great Scott!! – It’s the week of ‘Back To The Future Day’, the date in the second movie that they travel to in the Doc’s DeLorean – which, incidentally, doubles as the perfect retirement planning tool as he spends much of the 3-movie franchise trying to determine his own longevity.

This is also the week that I can finally introduce my own ‘dynamic’ retirement planning software, which isn’t quite as sexy or effective as a time-travelling DeLorean, but can draw on the practical and theoretical lessons in risk that I have learned and developed since first being introduced to them by a real doctor of mathematics soon after the original Back to the Future was made in 1985!

Since starting this company, I’ve never been entirely happy with the financial planning tools available to me – I will still be using the excellent CashCalc, but I wanted to be able to use the techniques that I’ve learned to illustrate with simple charts better answers for clients to questions like, ‘what is the chance that my money lasts my lifetime?’. And that can only help discussions about ‘risk’ and ‘loss’.

I had hoped to do this using some readily available dedicated software, but the few on offer weren’t versatile enough and I wanted to eventually apply more than one type of forecasting model. So, I decided to go ‘back to the future’ and write my own – and over 2000 lines of code later the first edition is finished and as it aims to look at a retirement plan and to sum it all up, that’s what I called it – SumItAllUp.


Over 1000 ‘What-if?’ calculations per month for each of five case studies

For a more thorough comparison with Dr Emmit Brown’s DeLorean take a look below, but SumItAllUp is no slouch. It can calculate over 1,000 ‘What-If?’ changes each month of a forecast and that can amount to over 1 million formulas in just 1.73 seconds on a standard laptop.  And it also rebuilds itself for every individual case study – hence the ‘dynamic’ in the description.

But the biggest requirement was that I wanted not one ‘flux capacitor’ in the application, but five.

sumitapp example 2

back to the future dashboardDashboard Envy

Even I have to admit that the DeLorean dashboard has a bit more going for it than the ones I designed for SumItApp – but, I reckon it has more features.

And there’s only ever been one model of DeLorean – I’ll be adding another two models once I’ve added even more ‘number crunching’ power. Why shouldn’t you have access to the same pricing techniques as a fund manager?

And being able to crunch five case studies at once means that I can choose to either compare different investment strategies and tax wrappers, for example a pension versus an ISA. Or, if more detail is needed, break an investment’s projected performance into different asset classes. But, it can also be used to combine the results of different case studies together, like the drawdown pensions of a couple.

The individual factors affecting your future pension income don’t all move in straight lines either and nor should your planner.  So input changes like contributions or withdrawals can be made monthly, whereas some programs only update annually – that’s a big difference.

If you’d like to know more about this additional service please contact me.

SumItAllUp is exclusive to Pearce Wealth Management and I am offering it as an add-on to our normal planning service for no extra fee.



Time-Travelling Delorean

Designer – Dr Emmit ‘Doc’ Brown. With the help of plutonium stolen  from Libyan rebels

Hardware/Software – One singe engine DeLorean fitted with a ‘flux capacitor’.

Energy Use – 1.21 gigawatts. According to a Buzzfeed article, that’s equivalent to 484 wind turbines, a nuclear power plant or 8 billion spinning hamster wheels.

Forecasting ability – perfect!

Price – You can find a variety of second hand and refurbished DeLoreans here. Unfortunately, they come without the ‘flux capacitor’ optional extra….and they’re in Texas.


Designer – my good self, using approximately 2000 lines of code and drawing on a variety of data sources including longevity data from the Office of National Statistics.

Hardware/Software – Standard laptop fitted with SumItAllUp

Energy Use – Approx 60 watts

Forecasting ability – However, sophisticated I make it, it remains a really useful forecasting tool – it can never be a guarantee of investment performance.

Price – There is no additional cost for using our SumItApp dynamic retirement planning service on top of our already comprehensive proposition.

Please remember:

  • ‘Pension Theft’ is unfortunately a reality. If you are cold-called by unknown companies or advisers offering you something that seems too good to be true, then it probably is – all qualified advisers are listed in the FCA Register;
  • Past performance is no guide or guarantee of future returns;
  • Investment risks apply to all kinds of pensions. Values can rise and fall over time, so it is quite possible to get back less than what you put in, depending upon timing;
  • This blog does not constitute financial advice and is provided for general information purposes only.

It’s a Small World – Part Two, ‘What’s the chance of that happening?’

chanceIn the first of these two blog posts, I highlighted how good and bad economic events are much more likely than you might expect. And this is partly due to the way the economic world is wired. There is a ‘network effect’ that also applies to many other complicated systems, such as our bodies.

I also described how some students in the States had developed a game that demonstrates this effect called the ‘Bacon Game’. The game is based upon linking actors to Kevin Bacon, either through appearing in the same movie as him or having acted with someone who has….and so on. And what we discover is that the acting universe is far more connected to the star of such movie greats as ‘Tremors’, than we would think if they only knew each other randomly.

But this second blog is about how, even if things did just happen randomly in the same way as tossing a coin or rolling a dice, unlikely events still happen more often than we expect. Or to put it another way, when the world gets as big and complicated as it is, coincidences are very likely even though we might imagine that the chances of them happening are extremely small.

Now I am not attempting to rubbish any beliefs you might have about ideas such as fate, for example. I am merely demonstrating that we ought to consider how likely coincidences are before we assign them any special spiritual or paranormal significance.

And in investing terms, it means that yours truly is especially sceptical when looking at a presentation from an expensive fund manager showing magnificent potential returns for my clients. After checking whether I think the data is real, I then need to consider whether they’ve just been lucky. Maybe they have just been ‘fooled by randomness’ as Nassim Taleb put it in the book of the same name.

One of the best examples used to demonstrate how more likely coincidences are than we expect is this question – What is the chance that two children in the same class at school have the same birthday? Statisticians know this question as the ‘birthday problem’ or ‘birthday paradox’.

And the answer?

Well, assume there are 30 kids in a class and that birthdays are evenly spread over the year. Given there are 365 days in a year, the answer would seem pretty unlikely. But, the mistake we make is that we tend to think in terms of any two children sharing a specific date such as the 12th November, rather than the chance of sharing any date in the year.

The answer is 50% – actually, it’s a little over a half as you only need a class of 23 to get a chance of 50%. Or to put it differently, if we had two classes of children, we would expect one of the classes to have two children sharing a birthday.

There are several ways of calculating this theoretically and if you contact me I can send the most straightforward one to you. But, we can also get the same answer using a mathematical technique of trial and error called a ‘Monte Carlo simulation’.

If you create a column of 23 random dates in an excel spreadsheet and keep hitting the F9 key to recalculate those random dates, you’ll find that half the time two of those 23 dates will match. This is a very simple example of this technique and I use it far more extensively when making financial plans.

Of course, the other option is to ask your own children or remember your own school days. And at my school I was that kid in my maths class that shared their birthday with a girl in the same class. I don’t think my teacher appreciated the statistical likelihood of that outcome – he was just demonstrating data selection techniques and had come up with his own early version of a dating service using holes punched in cards.

Alas, while his experiment was a perfect example of the’ birthday problem’, as an exercise in matchmaking it didn’t work. We’d have been a pretty odd couple. The girl in question was six inches taller than me at the time and went on to become a national karate champion – I was more into art.

I did, however, marry the girl in the next classroom whose birthday is two days after mine. And here we are together over 30 years later – what’s the chance of that happening?

Apparently, a little more that I’d give Sheldon and Amy in the ‘Big Bang Theory’.

Please remember:

  • past performance is no guide or guarantee of future returns;
  • the value of stock market investments can rise and fall over time,  so it is quite possible to get back less than what you put in, depending upon timing

It’s A Small World : Part One, ‘The Bacon Game’

This is the first of two blogs that will show you why it is a small world after all.

The world and its economy is far more connected that you might imagine. And while that does have some negative consequences, it also provides considerable benefit for the general growth of the economy and that is particularly rewarding for long term investors.

It might be my least favourite ride at Tokyo Disney Resort, but it is a small world after all.
It might be my least favourite ride at Tokyo Disney Resort, but it is a small world after all.

Normally, I tend to go a little ‘off-piste’ at this point in the hope that I can maintain your interest. However, in this case I am fortunate that, 20 years ago, three Albright college students did that for me when they dreamt up a game that very effectively demonstrates how complex systems, like the economy, benefit from a network effect. It is known as the ‘Six Degrees of Kevin Bacon’.

The aim of the game is to discover how connected any Hollywood actor is to Kevin Bacon – the hero of such cinematic treats as ‘Tremors’, which I admit is only good because it is so bad. The idea is to work out the shortest number of links or ‘degrees’ between any random actor and Kevin.

If the actor and Mr Bacon have appeared in the same movie, that’s one degree of separation. If the random actor was not in a film with our star, but appeared in another movie with an actor who has appeared with him, that’s two degrees – and so on.

So, you might ask, how well connected is the movie world in this way?

In his excellent book, ‘The Origin of Wealth’, Eric D. Beinhocker describes a study using data from several US universities that show the highest degree or ‘Bacon’ number for any American actor is 4. He goes on to state, ‘90% of the roughly 570,000 actors in the world had some connection to Bacon, the highest Bacon number in the world was ten, and 85% had a number of three or less.’

Those are pretty amazing numbers. And it shows that the movie world and, by extension, the economic world is far more ‘connected’ than you would expect if the links were just random.

Why is this the case?

When you have lots of different clusters of people linked by different themes, such as their profession and then have random links between those clusters you get much better connections than by random chance alone.

It is possible to quantify this mathematically and two gentlemen Newman and Watts have shown that in a population of 1000 people if each person has 10 friends and 25% of them are random, then the average degree of separation is only 3.6. If each person has 10 friends and none are random, it’s 50!

In light of those numbers, it’s easier to see how social media companies like Facebook grew so quickly using the biggest economic network, the internet. And Facebook uses its considerable knowledge of its own network structure and its connectivity to entice advertisers. It also, in part, explains some of the extraordinary valuations of companies in the sector and why a simple application like Snapchat spurned a $3 billion offer from Facebook – but I stress, only ‘in part’. Some of these companies are priced as though they will achieve networking perfection and late investors are very likely to be disappointed.

And, of course, not all network effects are beneficial – the recent financial crisis laid bare the dangers of contagion and that in extreme environments, different types of investment are far more linked that we would like or that traditional theory suggests. Which leads me back to my previous blog about volatility. Simply put, market prices and movements are showing real signs of complacency.

I’ll leave you with a short video of Kevin Bacon, who given his networking credentials fronts the current advertising campaign of the EE mobile and broadband network. Here he is challenging Jamie ‘never wash your hands’ Oliver to make the best bacon sandwich.

And I’d really appreciate it If you could help me add to the ‘small world’ network effect by clicking the ‘like’ button at the end of this blog.

Please remember:

  • past performance is no guide or guarantee of future returns;
  • the value of stock market investments can rise and fall over time,  so it is quite possible to get back less than what you put in, depending upon timing

An Introduction to VIX – the Fear Index

If I said to you the word ‘Vix’, chances are you would be thinking that I was talking about ‘Vaporub’. However, in this case I am referring to one way in which we measure how ‘fearful’ financial markets are.

Not that Vicks Vaporub doesn’t have its uses in life. Aside from the obvious one of relieving nasal congestion it also serves as a reasonable clue to the health of a marriage. If you are happy sharing a bed with a sniffling partner covered in the stuff, chances are you’re both onto a good thing.

The Vix measures emotion between these two extemes. Pick a button.
The Vix measures emotion between these two extemes. Pick a button.

To give it its full title, VIX refers to the Chicago Board Options Exchange Market Volatility Index. That sounds very grand and a bit complicated, but as ever, I’ll try to break it down into a simple concept that is easier to understand. And I’ll leave most of the mathematics to those of you who want to contact me directly for a much fuller explanation.

The ‘options’ referred to in the title are essentially just price guarantees that can be traded for a fee. Some allow you to guarantee the price at which you can buy the stock index – others give you a guarantee to sell at a certain price.

And it’s the fee, or premium that you have to pay that gives us a clue to how relaxed or fearful the overall stock market is.

Why? Well if I am going to provide you with any form of guarantee, whether it’s on a household good or perhaps the insurance on a car, I need to work out how likely it is that I will have to pay out that guarantee and whether, on average, it will cost more that the fees I am charging.

When it comes to a stock index, the chance that I will have to pay out depends largely on one factor, how volatile that stock market is, or more importantly, how volatile it is expected to become. The more wildly it is moving around, the more likely that I will have to pay out on the guarantee and therefore the more I want to charge upfront for providing it.

And that is what the VIX attempts to do. It looks at the prices being charged in the market for a variety of options or price guarantees and comes up with a value that tells us how volatile those prices are telling us the stock index is expected to be. And that number is a percentage of the current stock index price.

A figure of 20% means that there is almost a two thirds chance that the market will remain in a range up or down 20% in the next year. A lower figure would mean that expectations are for a much calmer market, a higher figure for a more volatile market.

And at the moment the figure is a mere 11%, which is very low – the lowest level in fact since the start of the financial crisis in 2007. Then it was a spectacular misjudgement given what happened over the next two years.


But are current levels justified?

There are all sorts of indicators that are suggesting the financial markets are having one enormous ‘goldfish’ moment where they have completely forgotten the last business cycle. And the reason for this is extreme confidence in the actions of the central banks.

I am nowhere near as sure as to the level of their competence, but low expectations of volatility can last for a long time – you know that it will increase but it is very hard to say when. As I’ve mentioned several times, it suggests it’s time to be a bit more cautious. It also means that I am finally prepared to look at some defensive structured products, but that will be on an individual client basis.

And I repeat that if you’re into natural logs (mathematical not fire wood), rules of dispersion, letters of the Greek alphabet and want to pick the brains of a volatility watcher since 1985 – I’d be happy to answer your questions.


 It’s all part of the service.

Answering your questions is all part of the service, and living eight years in Asia gives you an insight into great service. Here is a short topical story about the service I received during the 1990 Italian World Cup, while staying at the Oriental Hotel, Bangkok.

My wife and I were there to spend a delayed honeymoon in the splendour of this fine hotel. Our original honeymoon was just a couple of days in Bournemouth and as exotic as that location is, we felt we deserved another break.

The problem was it was during the World Cup and given the time difference between Bangkok and Rome I needed to know the Oriental Hotel was putting the games on in the early hours.

I needn’t have worried. The Thais are fanatical about football. And I realised this when on the day of England’s first game against Ireland I entered the designated room at the hotel.

There was a huge projector screen at one end and about one hundred chairs in front of it and about the same number of staff standing around the edges of the room that refused to sit down even when I invited them to – and I was the only hotel guest there.

It was a rather bizarre environment. As the game started none of the staff made a sound, so nor did I. Then a senior looking member of staff came over to me and said, ‘excuse me sir, are you English or Irish?’

I replied, ‘English’ and he returned to the other staff to let them know.

The next time England got the ball, they all cheered, and when Lineker scored after 8 minutes I could have been on the terraces. It finished 1-1, but believe me when I tell you it’s hard to match Asia for service!