Weekend reading: five graphs that justify the gloom

You argue that inflation should fall fast from here/4%.

One factor I think you and other commentators underplay here is minimum/living wages. We have a ~10% rise coming in April. Along with the 2% drop in NI that landed in January, and never mind any Hunt tax cuts coming later this election year, this is a significant jump in disposal income for the bottom two quartiles on the income scale. Into a macro environment which has low unemployment (though 5m disability benefit claimants, heading up to 7m https://data.spectator.co.uk/welfare ), this feels inflationary to me.

@PC, I took a look out of interest. This rather sticks out to me:

“From the get-go, we might pick a career less for its income and more for its joy—because we envisage doing it for as long as our mind and body allow”

Which sounds great. Unfortunately though, when I graduated Arsenal didn’t seem overly keen on me picking them to play as their striker. So, I asked Steven Spielberg if I could help out directing movies, and he said “security!” and then a stocky gentleman escorted me out of the studios I had infiltrated.

So as a penniless grad, I applied instead to approximately 75,000 grad schemes which mostly didn’t even bother replying. When one finally accepted me, I had the choice of doing the work they offered me or working for minimum wage on the tills at Morrisons.
So after deep consideration over the following ten seconds, I went with the grad scheme and after several years of grinding, secured some promotions and earned a decent wage, and bought a house. I wasn’t loving the work, but starting again from zero with a big mortgage wasn’t really an option despite the notable absence of my joy.
So I looked for other sources of joy instead, and that turned out to be mostly things not involving my work.

Which I think is my very long way of saying that I’m surprised that of the two objections the ICE author could imagine to the concept, that not everyone being realistically able to secure a job which doles out joy on tap “from the get-go” wasn’t one of them.

No good times without the bad times. Night is darkest before the dawn and all that.

I read that wage growth chart different. First, it ain’t linearly scaled. Second, sharpest drop to 2014 (pre B Word). Then up slightly/sideways with the inflation grenade on the end. Still ain’t pretty.

Shame about HK. Then again, Thatcher signed it over rather than fighting. The Chinese enjoyed that moment greatly. Far greater personal and economic damage there than Brexit.

Last one out if the UK turn off the lights? Actually never mind, there won’t be any electricity left anyway even if you could afford the bill!

“Night is darkest before the dawn and all that.” That can be believed only by people who are not used to getting up early.

It is hard to argue with the evidence of pessimism that is presented. However, these types of articles are usually written somewhere near the bottom.

I actually think we are on the verge of a five year bull run in equities similar to the 1960s/ 1990s, for various reasons.

Gosh that archive Monevator piece from early 2020 really rattles chains like Marley’s ghost. However bad it may or may not be now, it sure as hell isn’t as bad as what it was then. “A bit of Spring might slow this thing down”… enough to bring tears to your eyes.

UK per capita GDP started flat lining around 2006, and we know what was building up around then. If you were in the “mild elite” (sic), you just weren’t very aware of it. It seems you are now though. Getting woken rudely from a deep slumber is never very pleasant.

@Ermine (#19)

Try this: https://monevator.com/halifax-spread-betting/#comment-133679
🙂

Re: ICE etc. There seems to be a concerted effort in the states to undermine the notion of retirement as I’m seeing it crop up in a few different blogs and podcasts. No doubt it is a response to the post-covid great retirement.

If you are still working and enjoying it in your 60s & 70s, it’s likely because you are lucky. Lucky to have good health and a full set of good enough physical capabilities (there’s only so much you can control via lifestyle factors alone, despite what longevity “experts” will tell you), lucky enough not to experience ageism in your field, lucky enough to have work which is satisfying.

But you can still do purposeful work full of meaning even while not employed. Work does not need to be for anybody, or to be paid. Working on your hobbies, helping out friends etc can easily fit into the category of work.

Things were better in the 70s

@Adrian Steele (#14).
” I wanted to explore your optimistic view about the collapse in renewable pricing. With respect to wind the economics seem impenetrable but it is clear that once you include the grid costs and backup supply costs (a lot of commentators don’t) then it isn’t that cheap at all. The failure of a recent auction at quite a low strike price is evidence of that I think. ”

We have to state our assumptions. Mine is that burning stuff to generate electricity is not a viable route for the future. In that I agree with the majority of scientists and national governments. Economists, I am not so sure about, but their assumptions often seemed based on wishful thinking rather than reality.

So there are really three options:
1) Nuclear
2) Renewables (hydro, tidal, wave, solar, wind, geothermal)
3) Burning fossil fuels with carbon capture use and storage (CCUS).

Carbon capture of the required efficiency has NEVER been demonstrated economically and at scale. Lots of work going on, and we may get there, but it shares something with fusion – it has been 10 years away for the last 40 years.

The strike price for nuclear was £92.50/MWh in 2012 – indexed to inflation. By 2022 that figure had reached £128/MWh by 2022, and will continue to be inflation indexed for 35 years after construction is complete (https://en.wikipedia.org/wiki/Hinkley_Point_C_nuclear_power_station).

At that price EDF are taking a bath and whining that they need more money from the UK to avoid a stonking loss. The UK is struggling to find anyone to build nuclear here without eye-watering subsidies from the UK taxpayers.

Renewables costs have fallen dramatically and continue to fall. Lazards do a regular analysis of the levelized cost of energy (LCOE) for a variety of technologies, including conventional (https://www.lazard.com/research-insights/2023-levelized-cost-of-energyplus/). LCOE looks at capital, fuel, R&M over the life of an asset. LCOE has its critics, but it is the only agreed global measure we have for comparing alternative sources of energy. Looking at their chart for unsubsidised generation, we can see that LCOE for utility scale PV + storage, and onshore wind + storage, is lower than any other solution except the low end of coal costs and combined cycle gas turbines (not peaker plants). They do not give figures for these with CCUS, which would be the equivalent to renewables plus storage, because there are no plants and therefore no data.

So renewables costs on a downward trends, nuclear on an upward trend, and no solution for fossil fuel burning plants.

Looking at storage development alone, this open access article from a group at Imperial College looks at the levelized cost of storage (LCOS) for various storage technologies in various applications (https://www.storage-lab.com/levelized-cost-of-storage)/ TLDR – its getting cheaper and better, and storage is not really a problem for grids with high levels of renewables, either in cost or potential for deployment.

And this paper from 2022 shows the technical consensus is that reliable grids with 100% renewables are entirely practical around the world (https://ieeexplore.ieee.org/document/9837910).

All of the above is why we bother with wind.

Reading the FIRE v ICE debate, I can’t help but recall the great quote from Derek Smalls, bass player of Spinal Tap, where he found his place in the middle of the Fire of David St Hubbins on vocals, and the Ice of Nigel Tuffnel’s lead guitar, “you know, kind of like lukewarm water”. That sums up my position on “retirement vs work” nicely.

@Seeking Fire. Yes, there is no doubt that of the circa 108 billion homo sapiens that have lived and died, that those who are living right now in the UK are in the top 1%. Even compared to the 8 billion currently, we’d struggle to argue we are not in the top 10%. We have nothing really to complain about.

Yet, as a bunch of tribal apes, we don’t measure our position in absolute terms. It’s about relative position in the hierarchy. Across the developed world, people feel their exalted and unjustified position in that hierarchy is slipping. They are correct.

The actual problem is information technology. It’s the great leveller. It’s destroying the moat that most of the population in the developed world have relied on for a number of generations. An individual with 50th percentile ability was able to obtain a 90th percentile outcome due to the luck of their birth location. That’s going to converge to a 50th percentile outcome. Not much can stop that.

Of @TI’s pessimistic indicators, the one that worries me least is the decline in house prices. 1.4% is less than the transaction costs of moving, and a lot less than the uncertainty in valuing a property for sale in the first place.

More pertinent is the rise in housing costs, whether mortgage payment for owner-occupiers or rents. I imagine that significantly exceeds inflation, particularly income inflation.

@TI. On a purely technical level, we should all stop using RPI and use CPIH. For all the debate over how to measure inflation, the conspiracy theories over it being manipulated etc, one thing is not in doubt. That RPI as a metric of inflation is archaic and definately not best in class. Using RPI is like going back to using Imperial measures. It might make the Moggsters happy but it’s basically crap. We should start looking at all these graphs vs. CPIH. My only wish is that the ONS would backbuild a proxy for that going back 100y+.

I’m firmly with far_wide and ermine on the FIRE vs ICE argument.
To tie in with the FT article I’ve even gone as far as downsizing home, although we never really needed a large 4 bed detached so it was an extravagance to start with.
Although it hasn’t provided a pension pot directly from the proceeds, it has wiped out a mortgage that would have taken several more years to pay off, enabled us to fill both of our ISAs for this year and next, and made it possible for me to triple or nearly quadruple pension contributions.

One could forgive millenials and Gen Z for being a bit peed off if they end up exempting boomers and Gen Xers from stamp duty on downsizing though. Reaping the benefits tax free while younger generations face working until 71 to afford their Blackrock-owned HMO room rent, rented electronic devices, AI girlfriend/boyfriend subscriptions, and armoured street riot proof Deliveroo drone deliveries.

The Verdad article on high yield bonds was timely, I have limited exposure to a US high yield bond ETF. So just a reminder not to take the YTM literally and factor in the higher default rate. Although it would only be HY index weighted anyway.
I do wonder what HY vs IG bond ETF total returns will be like over the next decade. Maybe everything will deliver about 6% pa, including equities.
I’m not holding my breath for anything better than that.

@Jonathan B:
The so-called formula effect (geometric vs arithmetic) explains most of the difference between PRI & CPIH. The 2015 paper: UK Consumer Price Statistics: A Review by Paul Johnson provides IMO a good (but somewhat lengthy) explanation of this and the other issues.

If you take a look to this ONS page, https://www.ons.gov.uk/economy/inflationandpriceindices
the ONS publishes the RPI index every month back to 1987. The CPIH index is available from 1988 on that ONS page too.
There is annual RPI data available somewhere else on the ONS, back to 1948 I think.

If you want to go back farther and IIRC then you need to use other sources – see comment #46 above.

@AlCam. Yes, it’s approximately the case that RPI is 1% over CPIH. Nonetheless, the spread varies. Assuming a constant spread you lose the path dependence which is meaningful during stress periods.

Moreover, the swerve to define RPI as CPI from 2030, while an effective way to avoid legal issues, does mean that people will continue to use RPI. Rather than the more appropriate measures such as CPI or CPIH. The lack of an official back history compounds this, meaning that historic analyses will continue to use the wrong inflation metric. It makes international comparison very hard.

Given that many investment banks have produced a back history for CPI/CPIH, the ONS could even just take one of those (or an average).

@ermine (#51). “what I would like to know is why nuclear is not regarded as fossil fuel? Is it the question of scale, the whole e=mc^2 making m trivial in the grand scheme of things relate to other fossil fuels?”

Fossil fuels are usually defined as ancient organic matter that has been buried for millennia, and converted under heat and pressure into oil, coal and gas. Radioactive materials needed for nuclear power are elements, not complex carbon-based molecules. These elements have been generated through the life of stars, in the death of stars, and in some major astronomical events – collectively known as ‘exotic processes’ such as colliding neutron stars or black holes.

If you are going to burn a fossil fuel for energy, you will create CO2, and that will need to be captured if you want a zero carbon emissions energy system. Hence the move to renewables and potentially nuclear. Nuclear is not renewable, new uranium is not being produced on earth, but we have quite a lot of it. In fact proven reserves are going up faster than we are using it https://world-nuclear.org/information-library/nuclear-fuel-cycle/uranium-resources/supply-of-uranium.aspx. At current efficiencies we have about 90 years’ supply that is easily recoverable.

Common discourse confounds low to zero carbon emission energy supplies with renewable energy. Low emissions is what we want, both renewables and nuclear are a way to get there.

The problem with nuclear is three-fold. It is slow and expensive to build in areas of the world where safety is taken seriously, has an appalling record of leaking when safety is not taken seriously enough (See Dounreay where radioactive waste was dumped into a shaft that unfortunately had access to the sea. Guess what happened! https://en.wikipedia.org/wiki/Dounreay), and finally the long-term decommissioning and safety costs are hidden and pushed into the indefinite future.

We know how to do the technology and engineering to provide safe nuclear power, but nobody wants to pay the cost. As much as anything, that history of faking the numbers and playing silly buggers for ‘national interests’ has made new nuclear expensive, and politically and socially difficult.

@ermine (#56)

On reserves, the figure I looked up described the ‘easily recoverable’ reserves lasting for 90 years. I think there is a lot of other stuff we could get at if we needed. Uranium is a fairly common element. Then there are all those tricks we can play with fast breeder reactors, thorium cycle etc. I don’t think running out of nuclear fuel is going to be a major concern, even if we do go all in on nuclear. And as I explained, we are probably not going to do that because it is progressively getting more expensive, whereas both renewable energy and storage costs are falling, and still falling quite fast. Add in the social and political issues and it is going to be difficult to radically increase the nuclear fleet.

The existing fleet is also under threat from climate change. Nuclear plants use a lot of water and are normally sited on the coast or on rivers. France already have to switch off nuclear power stations in hot summers where there is a lack of water in rivers or the environmental impact of discharging hot water into already hot and depleted rivers is too high https://www.nature.com/articles/d41586-022-02817-2. Plants on coasts then have to manage sea-level rise and increasing storm intensity.