Good reads from around the Web.

Inequality is a rising – and a very real – problem. So it’s no surprise that those members of the chattering classes still able to earn a living coining bon mots for the broadsheets have come up with a new one: Wage rage.

Wage rage is what happens when your salary doesn’t go up in real terms, yet living costs and company profits do.

At the moment it’s mainly manifested in localised rants between couples in the grocery aisles of Tesco – one wants the asparagus while the other says make do with carrots – but it can only be a matter of time before the squeezed middle-classes angrily demand to see each others’ pay slips.

The lefty economist Chris Dillow, who writes curiously enough for the Investor’s Chronicle, has a Marxist explanation for why real wages have been falling:

…socio-technical change since the 80s such as CCTV, containerization and computerized stock control has made it easier for bosses to monitor workers. Direct oversight means they don’t need to worry about buying workers’ goodwill. They are instead using the Charles Colson strategy: “When you’ve got ’em by the balls, their hearts and minds will follow.”

Years ago, firms wanted smaller but motivated workforces.

Now they can control workers directly, they don’t need to worry so much about motivation and so are content with larger but grumpy workers.

Dillow argues that high-flying executives can’t yet be motivated by the threat of being replaced by someone in China or Amazon’s mechanical Turk, and so they have been able to increase their wages.

Is he right? I have no idea.

As an investor and a capitalist, I do wince though when I see company profits rising relentlessly even as revenues and real wages fall. That the richest 1% have got inexorably richer is just the icing on the cake.

The problem for me is not just that it’s arguably morally wrong for a few to benefit at the expense of the many – morals are pretty fluid, after all – but that it’s unsustainable.

Companies need customers. And democracies need some notion of equality.

Still, it only takes a few lines in The Guardian for my inner Thatcherite to come out swinging his man bag:

There are also signs that workers are paying a price for the new competition from the likes of lone parents, whom aggressive workfare policies are chivvying to take up whatever work might be available, irrespective of the wage.

Yes, there are signs of that in the same way that there are signs in tea leaves.

Inequality has been growing for decades, through various political administrations. It’s more likely down to technology, globalisation, and the near-universal acceptance of market economies. It’s not down to saying that people who can earn money should do so before dipping into the pockets of others.

And then there’s the language. Someone with a job is a “worker” but a parent with a child who gets a job is apparently still a “lone parent”.

When does a lone parent become a worker? And what do we call a lone parent who already has a job? Or shouldn’t they exist in Guardian-land?

Capitalism rules, okay?

My hope is that the slide in real wages is a symptom of the long economic slump and the lack of animal spirits.

Once the economy starts ticking up on a global scale, company bosses may well fall over themselves to employ more people to meet the demand, increasing the competition for workers (and those wage-less lone parents…) and putting more money in our pockets to spend. Gradually workers will claw back some of what they’ve lost.

A rosy outlook? Certainly, but it’s worked before.

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Having enough to live on until the day you die – that has to be the clear and unfettered goal of every retiree. Only when that objective is secure can we move on to grander visions of a golden retirement, or passing on an estate.

As they say in Alien: “All other priorities are rescinded.”

I’m dealing with this now as a close relative of mine needs help to make safe her income. She’s up against the ravages of inflation, a Darwinian stock market, sharky financial advisors, and a risk tolerance lower than a nun in Caesar’s Palace.

She doesn’t have a defined benefit plan, or sources of income beyond the state pension, and her pensionable assets are modest.

Making a happy retirement out of that lot can be done but it will be touch and go. We will have to put the chips on the right squares and there will be no second throw of the dice.

What really matters?

Daunting choices and goals have been swirling around my relative, leaving her frozen in the fog. What’s needed is a retirement plan filter to help her see clearly.

Here’s what I’ve come up with:

• How much you got? In pensionable assets and any other income that will help your retirement. For many people, “other income” will just be the state pension.

• How much you need? What’s the minimum amount you can live on and be reasonably happy? I’m not talking breadline bleakness here but jetting to Capri on a whim is probably out, too.

• How much you want? Okay, here’s where those Capri weekenders come in. What other lifestyle goals and dreams do you have. For example traveling the world, passing on an inheritance, and so on.

Once you have the answers to these questions you can set about your strategy.

The least risky options available are outlined by William Bernstein – the renowned passive investing champion – in his excellent book, The Ages of the Investor.

Bernstein counsels a two-part retirement strategy:

1. Create a minimum income floor – This aims to meet your basic retirement needs for the rest of your days, and is generated using near risk-free assets.

2. Create a risk portfolio for the fun stuff – Legacies, Gucci bags, and bionic parts are funded by (hopefully) the rise in value of this portfolio. As the name suggests, you can afford to take more risk here because your basic needs are already secure. Though some of the risk portfolio should always be in cash to handle emergencies.

Critically, by ring-fencing the two parts of your retirement plan, you won’t endanger your survival income by taking risks in pursuit of the good stuff.

In this follow up post, I take a look at the best options for nailing down that all-important income floor.

Take it steady,

The Accumulator

Good reads from around the Web.

You can’t turn on the TV or read a business website without stumbling across an economist these days. The financial crisis took these nerds-turned-superstars off the sidelines and onto the front pages.

Why did economists become our go-to pundits? Because we demanded explanations for what happened in the meltdown, and economists fell over themselves to give them.

Sadly, as my post of the week from The Atlantic explains, while economists might be pretty good historians, they’re rubbish at proposing useful actions or predicting the future:

Imagine you are the Royal Physician in England some time during the 14th century. The prince is sick, and you’ve been summoned to help. You call in two experts for advice. The first says: “Use leeches to suck out the evil humors.” The second says “No, you must bleed him to get the evil humors out.” They start to argue, insulting each other in nasty epistles. “Leech guy is secretly working for the French!” alleges Bleeding Guy. “Bleeding Guy just wants the prince to die because the prince wanted higher taxes on the nobles!” Leech Guy fires back.

What’s the right move? Well, in an ideal world, you would go and get 999 patients who have illnesses similar to the prince’s and give them all a variety of household substances, such as bread mold. Then you would take careful note of who died and use statistical analysis to figure out which household substances cured disease. Thus, you would discover penicillin and invent modern medicine.

Sadly, this is not what you do, because a) if you proposed it, you would be led off to the dungeons and beheaded b) it’s the 14th century and you have no concept of the scientific method and c) you don’t really have the right tools for that experiment, anyway. Instead, it’s bleeding or leeches. So you take your best guess and you pray you’re right.

The economic situation we find ourselves in today is a little bit like the example above.

I’m skeptical when I hear an economist explain what’s going to happen in the economy. After many years of reading their opinions, not one has struck me as generally right.

Some, such as the perma-gloomy Nouriel Roubini, seem to be like the sacrificial virgins of our forebears. When the market falls they are given airtime to appease the Dark Lords of Doom, but once the Apocalypse is postponed, they’re returned to the dungeons.

Lots of investors say they don’t take economists seriously, but my experience says otherwise. From 2009 to 2012 I was regularly emailed economic predictions – invariably pessimistic – from investors I know. Comments left on this blog were similar.

Like porn stars, somebody must be using their services and paying for them, whatever they say in public, or else the economist industry wouldn’t be so big!

I rarely include economic prophesies in Weekend Reading. But I do think economists can be helpful to get a view (not *the* answer, and not a prediction) on what’s already happening in the economy, or in a specific sector.

Economists are most useful at explaining recent changes on the bottom-up level – the pent up demand for UK housing, say, or the way that employment is rising despite the weak economy.

Just don’t let them get their crystal balls out.

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