A slight change in focus can produce a profoundly different understanding

On the Impossibility of a ‘bottom up’ Equity Strategy

One of the first things that I confronted as a young finance academic (this is pre-history) was the impossibility of running a portfolio of stocks selected for their individual merits. The reason was, once the portfolio had more than a certain number of stocks, the specific risks of individual stocks become largely irrelevant. This is the whole point of diversification. Unless the portfolio holdings are skewed towards one or two stocks the portfolio would be defined by its systemic risk; the risk that cannot be diversified away. If the portfolio consists, say, of bank stocks, then its risk characteristics would accord with those factors that impact all banks. The portfolio risk would be dominated by macro factors such as GDP growth, Inflation, interest rates, credit spreads, and so on. If you check the top ten holdings of any of your funds you will notice it is rare for any individual stock to constitute more than 2-3% and the holdings usually exceed 50 stocks. Every portfolio is effectively a macro portfolio even when it purports to be bottom up. However you pick the stocks, you usually end up with something that is largely driven by macro factors. For those that doubt the veracity of the paragraph take a look at Chapter IX of Portfolio Analysis by J.C. Francis and S. H. Archer, Second Edition, Prentice-Hall, 1979. I am sure there are more up to date discussions of this point but this was the Chapter that made me think back in 1979.

If we accept the premise of the above paragraph then this has profound implications for portfolio management and the wider fund management industry. Portfolio outcomes are determined by a well defined and finite set of macro factors. Macro has always been the only game in town. Portfolio outcome variation has been driven by selecting stock portfolios which were unwittingly weighted towards specific macro factors but attributed to the marketing objective of the fund. The understanding of this issue has slowly emerged and we have seen much written about factors in terms of value, momentum etc. However useful these broad categories might have proven they are not clean macro factors. Some banks are clearly value stocks but others momentum or growth stocks. The need for a well defined set of macro factors that could capture portfolio differences remained. One attempt to fill this need is a company called Quant-Insight (, and in which I own a small shareholding.

QI offers a set of independent and finite macro factors against which most diversified portfolios can be characterised. QI tells you what you have in terms of well defined factors such as growth, inflation, credit spreads, interest rates etc. QI tells you if the value of your portfolio (or individual stocks or other portfolios) is out of line with the historical relationship with the set of macro factors. QI tells you how strong is this relationship and when the portfolio relationship to macro factors may be changing. QI cannot tell you how these macro factors will evolve (nothing can) but it can show you to which factors your portfolio is presently exposed. QI can also remind you that whatever you think you have what you actually have is some weighting of macro factor exposure. It may be that you can achieve a more efficient portfolio with exactly the same factor weighting. A more efficient portfolio would offer a greater return for the same level of factor risk.

Type 2 Diabetes

The condition of Type 2 diabetes (T2D) has long interested me. In part this is because three of my siblings suffer from it and I rather expected to do so my self eventually. However as of 25 March my HbA1c level, a diagnostic test for T2D, remained in the ‘normal’ range. So far so good! The odd thing is that I have always been the overweight one. I am overweight now (in fact ‘obese’) which got me wondering about what is going on. It turns out T2D can be found in all weight ranges as measured by BMI. Not all obese people develop T2D and not all low BMI people remain free of it. Investigation led me to Newcastle University and the work of Professor Roy Taylor.

Prof. Taylor hypothesised that we all have a personal fat tolerance level (PFT). Fat is stored under the skin but once our tolerance limit is reached it is stored in our organs. In particular it is stored in our liver and pancreas. This disrupts insulin creation and leads to consistently high sugar levels in the blood. The horrors of T2D then appear (including the so called side effects of conventional treatment). Prof. Taylor suggests that losing weight can result in T2D going into remission with no other treatment. His research provides strong evidence that this is the case. In his book* he provides a useful table indicating how much weight you need to shed depending upon your starting point. Presumably you start when you first realise you have T2D. So if you weigh 120 kilos and are diagnosed with T2D then you should lose 15 kilos pretty damn quick and keep you weight stable.

In all theories of T2D high fat content in the liver and pancreas is implicated ( Losing weight brings fat storage below the tolerance limit and presumably enables you to eliminate it from the liver and pancreas. The hypothesis is plausible and Prof. Taylor’s research certainly indicates remission from substantial weight loss. It also suggests that, whatever you weigh now, losing a few kilos might be an effective preemptive action if you stabilise your weight at this lower level. It is certainly worth reading his book. T2D is a terrible disease and best avoided. The book contains a lot of easily accessible information and some useful guidance on how to lose weight and stabilise.

One aspect of Prof. Taylor’s book that puzzled me though was the matter of waist size.He suggests men are at risk of T2D if the waist size exceeds 35 inches. This suggests a correlation between waist size and organ fat content independent of height, weight, and body shape. This is not demonstrated nor is it intuitively obvious. Moreover, why 35 inches?

  • * ‘ Your simple guide to reversing Type 2 diabetes‘, Professor Roy Taylor, Short Books 2021. The proceeds of this book will go to Diabetes UK.

An Anatomy of Inflation

Andy Haldane, the outgoing Chief Economist of the Bank of England, is reported to have claimed that the UK might experience a 1970s style inflation. This is very unlikely. The 1970s inflation arose because of an unusual coincidence of factors that, at the moment, are not evident. This is not to say they could not arise but until they do it is best to view the inflation risk in the present context and not make dramatic comparisons with previous experience.

The distinguishing feature of the 1970s inflation was a unionised labour force. The unions were strong and viewed as legitimate institutions protecting the rights of workers. The weapon of choice was the strike. Not all strikes were sanctioned by the unions. The grassroots organisation of the unions often took unofficial industrial action. The unofficial, and indeed official, strike became as much a political weapon as an economic weapon. The confrontational nature of industrial relations was toxic to economic health. It was intended to redistribute the cake more equally but had the unfortunate side effect of restricting the growth of the cake. It also gave rise to a pernicious form of inflation.

The unions were very strong in key sectors, especially nationalised industries such as coal, electricity, gas, water and telecoms. The organisation was often along the lines of skills. This gave rise to the particularly toxic problem of pay relativities. The unions were competitive not cooperative. They were not only concerned about the share of labour versus capital but also the share of electricians versus gas engineers. It was this that gave the 1970s inflation its pernicious and unique quality. Industry X would negotiate a pay deal based on a productivity agreement which made the pay deal self financing. The industry could afford it and there was no need for price rises. Unfortunately industries Y and Z would then put in for pay increases based on relative pay considerations and not productivity agreements. The power of unionised labour usually resulted in pay relativities being maintained. However in the absence of the productivity agreements these pay deals were not self financing and either prices rises ensued or more often financial deficits. In the public sector this hit the fiscal position and in the private sector it hit investment and modernisation. It was this that destroyed the car industry in the UK. Inflation was given a huge boost from pay deals that were not based in productivity improvements. Industry X, seeing industries Y and Z get comparable pay deals, would put in for another rise, perhaps this time not financed through productivity gains. And so the never ending spiral began…

The powerful unions were also able to protect their members against price shocks arising, for example, from currency depreciation and most notably, an oil price surge. Inflation plus deals were negotiated. This essentially built in another inflation spiral as one group tried to pass on the shock to another. All this was achieved through damaging strike action that undermined investment and productivity. All the while the state underwrote this madness through fiscal and monetary policies designed to maintain ‘full employment’. The cake grew more slowly than aspirations and the pressure on inflation was constant. This is hardly the situation today.

There is certainly powerful fiscal and monetary stimulus. There are also price shocks arising from supply disruptions. The supply of labour in the UK may diminish as Brexit works its way through the economy. All of this creates ideal conditions for inflation. However, unions are not powerful. Strike action is rare. No one speaks of pay relativities. Technology is opening up avenues for productivity increases and the capital available for investment is quite extraordinary. Inflation shocks may in fact inspire investment and productivity gains. As with the 1970s, the present situation has some unique features. It is nothing like the 1970s.

The Power of Diagnostic Tests

Diagnostics tests have been in the news. The lateral flow test as a diagnostic test of Covid-19 infection has been under scrutiny. This has brought Bayes’ formula into the media mainstream. When I was first taught statistics (early 1970’s) we seem to have skipped over Bayes’ formula. So I dusted off the first book I used (I still have it), ‘Elementary Statistics‘ by P G Hoel, Third Edition, and had another look. The example given in Hoel’s third edition is marginally more complicated than those appearing in Google searches but I will persist with it.

Assume a test that is capable of detecting a specific rare disease has been developed. It will correctly detect the disease in 97% of the cases that actually have the disease. However, when applied to healthy individuals (that do not have the disease), 5% are incorrectly diagnosed as having the disease. Further, (and this is the odd complication) when applied to individuals that have certain other milder diseases, 10% are incorrectly diagnosed as having the specific rare disease. The problem is to calculate the probability that an individual selected at random from the population and tested for the rare disease will actually have the disease if the test indicates that she has the disease. The answer cannot be derived with only the information included in this paragraph.

The probability of an event is the number of ways it can happen divided by all possible outcomes. In order to calculate the number of people that if tested, and test positive, actually have the rare disease we need to know how many people in the population typically have the disease. In the Hoel example, only 1% of the population typically has this rare disease (which is why it is rare). So if you selected someone at random and gave them the test and it was positive there would be 0.01×0.97=0.0097 chance that this person had the rare disease. This may not be obvious but you must focus on the fact that it is a rare disease so for every one that does have the disease 99 out of a 100 do not. So if you select someone at random from a 100 people there is a very high probability you will not pick the one that has it.

The chance of getting true positive result is thus 0.0097. The chance of getting any positive result is the chance of getting a true positive result plus the chance of getting a false positive. In Hoel’s example there are two ways of getting false positives. First 5% of healthy people are incorrectly diagnosed following a positive test. If we assume 96% of the population are completely healthy then there is a 0.05×0.96=.048 chance of getting a false positive from the healthy population. Finally 3% of the population (100-1-96) has some milder disease and a 10% chance of being incorrectly diagnosed as having the rare disease. There is thus a 0.03×0.1=.003 chance of getting a false positive from this proportion of the population. The total number of possible positives from the test is the true positives plus the false positives, which is .0097+.048+.003=.0607.

The probability of having the rare disease if you test positive from the test is the probability of getting a true positive outcome (.0097) divided the probability of getting any positive outcome (.0607) which is 0.1598. In other words you have a 16% chance of having the disease (rounding up) if you take the test and 84% chance of testing positive and not having it. Is this a good test for the disease? Clearly not but if you go back to the second paragraph you will see this test correctly detects the disease in 97% of the cases that actually have it. The problem is only 1% of the population has the disease and the test gives some false positives in the other 99%.

Having the disease and testing positive in the test are two different events. You can test positive without having the disease. You can have the disease and not test positive. In order to resolve this conundrum we need some prior information about the probability of you having the disease. In Hoel’s example we used the information that it was rare and only 1% of the population has it. However, what if the disease has symptoms and you only go for a test if you have symptoms? This will increase the likelihood that you have the disease so we would use a higher number than 1% as the prior. In the case of Covid-19 many infections are asymptomatic which complicates matters further. I hope this example from Hoel helps clarify some of the difficulties in diagnostic testing in the medical profession. The important take away here is that just because a test correctly detects 97% of the cases that have the disease it does not mean YOU have a 97% chance of having the disease if you test positive. You have a 16% chance in this example because the disease is rare (only 1 in a 100 get it) and there are false positives.

If you want a different exposition try this link

Postscript: It occurs to me that some of the calculations are not intuitive to most (99%) of people. For example, let us look at this sentence;

So if you selected someone at random and gave them the test and it was positive there would be 0.01×0.97=0.0097 chance that this person had the rare disease

The probability that you select someone at random and they have the rare disease is 1%. The probability that the test correctly detects the disease if the selected person has it is 97%. So, the probability that you select someone at random, you give them the test, it is positive, AND they have the disease is 1%x97% or in decimals, 0.01x.97= .0097. Another way to look at it is, assume you give the test to one million people. Ten thousand have the disease. The test will correctly identify 97% of them (9700) as having the disease, or .0097 of the million. It is the proportion of the million that have the disease AND the test identifies as having the disease.

The European Super League (or much ado about nothing)

The European Super League (ESL) proposals mooted by 12 clubs has its roots in the formation of the Premier League (PL), which was little more than a domestic super league. Both allow some promotion and relegation and the Premier League has a core of clubs that is always present. The difference is that in principle any PL team can get relegated whereas in the ESL there is to be a permanent core of 15 that cannot be relegated. The furore really centres on the loss of this principle of relegate-ability. In practice the principle is little more than a fig leaf to cover the fact that the game of football long since abandoned its origins. The ESL merely makes transparent what is already a reality. To understand this one has to look at the game from the fans perspective and as a business. The two are linked but in a very unbalanced way.

The fan identifies with a club. The identification is comparable to addiction. Drug addiction usually begins with people seeking mental highs. If you like football you can enjoy watching two great teams play. However your mental experience is greatly enhanced by linking your identity to one of these teams. Any fan that has been to a live game will know exactly to what I am referring. The habit of fans of identifying psychologically with their team results in an addiction. It is an addiction that has been progressively exploited by club owners since money and sponsorship started to dominate the business of football. It has been enhanced by the exploitation of other addictions such as alcohol and gambling in order to generate even more revenue. The idea that fans are being betrayed by the ESL is frankly, bollox. They were betrayed many years ago and have been ruthlessly exploited ever since. Once you are addicted there is no escape. I am a season ticket holder at one of the mooted ESL clubs. I am an addict.

The club belongs not to the fans but the owners. The fans are just addicted customers to be milked appropriately. Merchandise, sponsorship, and ticket prices that cost more than Opera. Subscriptions to sports channels are also essential. Throw in gambling, alcohol, and poor over priced food and you can see football is a cash cow. Of course owning a football club requires significant investment and if that investment were simply subject to on-field performance it would make it a precarious investment. Fortunately addicted fans stay whatever the results and new fans are sucked in through global branding. Those friendlies played in China and the USA are about expanding the global brand. The use of players from non-European countries also has a global branding element. I doubt anyone from South Korea had heard of Spurs before Heung Min Son joined the team Now the stadium has a liberal sprinkling of South Korean fans and plenty more in South Korea. The business of football long since became a revenue maximising business. Why is everyone now so surprised that the largest clubs (in revenue terms) should seek to secure that revenue?

This link will take you to European clubs ranked by revenue for the 2019/2020 season. The top 14 have all been mentioned in connection with the ESL and the 11 of these 14 have signed the letter of intent. AC Milan has also signed and though not figuring in this table is a big potential revenue generator. The revenue generated globally by these clubs playing each other far exceeds the amounts each can generate playing lesser teams in their national leagues. The ESL enhances revenue in a revenue maximising world. The table also explains the choice of ESL teams in the founding group. Spurs have won little for a long time but they are still ninth in the revenue generating ranking. The global brand is strong and nothing supports the addiction theory more than Spurs revenues. No one can accuse Spurs fans of being glory seekers.

The ESL may also introduce some welcome innovations like a wages cap. It will also allow 5 teams in on merit which is two more PL allows. If one of these merit clubs becomes a big revenue generator one can see the possibility of rule changes later to accommodate them. The founding clubs will control the league and seek to maximise revenue. They can do what they want. The format is very similar to franchise sports structure used in the USA. There is no shortage of fans in the USA and it is a very lucrative business. The relationship with national teams and national leagues remains to be seen. It partly depends on the latter and how they respond. It formalises a two-tier system that is informally already in operation. Moreover it takes power from governing bodies of football. These bodies have not covered themselves in glory so I am not sure many fans will lament this development.

I neither welcome nor object to the ESL. It seems an inevitable outcome of developments that have occurred continuously since I first attended a match at White Hart Lane. I have no illusions about tradition and history and a lot of other guff that many of those losing out have puffed out in recent days. I am addict and this identification enhances the match day experience to a level that makes it irresistible. All fans are addicts. The Fulham fans will still go to watch Fulham and dream of Champions League football (or just staying up). Now they can dream of being one of the 5 allowed in on merit. The likelihood of this dream coming to fruition is not much different. And I will get to watch Spurs lose to much bigger teams than Fulham and yet still turn a profit for ENIC.

Postscript: Wage bills are highly correlated with success so the importance of money is deeply embedded in Football. The causality is most likely rich clubs can afford to lure the best talent with…yes, you guessed… money. As Manchester City has boosted its pay it has moved up the table. The graph is taken from

The Power of The Market

Environmental, Social, and Governance issues (ESG) are taking centre stage in many public debates. These are political issues (with a small ‘p’, so not Party Political) and might once have been the domain of political processes. Past attempts to bring them into the commercial domain have been styled’ protest’ or ‘boycott’. Such protests and boycotts have traditionally been viewed as the activity of ‘left’ wing activists. When I was a student the National Union of Students organised a boycott of Barclays Bank because of its alleged support for the apartheid regime of South Africa. Many other such boycotts have littered my history. Today the Financial Times revealed that Barclays Bank has been criticised for underwriting loans to private prison companies in the USA. It had previously promised that it would cease to directly finance prison companies. Of course, underwriting is an indirect form of finance and clearly not in the spirit of the promise. The criticism comes not from left wing activists but rather fund management firms. This is a modern trend and a welcome one. It demonstrates the power of the market and the market has acquired a taste for ethics.

Recently the Initial Public Offering for Deliveroo was boycotted by important UK fund managers because of its perceived poor treatment of staff. The boycott, plus the brouhaha that surrounded it, damaged the enthusiasm for the IPO. It was brought to the market at the bottom of its pricing range and the price promptly collapsed. The pain is felt by the underwriters, those that bid, and the owners of Deliveroo. The cost of equity proved much higher than the owners had hoped. Boycotting IPOs of companies with questionable ethical practices seems to be an effective deterrent especially given the dual listing structure of the Deliveroo IPO. However, not investing in the secondary market shares of single listings is perhaps less effective. My immediate response to the FT revelation about the Barclays Bank cynicism was to avail myself of the opportunity to vote against all resolutions in the coming AGM. I also made this public on social media and encouraged others to do the same (should they be so inclined). It may seem like a futile gesture but given the inclination of large funds to look carefully at ESG matters it may have more force than it would have done when i was a student. However, i could not make the election if i did not the own the shares. Not investing in the shares of companies with questionable ethics is not necessarily the most effective protest. Ignore the IPO and buy the shares cheaper in the secondary markets and vote accordingly (assuming your shares get a vote). Perhaps boycott dual listings.

The power of the market extends well beyond investment. The most powerful group is the consumer. Individually powerless but collectively irresistible. If you want to slow global warming then buy products that are associated with lower CO2 emissions. If you don’t buy I guarantee you they will not produce such products. Of course consumers are not a homogenous group and the ‘free rider’ principle reigns. But there is no free ride with global warming! The activism of large fund managers is not born out of a sudden attack of morality. It is a commercial imperative. Investors have become sensitive too many ESG issues. Social media magnifies this sensitivity in an instant. Taking an ethical view is good commercial practice today. ESG sells and there are many scrutinising whether claimed ESG credentials stack up.

The effectiveness of the market (and the profit motive) for achieving social goals compares well to the political process. Democratic processes are slow and have been much eroded in recent years. The package of options (aka Political Parties) is also limited in scope. Getting a government to tackle the employment policies of global giants is challenging even if it is inclined. The other route is to be an active investor and make clear to those that manage your investments that active ESG policies will incline you towards their management. Even passive investors can be active.

House Prices and Central Banks: the RBNZ dilemma

Easy money has boosted asset prices. This is logical and inevitable. One asset class, housing, is politically problematic. Home owners are happy (though not all should be) and aspiring home owners not so happy. This relationship is also age related with home owners being typically older than aspiring owners. Politicians regularly spout promises of ‘affordable’ housing and then pursue policies that subsidise demand and do little for the supply of home units. The lack of affordability of home units is a global problem and a major political headache. In New Zealand Jacinda Ardern, the Prime Minister, has taken a novel and potentially profound step towards securing affordability. The Reserve Bank of New Zealand has been instructed to include house price stabilisation as part of its mandate. The RBNZ is already tasked with consumer price stability and it must now also target house price stability My source on this quite startling development is .

In principle achieving both consumer price and house price stability is achievable. If both are simply ‘monetary phenomena’, as some economists would argue, then the RBNZ, which controls the money supply, can fashion a strategy that could work. In practice, this is clearly not the case. After over a decade of very easy money consumer price inflation remains subdued and typically below target whilst house price inflation has become a serious political problem all over the world. So how can the RBNZ tackle this new mandate?

They could get lucky. It may be that inflation is now being driven by globalisation and technology and is only marginally sensitive to monetary conditions, at present. This would be consistent with the monetary and inflation experience of the last 12 years. The RBNZ could simply tighten up monetary conditions sufficiently to dampen house price inflation. If the consumer price inflation is insensitive to monetary conditions there would be little impact on consumer price inflation. No central bank believes this, of course, otherwise why have they pursued such easy money policies for so long with little effect? Imagine the Bank of England suddenly announcing it is about to raise interest rates. The political uproar would be deafening even though it would dampen home price inflation and probably not impact inflation that much. It would also be in direct conflict with Treasury policy which is to subsidise demand for housing in the UK. The RBNZ might need to be more creative.

One possibility might be to change the status of mortgages, making them more expensive and restricting access. This might need co-operation of agencies beyond the CB but such measures as raising capital requirements for mortgage loans, changing liquidity requirements for bank balance sheets, and quite simply limiting the proportion of a banks balance sheet that can consist of mortgage assets. If you cannot get a mortgage or it is more expensive, home price inflation will be damped. If such action is taken by the central bank or regulator for ‘stability’ reasons then it is politically more palatable. The big risk however is not that such an approach is not successful but that it is too successful.

It was RBNZ that first used (1989) a specific target for inflation as its policy mandate. Independent central banks pursuing specific inflation targets tamed the inflation monster. However, they may have killed it because attempts to wake it up have not been very fruitful. In pursuit of price stability central banks brought us to deflation and negative bond yields. No one thought that was going to happen in 1989 (though I did play around with the idea). So let us speculate that the RBNZ is going to start a new fashion for home price stability. How might this end?

In recent blogs I have categorised home price inflation as a kind of pyramid scheme. The steady grind higher in prices requires new mortgagees to lift old home owners out and realise their equity. What if, in the pursuit of stability, new mortgagees dry up or at least have less cash with which to join the scheme? Prices may not ‘stabilise’ they may fall a bit. This will have knock on effects throughout the pyramid system. Banks may find their loss at default rates increase necessitating more expensive mortgages and less accessibility. The whole home price dynamic could reverse. Most people would minimise this risk because demand for home units is constantly growing. This is true but the price at which demand is effected is indeterminate and has as much to do with monetary conditions as the need for housing. If this were not so why ask the central bank to include it in its target?

The demand for home units is increasing but the structure of demand is changing. There is more demand for low density, larger properties since the pandemic began. People are dispersing rather than congregating. On balance this should help cap home prices. There are new and significant entrants into the home provision market. Lloyds bank is planning on becoming a private landlord. Large well funded private landlords with reputation risk may well make the private rental market more acceptable. The need to buy in order to achieve security of tenure and decent housing may well diminish. A landlord like Lloyds may also function as a surrogate national landlord enabling mobility across the economy. Things change and as with consumer price inflation the catalyst for change is often an obscure event that seems specific and non-general at the time. Just saying…

Beyond Atheism

I find it surprising when people that do not believe in a deity describe themselves as Atheists. The word Atheism derives from the Greek ἄθεος which means without God. It is not a flattering term. Its use originates with believers who wished to classify someone as being forsaken by God. Believers all at some level ‘know’ God and look down on those whom God does not wish to know. There is a softer status for those that God might know if only the individual would open themselves up to God and this is Agnostic. This too derives from Greek and means without knowledge of God (but still open to the possibility). Those that wish to acknowledge their lack of belief ought look beyond the word atheism.

The belief in a deity is central to religion. Buddhism has no deity as such though Buddha seems to act as a substitute. It is strictly speaking a philosophy or, more accurately, an ideology. It is a set of values and ideas by which to live. All religion has an ideological element so you could, say, live by christian values without believing in God or Christ or the Holy Ghost. Christians (Jews, Muslims) however would argue that the deity (and derivatives) is central to their identity. Religion is of course a social identity and a way of anchoring yourself in the set of human societies.It is here that the identification Atheist becomes problematic. How can you form an identity based solely on a rejection?

Atheists of course do not simply identify as such. They anchor themselves in other, non-deity based, ideologies; humanism, communism etc. They all suffer to a greater or lesser extent from the same problem; a fixed set of ideas and values. It is rather like placing your mind in a box. Thinking beyond the box is not allowed and risks the classification of Heresy. This classification can be socially quite damaging. The problem as I see it is not the deity but the ideology. The belief in a deity does give more power to the ideology but it is still the limitation of thought (through language and ritual behaviour) that is the problem. Atheists are just as guilty of this as theists.

If you wish to reject deities and religion a better term to use is Freethinker. The term basically defines itself. You accept no restrictions on your thought. You may exist in a specific identity but recognise the contingent nature of this identity and look beyond. Your mind is open to possibilities and rejects only those states that restrict your freedom of thought. Of course you can never fully identify with any ideology or religion but you need never wholly reject them either. You may need to accept some restrictions on your language and behaviour (and hence thought) for social safety reasons, but you try to minimise these. Freethinking opens up new ways of being.

Instead of rejecting, ridiculing, and condemning you can ask; why? Why is religion so prevalent? Why is religion so powerful? What purpose does it serve both society and individual? Given our knowledge of the universe some find it hard to sustain the idea of a deity. Others it seems have no problem. Rejecting the latter without understanding why it is the case seems a dangerous attitude. If the motivation remains after the form is rejected it may materialise in some other more dangerous way. The key is the existence of the category, heretic.

In psychology there is a theory of identity known, unsurprisingly, as social identity theory. Put simply we strengthen our social identity by the extent to which we degrade the status of the outsiders (the heretics). It is really about entitlement. The more we elevate our identity relative to outsiders then the greater our entitlement and by implication power. Looked at like this then all religion, ideology, nationalism, etc is about human identity A establishing its superior claim over human identity B. This seems to be the constant in human history (so much so that it undermines the very concept of history). This process would continue even if no one believed in God. The problem is not faith or concepts like God. The problem is the tendency of humans to crowd into groups and try to dominate other groups by establishing their greater social entitlement. This will happen with or without the intervention of God.

The pattern of division and conflict seems intrinsic to humanity. I used to think that an external existential threat would bring us together. Climate change is an existential threat but I see little unity arising. Covid-19 is a serious threat and it has brought even more division. If humanity cannot overcome this intrinsic weakness to divide and fight then it is hard to be optimistic. I would cast the role of the freethinker as one who seeks to identify what is common to all and not difference.

Theists believe a deity elevated man above the status of other animals and hence beyond nature. The latter works by creating difference and seeing which category is adaptive. This seems to be how human society also works. The existence of the idea of a deity suggests human society would like, at some level, to rise above nature. It will not achieve this by emulating (or subjugating itself to) the methods of nature. Creating social difference and conflict is nature. Looking for commonalities, supporting the weak and helpless, sharing etc is beyond nature. Perhaps we should try it. What do we have to lose?

Lives v Livelihoods

The present situation in the UK may be confusing for some. It makes more sense if one keeps in mind the government is seeking a trade-off of lives against livelihoods. This may sound callous but it is a common trade-off in public sector decisions. Cost-benefit analysis of many projects puts a money value on life. It is inevitable. If no risk to life were ever allowed then very little, if anything, would be initiated. It is unclear what quantitative analysis has been undertaken by this government (very little I suspect) but the qualitative decisions are clear, if open to dispute.

The economic situation is fragile. The first wave of government assistance for firms and staff increased indebtedness. The government owes more, businesses owe more, and individuals owe more. Cash reserves have been eroded. There is evidence of long term saving (pension plans) being tapped. The initial shock was very severe and has brought many economic agents to the brink. Another shock from even a brief national lock down might push many over the edge and boost bankruptcy. This is I believe is what the Chancellor meant by ‘permanent damage’. One bankruptcy can trigger others as corporates and individuals owe money to each other. Another national lock down could have systemic consequences.

The response of the government has been to look to local lockdowns. The whole process has been hampered by the dramatic failure of an expensive track-and-trace system. Nevertheless the logic is clear. Seek to achieve the maximum impact on infections with the minimum economic fall out. There is no question of trying to eliminate the virus. This will be left to a vaccine. The intention is to reduce excess deaths to a level that the NHS can manage. The aim is to do so without crashing the economy.

The logic is evident in the measures. Pride of place is given to restrictions on households mixing. This makes sense. Infection does seem to be linked to close personal interaction especially without protection. Restricting households mixing thus is expected to have a big impact on infections at little economic cost. Restricting such mixing in restaurants imposes some cost to the restaurant but it is possible to arrive separately and sit at adjacent tables I guess. And you can always just go out as a household (unless you live alone).

Many restrictions do involve an economic cost, notably to the hospitality industry. This is a big employer so the fall-out from such restrictions is potentially more serious. The hope is that by imposing restrictions locally it will restrict the economic loss and enable national groups to continue to function. I doubt Burger King will go out of business. However, local businesses may be doomed by such arbitrary lockdowns. It is impossible to avoid all economic losses. The cry for state help is understandable but this merely transfers the problem to state debt. It does not eliminate the economic cost.

There is no costless solution to an economic shock. The trade-off between lives and livelihoods is inevitable, if tragic. It is particularly important because the infection pattern seems highest in the most deprived areas. Poor housing and the impossibility of working from home are not unimportant factors in transmission. The stress to someone living on the edge losing their job should not be underestimated. It is the reason many have wilfully ignored the reality of Covid-19 and just carried as before. There has also been wilful stupidity with a refusal to wear masks or socially distance, in holding illegal large gatherings and such. Far too many have failed to take the pandemic seriously and this has cost others their life or livelihood. State enforcement has not been much in evidence.

The next few months promise to be difficult and bring much bad news, both in terms of deaths and economic loss. It is exacerbated by the government’s apparent intention of leaving the EU without a negotiated settlement. This will add uncertainty and cost at a time when the pandemic has eroded economic strength. This can only be bad news in the short term. It may seem ironic that those most vulnerable to Covid, the over 65s, are the single biggest bloc of supporters of this government. Economically, however, as a group they are also the most secure, being owners of valuable properties and having pensions in payment. Moreover, being typically retired they do not need to go to work or venture far from their homes. Despite being less vulnerable to the disease, the young may in fact be the main victims once social life and economics are factored in. Yet it is the young that have been most likely to display a wilful disregard for restrictions…

House Prices and Banks

If you try to set up a margin account with, say, IG index, the regulator places quite a few obstacles in your way unless you can claim professional status. This makes some sense because with margin trading you can lose more than the initial margin. It is leveraged trading. Rewards and risks are high. However margin investment in property is encouraged by all and sundry. When you put down a 10% deposit and borrow 90% to buy a property you are a margin investor.

Buying a home is always an investment. It is buy-to-let-to-yourself. There are many tax advantages to this arrangement. You are not subject to CGT when you sell if it is your main residence. You receive the rent tax free by netting it out. Of course as there are no CGT or income tax liabilities there will be no offsetting allowances for repairs etc. You have security of tenure subject to meeting the debt servicing obligations. The property is held as collateral against the 90% loan amount. If you fail to meet your debt service obligations the bank can foreclose and require you to settle the debt. If the property value is lower this may eliminate your margin (deposit) and leave you with a margin call (negative equity).

Banks regard property as low risk investment as does the regulator. In part, the reason is that loss at default is deemed low. The bank has the margin (deposit) as a buffer and collateral which it can liquidate towards settling the debt. Any net debt remains the liability of the investor (the homeowner). It is in the net debt or negative equity that loss at default arises. Of course with steadily rising house prices loss at default is very low.

The regulator requires the banks to keep a capital reserve to cover loss at default. The precise method for calculating this capital requirement and the form in which the capital is held is secondary to the point of this blog so no elaboration of this very technical area is required. The point is the capital required is linked to the realisable value of the collateral aka house prices. If house prices drop materially the value of the collateral declines and so does loss at default. The banks will need to raise more capital. The banks have an interest in rising house prices.

If banks abruptly tighten lending conditions perhaps by lowering the average loan-to-value limit the effective demand for homes will decline. Many homeowners wishing to sell will be unable to do so because the next buyer cannot get a mortgage. If the mortgage famine lasts it may lead to falling house prices and higher loss at default. The banks will need more capital. If the house price fall is dramatic the need for more capital could in principle become a systemic crisis.

In a pyramid scheme initial investors are paid returns financed by additional investors. There is no actual investment and the scheme continues as long as more investors join the scheme. It fails once there are no more investors. The similarity between mortgage finance of housing investment and a pyramid scheme has always bothered me. My experience of the UK housing market between 1988 and 1994 confirmed the similarity. My experience of the Cypriot housing market and calamity of 2013 suggested it is always an accident waiting to happen. Homeowners need rising house prices. Banks need rising house prices. The regulator needs rising house prices. The government needs rising house prices. But sometimes events intercede and the pyramid scheme fails…


I have spoken of loss at default and not mentioned probability of default. The expected loss is the product of loss at default and the probability of default. The probability of default is more closely connected to interest rates and unemployment.

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