Sunday 28 February 2010

UK Property Market – February 2010 Update

I am still yet to buy myself a flat or house even though the ownership of one is important to my retirement investing strategy in the longer term. I have now for the time being even stopped looking on the internet at house prices in the area that I am interested. The reason for this is that in my opinion UK house prices are still overvalued by a huge margin. Last week the Nationwide reported that average house prices had fallen from £163,481 to £161,320, a monthly fall of £2,161 or 1.3%. On an annualised basis house prices in absolute terms are still up annually by 9.2% and if I look at real (after inflation) returns they are still up by 6%.

Saturday 27 February 2010

Buying Gold

As I postulated here I made the decision on Wednesday to buy more gold. As with the last time I bought gold, the buy was not big at 0.6% of my total retirement investing assets. The trade was made by moving cash to gold rather than with new money. At the close on Friday gold had reached £733.01 (Note: I have a gold priced in GBP widget on the right hand side bar widget of this blog as I follow it closely) which means that even allowing for buy/sell spreads and trading costs I am up on this buy decision by 2.5%.

Thursday 25 February 2010

A home for cash

UK Retail Prices Inflation (RPI) is currently running at 3.7%. This means that if you are a UK basic rate taxpayer that to just stand still you need to be earning interest of 4.63%. It’s even worse for higher rate taxpayers, you need to be earning 6.17%.

So what’s available out there? A quick look at MoneySavingExpert shows that the best ‘clean’ account, which is one that plays no tricks like introductory bonuses or withdrawal penalties, is paying interest of 2.5%.

This means that even with this account the basic rate taxpayer is every year is losing 3.7% - 2.5% + 2.5% x 20% tax = 1.7% of purchasing power on their cash holdings and the higher rate taxpayer is losing 3.7% - 2.5% + 2.5% x 40% tax = 2.7%. So if you are a prudent saver you are being punished while if you are in debt up to the eyeballs your debt is gradually being eroded by the wonderful [sic] inflation that we are seeing. This is thanks to the Bank of England base rate of 0.5% plus the great management that the government is showing.

I’ve protected myself as well as I can by having a significant portion (17.6% of total assets) of the low risk (cash and bonds) portion of my current low charge portfolio in NS&I Index Linked Savings Certificates which is giving me a real positive return. Unfortunately a new Issue of these has not been offered for some time and so I can’t put any more money here.

A little over 3% of my cash is sitting offshore in a ‘clean’ account paying interest of 4.25%. I’m losing money in real terms daily however at least it’s better than the best UK ‘clean’ account rate of 2.5%.

The remainder is in a ‘clean’ UK based account paying 2.1% interest. This is losing significant purchasing power however I feel powerless to do anything about it. I see no option at the moment but to sit tight and hope that one day my prudence is rewarded. Does anyone have a better option?

As always DYOR.

Wednesday 24 February 2010

US Inflation – February 2010 Update

The above chart shows the Consumer Price Index (CPI-U) to January 2010 courtesy of the Bureau of Labor Statistics. Year on year inflation has fallen from 2.7% in December ’09 to 2.6% in January ‘10. Annualising the last 3 months and inflation is running at 0.0% and annualising the last 6 months has inflation at 1.2%. It looks like the US has their deflation ‘problems’ under control for now.

I have taken the liberty of dividing the chart into two sections. The first red section runs from 1871 to 1932 and the second blue section runs from 1933 to present day. I chose this break point as during 1933 the US officially ended their link to the gold standard. I think this chart demonstrates a point that government will always choose to inflate debt away at the expense of savers if given the chance. They could not do this under the gold standard.

To demonstrate this arithmetic mean inflation rates have been:
1871 to 1932 CPI = 0.5% with deflation being a regular occurrence.
1933 to Present CPI = 3.7%
The CAGR CPI from 1871 to present has been 2.1%.

Tuesday 23 February 2010

UK government bond yields continue to rise – February update

I continue to monitor the 10 year government bond yields of three countries (Australia, United Kingdom and the United States) to try and understand when interest rates may start to rise with my datasets shown in today’s chart.

Since June of 2009 the 10 year Australian bond prices have actually fallen by a relatively small 0.5%. In contrast the US 10 year has risen by 7.4% and the UK 10 year by 13.8% to be 4.20% today.

I’m going to update why I think the United Kingdom bond (gilt) yields continue to rise:
Reason 1. The Bank of England have now made clear that they are going to hold interest rates at 0.5% even though inflation is well above target. They have even mentioned that they could yet perform more quantitative easing (QE) which must be inflationary. In the letter to the Chancellor the Bank of England claims that ‘the direct effect of the short-run factors on inflation should be only temporary’ and that ‘although it is likely to remain high over the next few months, inflation is more likely than not to fall back to target in the second half of the year...’. I can’t help but feel that the Bank will ignore their inflation target of 2% and that it’s a case of do as I do not as I say given that the Bank of England’s pension fund has 88.2% of its assets devoted to Index-linked gilts. The market is starting to think the same thing and so to ensure a sensible real (after inflation) yield the prices have to fall and yields rise.

Reason 2. Alistair Darling has forecast government borrowing to be £178 billion. On Thursday last week yet another record was set when it was announced that in a month when tax receipts usually flood in the government still had to borrow £4.34 billion. This is the first time since 1993 that the government has had to borrow in a January. Punters are now starting to suggest taht at current trends the government deficit could be £10 billion more than forecast. Supply and demand principles should hold. More supply of debt for purchase should reduce the price of debt.

Reason 3. The UK government are still yet to explain how they are going to reduce the levels of borrowing. The levels of borrowing are heading to 13% of GDP and may even exceed that of Greece which we have seen so much of in the press lately. How long until the credit worthiness of the UK is downgraded. This will depress prices meaning yields will have to rise.

Reason 4. Those who already own government bonds and can see what’s happening will start to sell their holdings. This combined with the Bank of England now out of the market and no longer buying debt through QE has to reduce the number of buyers. Again supply and demand should prevail pushing yields higher.

So what does this mean for my retirement investing strategy? Exactly where I was last month. If I owned gilts I’d be considering selling. I don’t own fixed interest gilts so I’m ok here. I do own index linked gilts but with inflation kicking off I’m comfortable with this and following the Bank of Englands pension fund.

I also will continue watching house prices carefully. The interest rates on mortgages have to rise as those wanting to borrow for a house will effectively be competing with the UK government for funds. I can’t see how house prices can continue to rise with increased borrowing costs and this could turn out to be the catalyst that brings on a reduction in house prices.

As always DYOR.

- All yields are month end except February which is 18 February 2010