Weekend reading: Get ready for the drop

It might not be a popular idea but this corona virus could help slay some of the zombie companies out there and shake things up.
Hopefully it also leads to better lives for us overall – lower GDP notwithstanding

I do expect the economy to recover, but not as much as that sharp “V”. I can definitely see the bounceback being much more gradual as people will have learned from this and be more cautious with their spending, traveling, etc.

I’m not offended by the rally as much as others either. Sure, I’m not happy about the bailouts. But I’ve been fortunate that not me nor any of my friends or family have had any medical problems from the pandemic. I also held my shares instead of selling. And I’ve been fortunate to keep my job

Mmm, not sure I can explain it without repeating what I’ve just said?
The rate they refer to is diagnosed cases per 100,000 population. You can only diagnose a case if you are testing. There are lots, and lots, of undiagnosed cases (in fact you think there are more undiagnosed cases than most people believe). Testing rates vary. Wales is only ‘worst’ if you believe diagnosed cases actually tell you anything meaningful, in a context where only a small proportion of infections are diagnosed (the tip of the iceberg) and where that proportion varies by region (the icebergs are more submerged in some areas than others). Testing rates vary by region, so in Wales, which has tested a higher proportion of their population, more infections have been detected than in England, where a lower proportion of the population has been tested.
A more robust measure of how badly a region is affected is to look at covid deaths. If you calculate the death rate, using the number of deaths given and the population figures (I used 1.36m for Wales and 56m for England) then you can calculate that the death rate in
England is higher than in Wales.
Hence, I would say that England is more badly affected by covid than Wales, but Wales is testing more people and therefore has a (spuriously) higher rate of diagnosed cases.
Does that work better?

I’m curious to see if there is indeed a “second wave” of unemployment as the initial demand void ripples into service businesses which depend on those retailers. I lost my job at such a b2b company on the last day of April, 3 weeks after local stay-at-home orders began and a week before they were due to be relaxed.

Between radical incoming tech changes, brexit and now lockdowns, the economy has taken too many punches to the head, think coma vs dizzy spell. Hopefully all zombie companies will bite the dust, but I suspect those who made it over the too-big-to-fail line will have the lobby-power to get a free bailout lunch. Since this govt. is ideologically opposed to UBI and looks to be unshakably in power for the forseeable future, it will try to return things to the status quo asap. But with most people forced to at least run down their savings, possibly also run up debt, lose their homes and incomes, where will the growth come from? The 1% only use all luxuries ordinary people weren’t using anyway, like yachts, helicopters, mansions, so the real economy will bump along the bottom while people just get by, for a generation at least.

We’re facing a reset of jobs to reflect changing needs as well as tech replacing people, wants will be less affordable and resources as a whole will be more rationed on a finite planet straining with overpopulation combined with an economy structured for maximum profit at the expense of unsustainable waste. There is a massive shift in mentality required to adjust to lifestyles reflecting the new ways we’ll be forced to live. Usable energy drives civilization level and the exhaustion of the easily accessible options in oil/gas will be the fundamental driver forcing this change.

The focus on this current viral situation has fast-forwarded the inevitable changes by precipitating a crisis, but we were due a period of chaos because too many problems were incubating for too long. Economic, social, demographic, cultural, medical, political.

I can’t understand why anyone currently visiting a retail park doesn’t feel a shiver of fear running up their spine. All those businesses closed, possibly forever. Goodbye, Debenhams you were rubbish anyway. And Pizza Hut, RIP. But don’t worry, all their workers can go and get a job with Amazon, or Microsoft, or when that nice wee bijou coffee shop reopens that sells the Fair Trade beans and makes their own sourdough. Honestly. They used to say go and buy shares of companies you physically see and experience doing well. How’s that working these days then? Outside of tech? If only you could buy shares in the mental health sector of the NHS. I feel they are going to be coming into a boom period in the near future.

Many situations seem to be being driven and resolved from the ground up rather than top down-people voting with their feet
The lack of leadership abilities from our politicians and managers becomes more and more obvious every day-anyone can governing good times
Reality was always going to hit at some time with our current debt burdens
Covid just provided the straw that broke the camels back
The self employed have to return to work or starve and will
The nature of the self employed is to take a chance-Covid is just another problem to cope with
Civil servants and council operatives on secure wages whether they work or not can afford to take a high moral tone -moral narcissism is the order of the day
Inflexion point approaching between “death” from disease or from “starvation “
Cool heads required and keep a reasonable amount of cash on hand-2 years living expenses ideally plus a tin hat
xxd09

@ TI I agree mostly with your post. I am liking the recovery in stocks another improvement and I will be back to January levels. In my opinion the gloom is way over the top, I see a sharp recovery on the horizon and if necessary more money can be printed. The one problem I can see ahead is Brexit next Dec.

Has there ever been an incidence of a quick recovery after such a big economic hit? My guess is this is going to unfold just like coming out of every other recession.

Back to the basics. The price of all financial assets, the present value, is simply the forward values from the projection curve, discounted by the forward values of the risk-free curve. When the projection curve goes up/down, the price of the asset goes up/down. When the discount curve goes down/up, the price of the asset goes up/down.

The projection curve represents the growth rate of the instrument. This can be deterministic/risk-free as the coupon/principal of a govt bond, or as stochastic/risky as the coupon/principal on a corp bond, the dividend of a stock or earnings growth. The discount curve represents the risk-free rate you need to discount those future income or capital changes by, and is derived from the break-even forward rates of govt bonds or OIS swaps.

Now, the projection curve of many risky assets has clearly fallen. Default/recovery rates on corporate bonds are expected to rise, increasing principal losses. Equity dividends are being cut. Earning’s growth is expected to fall hugely. Note, however, most of these losses are relatively short-term. Say 1-2 years of cut dividends, lower earnings, higher default rates. Not 5, 10 or 30 years. Nonetheless, it’s clear the lower projection curve should lower asset prices.

Against that, however, look at the discount curve from USTs or OIS swaps. The 2-year discount rate is 3% lower, 5-year discount rate is 7% lower, the 10-year discount rate 13% lower, the 30-year discount rate is 35% lower. Lower discount rates means higher risky asset prices. Now, the 2-year discount rate has fallen just 3%; this is easily overwhelmed by the fall in the 2-year projection rates which could be down easily 10%+, perhaps 25%+ in many cases.

That’s, however, isn’t the case for the 5-30 year rates. Here, the discount rates have fallen by far more than the fall in projection rates – which may not have fallen much at all. In these parts of the curve, the larger fall in discount rates vs. projection rates is actually creating pressure for asset prices to rise.

Essentially, this event has caused the projection curve for risky assets to steepen dramatically, whilst causing the risk-free discount curve to flatten. Now, quite rightly, the short term gets a much higher weighting than the long term. But it’s not clear that asset prices have to go down substantially even if the economy tanks and/or company dividends/earnings fall. The fall in the long-dated discount curve is absorbing the impact of much of that loss.

ZXspectrum,

Gulp! I don’t think I understood half of what you said. I am the problem not you. Feels like I should give up this investing game.
I don’t think I will though. Its too much fun and a bit addictive. Ever onwards in blissful ignorance.

TP2.

@Keith

“if you can’t explain it simply you don’t understand it well enough.” Albert Einstein

I always wondered about the need for a stock market, what real role it plays in an economy, people selling shares to each other based on concepts of value and fair price. If a stock pays no dividend and reinvests all its earnings ( excluding executive bonuses natch), do we assume it’s price should rise if the model continues to hold and future buyers and sellers retain faith in this model? Why is, say, a P/E of 14 considered fair value? Why not 30, 100 or 10?
The only anchor I can see capable of absorbing liquidity ( ie not gold) are bonds, and share values should be referenced against those. Otherwise bootstraps and Dutch tulips spring to mind.
Providing no- one discovers a new continent, or a modern equivalent of the railway, money has to go somewhere and will find a rational for doing so.

@TI All you say is correct of course 🙂 I think the issue is that I have only ever invested passively before, and therefore probably subconsciously understand “S&P500 up 20% from its lows” as all companies in that index having equally gone up, when of course the index just reflects the average, and individual companies may do better or worse.

I also probably sub-consciously compare the performance of various indexes with what I see when I cycle past shops or what I read about in the local news, when of course many of these small businesses are not even represented in an index.

Due to these and other similar mental mistakes that I’m making, I’m trying to stop myself from making any big investment decisions whilst we are right in the middle of the storm (and when the lockdown has probably started to cloud my judgement!). This is hard however. Maybe I am more of an active investor than I thought!

A little anecdata from a region where lock-down was recently relaxed by a degree: went to my local cafe yesterday and the difference between 1 week ago and now is mask wearing has gone from ~90% to around 40%, 6ft is now 3ft. I’m not going back there again for a long time. Anyone got a good kouign-amann recipe?

Two points. 1) Of course it’s the market. What do you think defines the projection and discount curves?

2) The quote “if you can’t explain it simply you don’t understand it well enough” by Albert Einstein. There is no citation supporting such a quote. As anyone who has ever read Einstein’s original papers, he didn’t win the Nobel for the simplicity of his explanations.

The quote probably comes from a misinterpretation of a conversation Einstein had with Louis de Broglie. Instinctively, Einstein had an inability to accept the statistical interpretation of quantum mechanics. Einstein said to de Broglie “that all physical theories, their mathematical expressions apart, ought to lend themselves to so simple a description that even a child could understand them.” This also linked him, incorrectly, with Ernest Rutherford’s comment that “it should be possible to explain the laws of physics to a barmaid.”

The critical question seems to be whether we can ease lock downs before too many small businesses (and airlines etc) run out of money. I think now the initial wave of fear of the virus is being supplanted by fear of impoverishment. Hence the building momentum to ease lock downs around the world even as it seems possibly premature.

If people do prove willing to face the risk of Covid 19 and continue easing then I agree that it will be a V shaped recovery. Only anecdotal but I don’t know anybody who has actually lost their job. They are on furlough, working from home or working normally. All these people have money to spend but cannot. Once they are free to do so they will be out (tentatively maybe) spending on restaurants, bars, cafes, flights, hotels and other service industries. Demand has been artificially suppressed. Most people still have money to spend.

@ZX Spectrum 48K – great post, thank you. It filled in a few gaps in my understanding and I only had to read it once!

@ZX48k as usual you bring clarity / light into the fog – thank you.
But in fact Neverland asks a good question re how sustainable UK monetary/fiscal policy is right now – I too would be v interested in your view?

Dear The Investor – how about post hypothesising that inflation will at some point run above the target rate (currently 2 per cent) and the impact on investments. Given governments will run large deficits and debts are their stooges, central banks, likely to ignore inflation. I think I’m correct in saying between 2010 and 2020 there were periods when inflation was running at well above 2 per cent but the BofE would simply ignore it and keep rates low. If we are likely to see that over the coming years and decades how should we position our investments. I for one intend to load up on debt, upgrade to the biggest house I can (in a nice not heavily densely populated part of outer London) and reduce my allocation to governemnt bonds in favour of equities (preferably diversifying away from the UK) and Corporate bonds. What say you? Maybe an article on the subject?

@xxd don’t remember that one, but advice to maintain your critical faculties regardless of someone’s reputation for expertise sounds typical of Feynman. And a universal truth.

If 80% of the UK population get the virus, and
0.4% of those who get the virus die.
And on average they lose 5 years of their life

Then that is on average a loss of life in days over the whole population of
= 0.8*0.004*5 /365
= 6 days

So it’s as if you said to every person in the UK now; we are telling you now when you get to say 80 years old, we are going to jump your life forward about a week, and so you lose that week of your life.

That’s slightly better than when in 1752 Britain switched over from the Julian to Gregorian calendar and the calendar jumped forward 11 days, and everyone lost 11 days of their lives.

It seems strange that we are calling this a disaster, when that is the average affect to us. It probably only justifies some minor ‘give us back our 11 days’ riots.

And why if someone was not scared of dying this year before covid-19 came along would you, if thinking rationally, be scared of dying from covid-19 this year? The probability of the latter is equivalent and slightly lower, because it is a virus that roughly affects us in proportion to our normal age/health adjusted ongoing mortality risk.

Of course if you are the person, or friend and family of that person that dies, and loses a number of years of your life then it’s very real. But that’s true if we die in a cycle or snowboarding accident. It doesn’t mean we don’t go to the top of the mountain and enjoy the off piste or black run down.

A neighbour said to me yesterday ‘do you think we will ever get back to normal?” and my immediate response was ‘of course we will’. At some point most of us will have had the virus and it will be gone. At that point perhaps it may have mutated and we might get it again, but our earlier encounter will give us much more protection against it then and it will be like seasonal flu.

But perhaps my reply was a bit rushed, and maybe we will self destruct through the way we deal with this. The sensible ‘flatten the curve and save the NHS’ idea seems to have morphed into ‘let’s irrationally destroy all life for 2 years by suppressing the virus’ and some bizarre concept of a ‘new normal’ for decades to come.

I suspect common sense will prevail at some point and we won’t self-destruct and destroy our own enjoyment of life, but who knows.

I’ve been receiving considerable macroeconomic research in the last month concluding that the lockdown is not responsible for the majority of economic damage occuring. Little of this idea is getting into the public domain since most of it is paid for research but it’s very much the opposite of the narrative being spun by the media that the lockdown is causing the economic damage.

The Harvard economic team, however, has published their https://opportunityinsights.org/wp-content/uploads/2020/05/tracker_paper.pdf. One of their conclusions is that the shutdowns themselves had “little or no impact on economic activity”. Tbh this supports my view that “it’s the pandemic, stupid” and that in counterfactual scenarios where no lockdown has occured the damage would be just as bad. Businesses were laying off staff and household were changing their behaviour well before the US or UK government finally woke up to the risks.

@xxd09. That Feyman quote is out of context. It was part of a speech given at the 1966 National Science Teachers Association. The full text is here http://www.feynman.com/science/what-is-science/.

I would argue a more appropriate quote for current times from his speech is
“I think we live in an unscientific age in which almost all the buffeting of communications and television–words, books, and so on–are unscientific. As a result, there is a considerable amount of intellectual tyranny in the name of science.”

@ZX, interesting paper. I think unpicking what resulted from legal imposition of restrictions and what from human responses to pandemic fears will be a fertile academic area for sociologists for some time to come.

Here in the UK, lockdown only occurred on March 24th but clearly human behaviour was causing toilet paper hoarding well before that. And I think it was in one of @TI’s links I saw the graph showing that on one measure at least, Sweden’s behavioural response was very similar to elsewhere despite the much less draconian lockdown.

But I think all that means is that the start to economic recovery won’t simply be the government giving the green light, there needs to be the public perception that they can start doing things and spending money without risk.

And thanks for another good Feynman quote. “Intellectual tyranny” is a strong term, but the media do distort science to justify a good story. The reason the government has SAGE is not simply to access individual experts, it is so that there is a rigorous scientific filter to ensure that information has to be reliable to be used as the basis of policy. It is just a lucky chance that people like Chris Whitty and Patrick Vallance happen to have relevant personal expertise, their official role is really to ensure critical scrutiny to decide which science should inform the government.

The easy news headline starting “scientists say …” is a pet hatred of mine. There is almost always some single source without any analysis of whether that opinion is justified by the data or building on previous consensus. I always feel it is an unwarranted waste of my time to need to read likely prejudiced speculation to discover that what the journalist means is “one provocative individual with a science background says …”.

(Though of course “one provocative individual with an impeccable science background” would be a good description of Feynman).

Two deaths under 20 – ONS data shows 2 deaths under 15 up to 24 April (https://www.ons.gov.uk/peoplepopulationandcommunity/birthsdeathsandmarriages/deaths/datasets/weeklyprovisionalfiguresondeathsregisteredinenglandandwales; under 20s are not broken out).

The Verity et al. paper from March estimates the infection fatality rate in China in the under-10 age group as 1 in 60,000, but with high uncertainy (lower 95% confidence limit 1 in 540,000). In the 10-20 group the estimate is 1 in 14,000 (1 in 70,000 lower 95% confidence limit). However, these estimates appear to correspond to a single death in the Chinese cohort in the 10-20 group.

So 2 deaths under 15 does sound low, but in these age groups we seem to be looking at low number statistics in general.

@FvL. Regarding that sustainability of UK monetary/fiscal policy right now. First, my area these days is more EM markets than the UK. Second, it requires a long discussion, not appropriate for a comments section.

Our monetary policy approach is not different from most other in the G10: rates at ZLB and QE. There is clear long-term term damage in this approach but the market has accepted it for over a decade. Another round just takes us one step closer to Japan.

On fiscal policy, I think it’s sustainable near-term. It’s not that fiscal expansion, leading to larger Gilt issuance, is a good option. It’s just the least bad option. It’s never been cheaper – we’re paid to issue debt in real terms – and demand for duration is insatiable. Let’s allow investors to fill their boots. £200bn of issuance will cost £600mm-£1bn a year in interest. a rounding error vs. govt expenditure at £800bn/annum. The principal is being deflated away. The Gilt curve the longest duration market in the world, so rollover risk (which is what triggers fiscal crises) is low.

The UK has a large captive audience for it’s debt. Regulations have domestic lifers and pension funds over a barrel. Foreign real money bond investors are less likely to dump Gilts or shun them through a buyer’s strike: 20-30% of them are passive and 50-60% are active but they only vary their duration exposure by 5-10% vs. index. So in practical terms, real money investors are about 70-80% indexed. This is a side effect of passive investing: it allows governments to be less fiscally prudent and get away with it for longer. Stuff the debt holders and they don’t even complain. 20 years ago, when investors were allowed to speculate, it would have been easier for them to hurt imprudent countries via the debt channel. Now nobody wants or can go against CBs or govts.

Clearly alternatives to higher Gilt issuance is higher taxation to fund govt expenditure or letting the debt burden fall on the private sector. Normally, both would be probably be better, but here neither are ideal. Higher tax reduces free cashflow and this is a cashflows recession. Private sector debt is shorter duration and has much higher rollover risk. Either it won’t get rolled leading to default or it gets rolled at punitive credit spreads.

Long-term, of course, this isn’t sustainable, but that comes more down to the key UK vulnerability: it’s persistent current account deficit. That is why both private and public sectors are getting into debt. As Carney said we live “on the kindness of strangers”. As usual, I suspect the eventual stress will appear via the currency channel.

@ Jonathan: “Brexit views are well established to lie on a gradient of previous educational level, I wonder whether they would also correlate with discipline among those with degrees.”
I sometimes, neutrally and baldly, cite the marked educational divide on Brexit, demonstrated in the various polling analyses. Which as with the age divide, tells us something, albeit not the reason why. But your turn of phrase is priceless. My field is law, although I initially studied a science degree. Much in common: ability to absorb masses of information and evidence, weed out the relevant, and distinguish solid from baseless positions.

@Seeking Fire “How about a bit of self help. (a) If you are fat (can grip your love handles), stop reading this blog, put down the biscuits, go for a run and lose some weight. There seems to be some correlation with fat people getting ill. (b) get 8 eight hours sleep to boost your immune system”
As a slightly over weight middle aged man reading this with a bacon and egg sandwich in one hand, err you actually made me laugh out loud.
Actually for the first time in decades I have been running around the garden and doing knee presses.
In my youth I was an athletic person but for the past two weeks something has clicked inside me that I need to do exercise.
It just happened, I have no idea why, I have not been outside the driveway in 7 weeks and normally I would be walking all over London between clients etc, on Fridays I would be sometimes seen dragging my suitcase and laptop bag between my hotel in Battersea and Kings Cross to get on the train (its a nice walk btw).
I just feel weird at the moment

A strange time to do it, but we started moving towards our new drawdown strategy last week. Previously 60:40 for many years, now 50:50, 50 years expenditure in stocks, 5 in cash. Gilts and US Treasuries are gone, SIPPs now equities only. ISA equities and a short dated corporate bond fund that we will gradually dispose of in future years as we bring share ETFs in. We would do that now if we did not have CGT to pay on the ETFs.

We found we were not far off our 50y stocks target already, only having to buy 5y worth. Biggest change was the disposal of gilts and long dated US Treasuries.

We don’t plan to do any more rebalancing, but will cap value of stock portfolio at 60 years expenditure.

Naeclue-am I reading this right -you are measuring your safety net for retirement re expenses with the size of your share portfolio
Most investors put bonds and cash in this role
Mind you it’s the Warren Buffet way when you have the benefit of a massive portfolio-his recommendation for his wife was 90% S&P 500 and 10% US Treasuries
If this your case congratulations on your sizeable portfolio
xxd09

@xxd09, when we properly worked out what we were likely to spend, excluding significant one-off planned expenditure and funding the gap to state pensions, we found we needed a drawdown rate of less than 2%, so settled on a drawdown rate of 2%. We would like to leave a legacy (our SIPPs) and from all the reading we have done, the Warren Buffett portfolio seemed the way to go, but with global stocks instead of just the S&P 500. A 2% SWR seems historically fairly safe even with a high equity component, and the higher the equity component, the higher the expected legacy.

2% is approximately the dividend yield of the FTSE World index, so with a bit of luck we should not need to sell shares other than for portfolio management. eg selling shares in SIPPs, buying in ISAs to raise cash for SIPP withdrawals and also selling shares outside tax shelters and buying inside the ISAs. We plan only to start selling shares if we drop down to only 1 years worth of cash.

@The Investor – agree David Spiegelhalter is a beacon of common sense amid all the guff. It does seem to be overwhelmingly the case though that the guff continues to trump common sense. I have a CEO chum who has no plans to visit London again this year even though he has a business and staff to manage there. I said that being like Charlie in ‘Charlie’s Angels’ only goes far and staff need to see their managers but to no avail – he’s no going to risk killing his children. Risk seems to be a rather slippery concept to most of us and the prevailing opinion still seems to be that covid and the bubonic plague are similarly lethal.
This is partly why I think the pace of recover will be so slow and confidence will take a long time to return. I suspect too that the unions, and the teachers unions have started making noises already, will use it a pretext for negotiations of various sorts and the atmosphere in some sectors will become pretty febrile. None of this bodes well for the end of the furlough scheme and I assume the Chancellor will be brow beaten by media and unions alike to extend it rather more generously and for longer than might otherwise be the case.

@TI

David Spiegelhalter started by making the point that he found it extraordinary that according to Ian Diamond at the ONS, it wasn’t until April 17th that they finally got asked to do a survey to find how many people have got the virus and how many have had the virus. First results due out this week apparently.

I’ve just looked back and the urgent need for the population random sampling and antibody testing was being discussed back here on monevator on 14th March and the need was apparent way before then. This should have been a central part of pandemic planning. There might have been a delay by having to wait for a reliable antibody test, but there was nothing stopping the random sampling itself being started back in March.

How can anyone have any confidence in the UK response to the virus, when this sort of thing has been going on?

I’ve been following David Spiegelhalter via his blog and twitter for some time. He doesn’t pull any punches in that interview, especially when referring to the daily media circus and the statistics banded about therein. The only issue that I was slightly sceptical about was the proportion of excess deaths he implied might be “indirect deaths” due to COVID-19. I can accept that medium/long term there will be excess deaths due to a lack of screening, reduced levels of treatment for cancer and late diagnosis of disease as a result of reduced GP consultations but I would have thought these would take many months or years to loom large in the statistics. I suspect that as more COVID-19 tests are performed, especially in care homes, the proportion of excess deaths attributed to COVID-19 will climb. I’m basing this observation largely on https://www.ons.gov.uk/peoplepopulationandcommunity/birthsdeathsandmarriages/deaths/bulletins/deathsinvolvingcovid19englandandwales/deathsoccurringinmarch2020#comparing-covid-19-to-other-causes-of-death which analyses deaths during March.

@Jonathan,
“(Though of course “one provocative individual with an impeccable science background” would be a good description of Feynman).”

Something of an understatement! Feyman is a great source of quotes as in https://www.brainyquote.com/authors/richard-p-feynman-quotes .

Frank Zappa isn’t bad either as in https://www.goodreads.com/author/quotes/22302.Frank_Zappa . I think my favourite is “There is more stupidity than hydrogen in the universe, and it has a longer shelf life.”. (Also attributed to Harlan Ellison and, in a slightly different form, Albert Einstein.)

You have linked to the covid19 tracker (now study) app run by Kings College/Zoe in the past few weeks.
After reporting as usual (1 of the 3m plus) today I was dismayed to see they are now requesting donations to keep this work going. They are acknowledged by Scottish and Welsh governments and the NHS per their website so surely it is not beyond the wit of man for them to recieve some government grant/funding even if just for the short term given their work and findings to date.
I have no connection to the study just a fed up frustrated individual.

@Jonathan – good point about the divide with the humanities. I suppose it’s fundamental to the natural sciences that one accepts the existence of an objective reality and seeks to understand it via an iterative process.
The populist post-truth phenomenon seems more recent. Followers are willing to suspend logic to the point that obvious facts and blatant contradictions in the great leader’s claims matter not. Beliefs “trump” reason. I think about this as a counter-movement to enlightenment and the route to another intellectual dark age.

Interesting article in the Actuary magazine – hopefully the link works.
I‘ll resist the temptation to give the punchline.

https://www.theactuary.com/features/2020/05/07/co-morbidity-question

There are some excellent actuaries out there.

B

For me, one thing that has become apparent during the lockdown is that there is no way I would want to retire abroad. I never have been tempted much by the prospect, but now it has become obvious we would miss friends and family too much.

So here to stay, whatever happens to taxes, unless my fellow Scots are daft or pissed off enough by the English to go for independence. In that case we would discuss moving to Glasgow.

@TI, why is this “The new most hated rally of all time”? I don’t hate it and I am sure many others feel the same.

I see boyfriends and girlfriends are now allowed to meet one another, but it must be in a public space. As it’s been nearly two months, I suggest we brace ourselves for a dogging epidemic……….

@Ruby. “I think human contact greases the wheels …. Pitching for a deal or sale on zoom works but often we like to give business to people we like and for that we need contact – lunch, drinks, golf whatever. ”

Really? I hated being taken out by brokers, salepeoples and consultants. They used to spend thousands, often tens of thousands on restaurants, ski/golf holidays etc. I was honest with them: I don’t want your chatter, your views, your ideas and I definately don’t want to spend time with you at some restaurant or ski resort. I just want the lowest price. Thank god the FCA banned that stuff. About the only thing they ever got right.

I do know that, if it wasn’t for the small issue of dying of COVID, then the lockdown would be utterly brilliant. I’ve hardly met or talked to anyone, except my family, for months and I love it. Perhaps I’m just too introverted. Or perhaps I’m confusing introversion with sociopathy. It’s hard to tell.

@ ZK Spectrum – it sometimes certainly is, but maybe you’re right, I never greatly enjoyed taking out the ‘we’re up in London gotta have a night of it’ types and thankfully I haven’t done it for years. However, at some point you’re presumably going to have to hire the trainee ZK’s, show them the ropes, mentor them etc and that’s tough if you’re hidden away in your den and you’ll want to eyeball them. The alternative, doing everything remotely and giving a newly minted quant a bunch of money to play around with from his own bedroon, when he probably still wears pyjamas with pictures of aeroplanes on them, sounds rather high risk to me. So at some point I suspect the old ways will return.

The latest ONS data out today. 33.365k deaths ‘involving COVID’. 10 deaths under 19 / 2 under 14. Just under 30k deaths relating to those >65.

It is ridiculous (IMO) not to send your child to school when you can if you are worried about them dying from coronavirus. It is not ridiculous (I admit), if you have concerns around transmission amongst the community, they have a suppressed immune system or they live with elderly people or indeed you think there are long term medical implications from having had COVID. If those risks outweigh your benefits them continue to home school them. But millions of children (less v lucky children who are getting video schooling of which we are fortunately benefiting from) are being v significantly impacted and increasingly so.

It’s also not ridiculous if you’re an older teacher or in one of the vulnerable groups (or with a vulnerable household member). There won’t be PPE for teachers getting up close with 4-6 year olds.
I am really frustrated, however, that the priority for school return has been determined on the basis of childcare for the workforce, rather than educational benefit, or even on how difficult it will be to reduce risk of transmission within the school setting. Years 10 and 12 should have been prioritised. They seem to think that teenagers are adult learners who just need a bit of guidance with their online learning….

Vanguard Fan – you are absolutely right, I had forgotten to write down about teachers (particularly elderly ones) albeit I had thought it!

ZX Spectrum – yes you are right but your children’s position is not the position of the vast majority of children (circa 95% are in state schools) so it doesn’t really surprise me the results of your survey. We are also v lucky enough to be in the same position. Majority of people are not and many people need their kids to be at school or have care provision in holidays to be able to work. Plus may parents don’t have the inclination to do home schooling. In your case your school might decide to continue online lessons for remainder of the year. Whilst we are drilling our children on the three R’s (!) I also disagree that the lack of social interaction isn’t a major impact on their development.

This is a tricky one for everyone though I agree and key to see what happens with transmission rates when children go back to school.

@Snowman,
I agree with your scepticism about a 4% infection rate. Based on a “real” Covid-19 total number of deaths to date of 50,000 and a UK population of 67 million, that equates to an IFR of 1.7%. Based on an IFR of 0.5, I calculate infections of 10 million or 15%. The IFR range which the Cambridge modelling group’s results equates to is roughly 0.6% to 1% by my calculations. They pass my sanity check.

@Grumpy Old Paul

Exactly my reasoning for not believing the 4% estimate.

My own previous hunch of the number infected had been around 8 million for the UK population which compares with the Cambridge Group 6.5 million for England, and if you add in Scotland, Wales and NI you might get close to my figure.

However because my estimate was a while ago and the Cambridge Group figure is now, my figure is quite a bit higher than the equivalent Cambridge group figure.

My hunch had been based on hospital deaths over time, a likely growth/fall of those deaths and infection fatality rate. With hindsight I over-estimated the growth of hospital deaths quite significantly, I hadn’t anticipated that the R0 would fall below 1 well before lockdown, and so didn’t expect hospital deaths to peak as early as on 8th April and so over-estimated the number infected.

I left out care home deaths when forming my hunch because they may just reflect it is easier for the infection to get into care homes, added to which government policy has woefully failed to protect care homes as we know. So a larger proportion of those in care homes get the infection, than say people living in their own homes who have increasingly ‘stayed at home’ and so it skews the mortality experienced massively to a disproportionately higher age and higher vulnerability group.

It’s important to say the Cambridge modelling group estimate wasn’t based on any serology testing but based on similar reasoning to mine but with some people interaction thrown in also. According to Joshua Blake’s twitter account:

“We estimate the number of infections based on knowledge on how people interact, estimates of the fatality rate of the disease, and observed numbers of deaths.”

I still have a hunch that T cell immunity not picked up by antibody tests COULD lower IFR estimates further as we find out more. Where IFR has been estimated, such as in the Gangelt study, roughly based on number of deaths/number testing positive for antibodies, this possible error would increase the estimate of the number who have been infected. Possibly just wishful thinking on my part.

@Al Cam, I was just approximating. The portfolio I am working towards is 50:5 equities:cash. 50 years expected annual drawdown in equities, 5 years in cash, so 55 years in all, giving a drawdown rate of 1/55 = 1.82%, or approximately 2%. The drawdown rate will of course vary with time as it depends on the portfolio valuation and how much we actually spend, but this is the starting position.

Dividends get added to cash as they come in, no reinvestment. No automatic annual rebalancing, but an annual review, as follows:

1) review expected spending over next 5 years, divide by 5 to give average per year
2) if cash 60 years spending, sell the excess and add to cash
4) if cash > 6 years spending (excluding allocations to specific expected purchases), give excess away.

No more rebalancing, just selling equities as required – inspired by McClung. Variable withdrawal rate, as determined by annual review. If/when equities crash or are run down, the portfolio value will feed into the annual spending review. As mentioned, we have an extra cash portfolio to span the period until state pensions are paid and for specific expected one-off purchases (new boat and house improvements).

In yet more gloomy covid news, Spain are reporting overall antibody prevalence of 5%, with the most affected areas like Madrid up to 14%. Death rates in Madrid and Spain as a whole are higher than London and UK respectively. That actually gives an infection fatality rate of around 1%. Eek. Although of course there could be waning antibody levels by now, or infections which don’t produce antibodies. Neither of which are good news.

(Sorry, I couldn’t find any details of the study, just headline reports from the FT live reporting).

@Naeclue & @TI
Another good description of floor and upside is given at: http://www.theretirementcafe.com/2018/01/unraveling-retirement-strategies-floor.html
There are many textbooks available too – albeit, I think, they all originate from the US. IMO, the definitive text book is Retirement Portfolios: Theory, Construction, and Management, by Michael J. Zwecher

If you want to explore thoughts that relatively low sero-prevalence in antibody testing isn’t necessarily a problem, have a look at the documents in Ivor Cummins’ tweet in this twitter thread

https://twitter.com/andrewbostom/status/1260573902431977474

I’m not putting that forward as evidence, I’m just saying I’m keeping an open mind about possible mechanisms and natural herd immunity thresholds.

@Naeclue:
Re floor-and-upside, I understand what you mean.
And, thanks again for the additional portfolio/spending strategy details that you provided. Some really good food for thought there, especially if you have concerns/worries about bonds! Furthermore: sub 2% drawdown with a 6 year cash buffer feels pretty safe. Enjoy the ride!
FWIW, Dirk Cotton wrote just over a year ago: “I’m going to make a claim that may sound a bit outrageous: there is only one grand retirement-funding strategy. That strategy is to allocate some amount of retirement plan resources to generate a floor of safe lifetime income, to invest the remaining assets, if any, in a risky aspirational portfolio, and then to decide how to spend the risky assets throughout retirement.”, see
http://www.theretirementcafe.com/2019/02/honey-whats-our-retirement-plan.html
This sounds pretty close to your new plan.
Thanks again.

As I approach drawdown quickly (128 working days but I am not counting), and the tender age of 54 1/2 I wonder whether I have really thought through my drawdown strategy enough.
I have a 4 bucket strategy based on my idea of volatility however in the end the whole portfolio comes out at (30 bonds/gilts, 50 shares, 12 cash, 5 gold/commodity, 3 infra).
Now off to read the links.

Interesting TI on London having a Re of about 0.3 less than elsewhere under the Cambridge modelling team figures.

Working off the England regional hospital deaths by actual date of death (i.e ignoring care home deaths), I’m still calculating that Re is about 0.2 lower in London.

Now some of that can be explained by immunity we can expect from the serology testing. So if 10% of London has had the virus and 3% elsewhere that explains only about 0.07 of the 0.2 – 0.3 difference in Re (remembering that Re takes into account those who aren’t susceptible unlike R0).

So could the unexplained difference be due to immunity higher than that which we expect to show up in serology testing, for example T cell immunity? Possibly. But it’s fairly weak evidence. It may just be that Ro is lower in London than elsewhere for some reason combined with the different proportion infected.

Source of my figures
https://www.england.nhs.uk/statistics/statistical-work-areas/covid-19-daily-deaths/

Re(t) = deaths (t + 25)/deaths (t + 19) and averaged a bit over days
(assumes 22 days from infection to death, and 6 days between generations of infection)

@Simon T, @xxd09
I like Dirk Cottons [retirement café] blog for many reasons.
Principal amongst these are:
a) anybody who can link 21st century retirement planning to two of Physics greatest predictions of the 20th century must be worth a read, see:
http://www.theretirementcafe.com/2019/04/black-holes-higgs-boson-and-retirement.html
b) and, on a more serious note, he writes from experience – having been retired from his real job since 2005.

I know that both Monevator commenters xxd09 and Hari are retired and the latter has been for some time too – see above. I suspect commenter naeclue is also retired too. However, I know of very few UK retirement blogs that are written by BTDT retirees, especially with anything like the mileage that Dirk has under his belt. IMO Ermines blog is always worth a read and his occasional, self-labelled, rants are often quite enlightening – rather than just him letting off steam!
Are there any other UK-based blogs with a similar pedigree to Dirk’s retirement cafe?

@Al Cam
“Q1) should you consider extending the minimum duration of your cash buffer?”
Not really, because we will be collecting dividends. Historical dividends from the equities approximately equals annual spend. In a very bad year, like this one, dividends may drop, but I doubt they will drop by more than 50%. If I start off with 5 years of cash, dividends drop by 50% and don’t recover, it would be 8 years before I was left with 1 years cash. This does hit upon an issue I was considering though. When the market is down, that really is a poor time to take dividends. It would likely be better to reinvest them instead. I could do that, or buy accumulating ETFs and funds instead, but then I probably would want a larger cash buffer. So which is best?

1) hold 5 years cash and distributing funds, continually topping up cash with dividends
2) hold 9-10 years cash and accumulating funds, sell funds to top up cash each year, provided the market has not crashed.

Option 2 is essentially what McClung says to do. I don’t know what the optimal thing to do is, but collecting the dividends seems simpler, not least because I need some criteria for “not crashed”.

“Q2) how does the plan cope with the other key risks/challenges such as longevity, inflation, cognitive decline, first death, etc”
It seems ok on most counts, but there is not that much sensible data to back test with. The US market is too optimistic, others where the stock market has been completely wiped out are too pessimistic. The plan is simple enough for someone with a POA to continue to administer. First death does not matter from an IHT point of view and the SIPP will go to the survivor.

We have both been retired for some time, although small amounts of paid work still crops up every now and then. After retiring I worked part time as a consultant, but eventually packed it in as it was not as part time as I wanted. We both fully crystallised our SIPPs before stopping work, as we had the LTA looming. Go over the LTA before crystallising and you start eating into the 25% tax free lump sum (the PCLS is capped at 25% of the Lifetime Allowance).

Our previous strategy was simple. Continue to run a 60/40 bond fund, rebalancing once per year. Take 3% of the value at the start of the year as a budget to spend for the coming year, but don’t be too concerned if this is exceeded. With bond yields on the floor, I decided that 40% bonds was too much. Short dated bonds offered a worse return than cash and long bonds are now very sensitive to yield changes.

@naeclue:

Q1) FWIW, personally I prefer accum units [and something more like your option 2 above] – and then sell Units if/when required. This means you can decide what to sell, when to sell, and only take as much money as necessary when you want – i.e. not when a dividend happens to be paid. Selling once per year should sill be achievable – perhaps as part of your annual review, say?
Re criteria for crashed / not crashed: ERN’s SWR part 25 makes a pragmatic suggestion.
IIRC, he essentially triggers on a 20% fall in the equity market. His actual proposal is to use the cash bucket (“on the side”) once only and run it dry – ie do not replenish it once it is in use / emptied. This may not suit you. In any case, the details are in the section called “Cash Bucket” at:
https://earlyretirementnow.com/2018/05/23/the-ultimate-guide-to-safe-withdrawal-rates-part-25-more-flexibility-myths/
I also seem to recall that he was quite surprised how successful this simple approach was when he back-tested it.
re Q2) often (although not in this case I think) survivor benefits are c. 50%; whereas survivor needs can be >66%; is prolonged rampant inflation (a la the 70’s) a worry; I suspect longevity at c. +50 years from here is not an issue; and, personally, I too value simplicity and reversibility of a plan very highly too

@Naeclue:
I understand (at least at the top-level) SIPP inheritance rules; but other folks may well have other assets – such as DB pensions with different survivor rules. In any case, and as I am sure I must have said somewhere before, all situations are, to some extent, unique and the devil is always in those pesky details. BTW, neat trick re US withholding tax!

What do you think of Kartsten’s (aka big Ern) pragmatic crashed/not-crashed criteria and bucket on the side suggestion?

P.S. I totally share your concerns/worries re bonds – and have long preferred cash as a shortish-term asset.
P.P.S I have found that managing the LTA is a good mental challenge – but by no means impossible; although it would be preferable not to have it at all

If anyone else has been forwarded the “19 million brits have been infected” story today (estimating that 29% of the population have had the virus) here’s an interesting examination of the paper:

https://twitter.com/CT_Bergstrom/status/1261058066495074304