Fish Bait

The occasional baiting of Michael Fish over his famous weather forecasting error in 1987 has happened again.

Andy Haldane, the Chief Economist of the Bank of England, recently issued a bit of a ‘mea culpa’ when he said that the failure to predict the financial crisis and an overly pessimistic Brexit forecast was a ‘Michael Fish Moment’ for economists.

He also talked about economics learning from the changes the MET office made to its forecasting methods and the use of big data.

I can’t argue with that last point. But there is an extraordinary historical oversight being made here.

Economics had already experienced plenty of its own ‘moments’ to learn from between the time of Mr Fish’s forecast and the time of the financial crisis. And you only needed to wait about 48 hours for the first.

This RBS job advert appeared in the Feb 2007 version of, what else, ‘The Economist’ newspaper (apparently, it’s not a magazine). And I include it as it contains an accurate forecast. The tag line is, ‘Make it happen’. Well, they certainly did that.


Black Monday

Back in 1987, immediately following the weekend that Mr Fish made his erroneous forecast, there was another event that was a bit more global in scale. A financial crash known as Black Monday when stock markets collapsed around the globe.

In the States the Standard & Poors index of the largest 500 stocks fell by a quarter and it’s futures contract by 29%. I know this first hand as I was attempting to trade them over the day on behalf of clients.

As an event it completely challenged the prevailing economic thinking about ‘modern portfolio theory’, ‘the efficient market hypothesis’ and ‘random walks’. A one day move in equity markets of that size was supposed to be virtually impossible.

When I say ‘virtually’, we can actually put a number on it. Given certain assumptions, it’s one chance in ten to the power of minus 160. Or as it was put in one academic paper in 1995 –

‘Even if one were to have lived through the 20 billion year life of the universe and experience this 20 billion times…..that such a decline could have happened even once in this period is virtually impossible.’

In modern parlance this was an ‘epic fail’.

Two years later I had a front row seat in Tokyo at the bursting of the Japanese asset bubble, the ripples from which are still being felt today. And then there was Black Wednesday as the UK left the ERM, the Savings and Loan debacle in the States and the Asian Financial Crisis.

Then we had the LTCM bust where two Nobel prize winning economists from 1997 lost $4.8 billion in 1998.

The turn of the century saw the dotcom bubble burst and then, finally we get back to Mr Haldane’s Michael Fish moment of the financial crisis.


Flood Warning

It seems appropriate to use a weather analogy. And what those events demonstrated was, not only did financial floods occur more often than economic models predicted, they could be larger and arrive in batches. The financial dams built against them were also too low, poorly made or might not even exist. We even had examples where risk analysis was so poor in some markets that financial institutions were effectively buying flood insurance from other institutions lower down the hill.

But the most damning accusation is the likelyhood that, due to over confidence in their models, Central Bank policy increased the risk and scale of the last big flood in 2008.

If the dismal science of economics really does attempt to learn from other disciplines such as meteorology in order to counter that over confidence that would clearly help –  but a mirror and a larger dose of humility would probably help more.


The quote is from ‘Recovering Probability Distributions from Contemporaneous Security Prices’, Jackwerth and Rubinstein (1995) and is referred to in the book ‘Black-Scholes and Beyond’ by Neil A. Chriss



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.

2016 Investment Review – Valuations Top Trump

Not a black swan

Investment in 2016 A Black swan


One professional adviser publication produced a review of the year with a picture of a black swan on the front. It’s a clear reference to the results of the UK referendum and US election.  Except they weren’t black swan events. ‘Black swans’ are outcomes that, to the majority,  are completely unexpected.

There’s little point in me adding to the terabytes of pixels trying to explain any permutation of voter preferences or special interest groups that may have swung either the Brexit vote or US election 2% the other way. But events where even a 10% swing can change the outcomes aren’t black swans.

Those on the losing side of either vote may feel aggrieved and a little shocked, but that doesn’t mean the results were unimaginable or even unlikely. In two horse races the five to one shot can win, especially if the basis of measuring those odds via polls is particularly difficult in the first place.  The main weight of money being wagered was also centered in London or New York.


Polls apart – different polling techniques

On the subject of polls, I’d like to draw your attention to this blog, UK Polling Report. It’s written by YouGov’s Anthony Wells and he gives a frank analysis of the forecasting problems the industry has faced since the surprise result of the 2015 general election.  And this year, the size of the adjustments that some polling companies were making to their traditional polling data to make their results more representative of the overall population were a warning sign in themselves.

Anthony also does a good job of explaining the limitations of internet ‘voodoo’ polls.  These are loved by the mainstream and local media when they match their editorial message or support a headline grabbing story. But as a method of collating the views of a population they are very flawed.


Valuations Top Trump

The implications of the Brexit vote and US election are important, but to me they are still trumped by the extreme level of bond and equity valuations. And they remain high even as the US attempts to begin returning interest rates to more normal levels.

All the talk is of better economic numbers and economic impetus from Team Trump. But the change in rates has implications for all the debt built up on the journey to negative interest rates reached in the summer in many places in the world. At the moment that seems to have been forgotten by investors, but you can read about it here and here.

Central banks will be mindful of that and will continue to try to manage interest rates at artificially low levels. The result is that the main escape valve for economic stress is still through adjustments in exchange rates.

We have seen this several times since I wrote this blog almost two years ago.

You could be forgiven for thinking little has changed in the meantime. The FTSE index is back above 7000 after a trip to 5500, mortgage rates are similar and West Ham are still losing at home to Arsenal. But, foreign exchange rates have changed significantly and it’s not all about the pound. Expect more of the same and, above all, keep your investments simple and don’t chase after yield. This is especially true if it’s wrapped in a product you’re not sure about.


Spread trading – I can’t believe its not betting



At the end of that blog I also pointed out the dangers of trading foreign exchange using spread betting companies and expecting to win. Some firms are more reputable than others. But, if you were leveraged at the ratios encouraged by some of the these firms, the natural volatility in the market place would likely cause you losses. And that is before you even consider the large structural moves that have happened.

Back then I wrote:

 ‘If you are tempted by the hype, just ask the company seeking your business what percentage of their customers make money over a year? That should focus your mind a bit.

Well, early in December, the FCA finally announced plans for a crackdown on the amount of leverage that spread betting firms can offer to the trading public. In the consultation document it even included a suggestion that there should be mandatory disclosures on the ratio of winning/losing positions.

I don’t know why it has taken them so long to get to this point, but at least they are getting there. Although something tells me they are going to be more preoccupied with the peer to peer marketplace over the next year or two.

I’ll be looking at that sector again in the near term now that there are some signs of possible discomfort.


Complex investments are, well, complex.

It’s been a couple of months since I wrote my last blog, but I haven’t been quiet at work – far from it.

On behalf of other financial advisers in our group I’ve been taking a much closer look at what we term ‘complex investments’. These include structured products that offer a variable profit or loss if the underlying investment reaches certain levels over time, but also those investments that offer large tax incentives to encourage investment in smaller companies. (Examples are venture capital trusts (VCT), enterprise investment schemes (EIS & SEIS) and newer schemes that offer social investment tax relief (SITR).)

And what I’ve found is that some complex investments can be too complicated for a financial adviser to reasonably assess given a limited amount of time. There can be a layer of risk that isn’t obvious in a promotional document or even in the risk assessment of an independent research firm.

Or we may simply not have all the data we’d like. It’s painfully difficult to get historical information about previous performance from some scheme providers. They tell me that the data is proprietary information.

Well, it might be, but I believe I’ve found a way of getting the data I require in any event. And it’s producing some unexpected results.

I’ll be writing more on this topic in the new year.

Best wishes for a Happy New Year!


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.

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.

Gold Medal Birthday – 23 March

Gold Medal Birthday Bonanza.

Among all the headline grabbing Olympic statistics from the past two weeks, you can’t have missed this one. GB’s four most successful male Olympians were all born 23 March. Amazing isn’t it?

Sir Steve Redgrave, Sir Chris Hoy, Mo Farah and Jason Kenny all get Happy Birthday sung to them on the same day.

It’s generated many articles suggesting that there must be some significance to what seems too incredible a coincidence. And last week Peter Allen, host of BBC’s 5live afternoon radio show, invited listeners to call in with their own stories of personal success relating to that auspicious birthday.

One gentleman suggested that, like the Olympians and others born under the star sign of Aries, he was a determined and successful individual. A mother expressed regret that her daughter, born on that date, was a gifted athlete who wasn’t spotted and slipped through the net. If only someone had realised the significance of her birthday?

Well perhaps that is the case. I can’t prove otherwise.

But, Sir Chris Hoy won his first gold in 2004 and next up was Jason Kenny in 2008. So, until 2008, March 23 wouldn’t have been seen as a trend setting birthday.

Then there is the question of how likely shared birthdays are anyway.


Britain's four leading male olympians and their medals
Sir Steve Redgrave, Sir Chris Hoy, Mo Farah and Jason Kenny. All born on the 23 March – but, is this really that unlikely?

 Sharing a birthday – what’s the chance of that?

In fairness to Peter Allen, he did have a statistician on the show briefly, who explained what’s known as the ‘birthday effect’. I’ve written about that before here. It demonstates how many people you need in a group so that the chance of two sharing a birthday is 50%.

And it’s a surprisingly small number. You only need a group of 23 people.

You can show this using a mathematical equation, but there is another way which is easier to understand. Using a spreadsheet and a small algorithm it’s possible to create multiple groups of 23 people, all with random birthdays and check the results.

So, I created 1000 groups and, as expected, in almost exactly 50% of them two or more people shared a birthday.

And we can use the same ‘monte-carlo’ technique of trial and error to look at birthdays in thousands of much larger groups and compare them with real life examples – such as a team of Olympic athletes.


Team GB

Team GB sent a group of 366 athletes to Rio, which is a rather convenient number since that’s just one more athlete than there are days in the year.

And I’ve compared their birthdays with those generated by 1000 separate trials . Each trial is the same size as Team GB and contains 366 randomly generated birthdays.

Now, you might expect that the birthdays would be evenly spread over the 365 days of the year without much repetition for both Team GB and the 1000 random trials. But, that’s not the case.

Here are the answers to some obvious questions comparing the two groups.


On how many days of the year does no-one have a birthday?

On over a third of the days in the year, 134, no-one in Team GB has a birthday. That is exactly the same as the average of the 1000 random groups of the same size.


How many share a birthday with, at least, one other member of the group?

For Team GB the answer is 63%, which is again exactly the same as the average of the 1000 trials.


On how many dates do three people share a birthday?

There are 18 dates where three members of Team GB share a birthday. In the trial group there is an average of just over 22.


On how many dates do four people share a birthday?

Now this is a bit unusual, there are 11 dates on which four people in Team GB share a birthday. That’s much higher than the trial average of just under 6. In only 7% of trials were there 11 dates generated.

The actual 11 Team GB dates are – 30th Jan, 13th Feb, 12th March, 23rd March, 24th April, 9th May, 20th May, 21st May, 19th Sep, 6th Oct and 30th Dec.

(NB There are no dates on which five athletes in Team GB share a birthday, theoretically there would be one.)


How successful were those eleven groups of current Team GB athletes?

You’ll know that the four born on 23rd March were the most successful as it includes Mo Farah and Jason Kenny. The others born on that day are Tom Farrell who was competing with Mo in the 5k metres and Katie Clark, Synchronised Swimming.

On eight of the other dates the athletes earned at least one gold medal between them.


Fools gold?

Hopefully, from the above you can see that shared birthdays in large groups are far more likely than you might have imagined beforehand.

The only part of the analysis of Team GB that seems particularly unusual is the weighting of birthdays towards the earlier part of the year. This is consistent with some academic studies relating to sports. However, in itself it isn’t that meaningful.

It’s also very easy to get caught up looking for patterns that in reality aren’t there. In other words, there isn’t a reason for the pattern or trend as they’ve been generated randomly. Nassin Taleb wrote a book, ‘Fooled by Randomness’ that explains how serious this is in relation to financial markets. From managing risk to spotting fraudulent activity it’s a major issue.


Data mining

There’s also the problem of ‘data-mining’, which is looking for data which fits your argument.

If I look at a separate group of the top 366 Olympians of all time, the most successful shared birthday IS the 23rd March. There are five birthdays on this day, our four greats and a Soviet speed skater born in 1931 called Yevgeny Grishin.

It isn’t amazing that there are five sharing the same birthday. We should expect that in a group of that size. All that is unusual is that four of them are British.

But, I could sort the data differently.

March 23rd is the 82nd day of the year, but in leap years the 82nd day falls on the 22nd March. And if I sort the information using the 82nd day we get a different group. Chris Hoy and Jason Kenny were born in leap years on the 83rd day of the year. While Steve Redgrave, Mo Farah and our Russian speed skater are joined by Alfred Schwarzman. Schwarzman was born in a leap year 22nd March 1912, he was a gymnast representing Nazi Germany who later won the Iron Cross in WW2.

That isn’t quite such an auspicious group, but I deliberately searched for a more negative outcome to make a point.

As another example, there are 910 inmates at HM Prison Belmarsh according to Wikipedia. It’s very likely that six or more share the same birthday – would you see that as significant?

Would you phone Peter Allen if you shared that birthday?



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.

Missing the high notes – the 500 euro note (again)

The 500 euro note has a habit of going missing.

This blog draws heavily on the original, but also looks at the latest report from the Luxembourg Central Bank.


In June I highlighted a Europol (European Police Office) report on money laundering. ( You might not think that money laundering regulations will touch you, but the FCA requires all IFAs to carry out basic money laundering checks before working with clients )

Europol’s report explains a variety of money laundering methods and criticises the lack of controls within the Eurozone on the reporting and movement of cash. And Europol are especially interested in the use of cash as, to quote them, ‘although all cash is not criminal, all criminals use cash at some stage in the money laundering process’.

And if you’re going to move cash around it helps if you have a note with a large denomination. Nicknamed ‘Bin Ladens’ from the time when we knew he existed but not where, the 500 euro note means that 10 million euros in paper weighs little more than the average airline baggage allowance – 22 kg.

The European Central Bank (ECB) itself estimates that over 300 billion euros of its banknotes are held overseas.  And in June it announced that no new 500 euro notes would be issued after 2018 as they were ‘taking into account concerns that this banknote could facilitate illicit activities’.

It will be interesting to see whether issuance of the largest notes has changed when the main central banks report next year. In recent years, overall eurozone production of ‘Bin Laden’s’ has been growing. But one central bank stands out in particular, the Banque Central du Luxembourg (BCL)

Below is a graphic from the Europol report which shows data from 2012/2013.

Bank of Luxembourg

The top graph highlights the four main issuers of euro bank notes, Germany, Italy, France and Luxembourg. But, the second graph highlights the scale of Luxembourg’s issuance compared to the size of its economy.

As the source for the graphs shows, this information can also be found in the annual report of the BCL itself. And I was interested to see how much issuance has changed in their latest report for 2015, which was not available when I wrote the first blog in June.


500 euro notes even go missing from the BCL annual report.

In the first section on the amount of new cash issuance, the report refers to demand for the largest notes falling. But, in fact, it’s just the percentage rise in issuance that’s falling, the value of the largest notes issued has increased again.

In the previous year’s report the BCL detailed the amount of each euro note produced. They did the same in each of the reports from 2010 – 2013. However, in its latest report for 2015, these statistics are not included.

They have been replaced with statistics for the Eurozone as a whole, which is how they used to report the data prior to 2010. But one has to ask, why the change? They’ve also chosen to only release the report in French the last time I checked.

Perhaps they are especially sensitive now the 500 note will no longer be issued and the reasoning behind that decision. Or it might be the case that a combination of an O-level (yes, I’m that old) in French and Google translate have meant that I’ve completely misinterpreted the report.

This graph from the 2014 report doesn't appear in 2015.
This graph from the 2014 report doesn’t appear in 2015.


A dash for cash.

It should also be remembered that the ECB decision to stop new issuance of the largest note might not all be about preventing money laundering.

Legitimate demand for cash is bound to increase as the European Central Bank pursues a policy of negative interest rates i.e being charged for deposits.  And several regional German banks are already considering holding part of their reserves as cash rather than being charged for holding them directly with the central bank.

The same will be true of general savers if banks there introduce charges for retail customers as they have with the largest corporate customers. All of which negates the effect of negative interest rates in the first place.

For the policy to work as they expect you need to reduce the availability of cash as an alternative store of value whether you’re a private citizen, business, drug baron or leader of an international sporting federation.

Update: An FT article dated 16th August, covers this issue in more depth, ‘Banks look for cheap way to store cash piles as rates go negative’

You can find the BCL’s annual reports here
There are two blogs on the implications of negative interest rates here and here.


Ending on a different high note.

To those of you with a love of music, here’s Mr Les Dawson showing us all how to really hit the top of your vocal range. This is his emotive rendition of ‘Feelings’ – enjoy.

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.