Friday listening: Promises, Promises

Piggies in trouble.  Source: Google Images.

Piggies in trouble. Source: Google Images.

I’ve been a bit discouraged by markets this week – the gyrations make for poor commentary.  I guess the general message is to be short: short stocks, short oil, short Euros, etc.  We’re back to zero S&P500 return in 2015.  Just stay long fixed income (particularly in Europe) and long the US Dollar.  That about sums it up.

Anyway, it’s Friday.  I’ve really enjoyed this BBC radio series called Promises, Promiseswhich traces the history of debt from an anthropological perspective.  Some really fun concepts and stories here, as narrated by the author of one of my absolute favourite books – Debt, the First 5,000 Years.  The radio series is 10 episodes of 15 minutes a piece, so very digestible for those short walks outdoors or quiet time in the house.

Let’s hope for better markets next week, eh?

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Greek elections: The difference between known- and unknown-unknowns

I win!  Now what?  Source: Reuters

I win! Now what? Source: Reuters

Congrats to the protest voters in Greece’s election on the weekend, with the anti-austerity Syriza party taking a majority position in their parliament.  A few thoughts:

  • Now what?  The story of Syriza brings to mind the Tea Party in the US.  It started as a small protest party with extreme views – a simple message of ‘We can’t handle this debt burden that was left to us.’  Now that the party is in control, simple messages don’t work as well for continued governance: for example, Tea Partiers became very selective in which debts were OK to keep (Social Security and Medicare, mainly).  The press has already picked up on the challenge for Syriza going forward, as they figure out how to balance the simple message with realpolitik.
  • Markets priced the news well.  Yes, the Euro crashed for a little bit.  Stocks took a little hit.  But within hours (at least as I write), we’re practically back to where we were before the election.  So the market did a great job of pricing this known unknown: the winning margin of Syriza in Greece, and how aggressive they’ll be in renegotiating their debt burden.
  • Contrast with SNB manoeuvre.  The weekend news provides a good foil for the SNB move a couple weeks ago: that unknown unknown meant the markets had no time to price expectations.  On the plus side, market efficiency meant the prices moved quickly to reflect new info.  On the minus side, those discontinuous moves brings much heartburn to investors/traders.
  • What would you do?  Suppose you’re in a big position of power, and you have big news to communicate to the markets.  Do you drip in the info, like Super Mario and the ECB?  Or do you shock and awe, as the SNB did?  Markets clearly prefer the former, but maybe there are reasons for the latter method.
  • The bigger message.  I wonder if this qualifies under ‘folks with pitchforks’, when we talk about the demise of the Western middle class.  Now protest parties (e.g. Podemos in Spain) are expected to get a lot more votes, which will bring similar uncertainties.  Without being too ominous, the status quo seems to be unravelling.

I can borrow HOW MUCH??

Maybe it’s time to get on the housing ladder…I mean, everyone in the UK is doing it.  From the latest inflation figures, interest rates may not be on the rise for a long time; why not go for a big variable-rate mortgage??

I’m being a bit sarcastic here, but something compelled me to look at mortgage rates in the UK over the weekend.  Aside from the bad feeling I get from a variable-rate mortgage as a concept (aside for Americans: it’s incredible the amount US taxpayers subsidise home ownership, between Fannie/Freddie and tax-deductibility of mortgage interest), I wanted to see how much a regular schlub could borrow.  Using one of those fancy calculators one of the major high-street banks offer on their website, I put in something like:

  • Borrowers – 1
  • Salary for borrower – £35,000 p.a. (around the national average)
  • Other liabilities – £0
  • Result: I can borrow £168,000 

So around 5x gross income?? At average UK rates (keep in mind – no tax-deduction for interest here), that’s £850/month for a standard mortgage.  Assuming standard UK tax rates, after-tax income for this would be around £2,500/month; therefore the mortgage is around 1/3 of income.

I guess that’s alright, when rates are low.  About 4% for this scenario, which is about 3.5% above UK base rate.  Suppose the margin (3.5%) stays the same over time, with all the variability in the base rate.  The latter has been around 5% for an awful long time – so a ‘normal’ mortgage rate would be around 8%.  My mortgage payment would then be around £1,300/month, or just more than 1/2 of income.

Again, this signals 2 things for me:

  1. Americans are soooo lucky: fixed interest mortgages are a god-send, particularly for less financially-savvy consumers.  I’d much rather know that I’m paying 4-5% p.a. for 30 years than have the situation outlined above.
  2. I think I’ll hold off getting on the housing ladder: yes, house prices keep rising in the UK.  How can people afford it?  Rolling equity from their previous houses (the ‘ladder’ bit), and paying low interest (which, incidentally, helps build equity through raising house prices).  I think I’ll wait until interest rates rise towards equilibrium, then see who can no longer afford their mortgage payments.  When will that be?  Who knows.  Thankfully rental yields seem to be about the same as interest rates on a mortgage, so I’m not out too much.

End soapbox.