A slight change in focus can produce a profoundly different understanding

Judging the Bank of England

The Bank of England has been the subject of some not inconsiderable criticism since the financial crisis. Mark Carney has come in for some personal attacks especially from Brexit-types. So how has the BoE performed? First let us remind ourselves what is the primary objective of the BoE as set out in Monetary Policy Framework .

Monetary Policy Framework

The Bank’s monetary policy objective is to deliver price stability – low inflation – and, subject to that, to support the Government’s economic objectives including those for growth and employment. Price stability is defined by the Government’s inflation target of 2%. The remit recognises the role of price stability in achieving economic stability more generally, and in providing the right conditions for sustainable growth in output and employment. The Government’s inflation target is announced each year by the Chancellor of the Exchequer in the annual Budget statement.

The objective is price stability as defined by a long run compound average annual rate of inflation of 2%. The index of choice is the Consumer Price Index. The compound average rate of inflation in the last 9 years (from October 2008 in the heart of the financial crisis) is 2.17%. You can calculate it yourself using ONS data if you wish. I would say that is not too shabby considering the enormous and unprecedented challenges faced by the BoE over this period. The year-on-year Inflation rate has varied considerably but the compound average is remarkably close to 2%.

CPI 10 years

The RPI index has been abandoned as an official inflation statistic as not fit for purpose. Nevertheless it is still widely used in all sorts of financial contracts. Interestingly the conclusion would not have been wildly different if the RPI had still be the official index. Over the 9 years from October 2008 the compound average annual rate of growth of this index was 2.64%.

So why is this worth a blog? First, contrary to popular belief, ex post, this has not been a deflationary period but rather one of price stability. This is not to say there were not enormous deflationary pressures.  Thanks to the BoE they did not become deflation. Second, if the BoE can achieve price stability over such a challenging period one might reasonably conclude that the long run expected rate of inflation is 2%, provided the objective and independence  of the BoE remains unchanged. This is an important observation for all sorts of planning needs. Finally, rather than attack the present governor of the BoE we should thank him. He has done a remarkable job. I doubt the previous incumbent would have done as well.


Political Classification and Brexit

Political views are commonly classified along a linear scale. You are right-wing or left-wing or somewhere in between. Different people associate different characteristics with the various positions. Classifications are thrown as insults or plaudits depending on how the associated characteristics are viewed. Some regard all right wing people as racist and nationalist whilst left-wing people are globalist and tolerant of diversity. This is of course a long way from the truth, as anyone even vaguely familiar with the current UK political scene can testify. So what is a valid basis for this linear political classification?

A key distinction is the attitude to agency. It is about freedom to determine your own life and individual responsibility. As a general rule, the greater is individual freedom the greater is individual responsibility. The corollary is that the more social protection an individual receives (less individual responsibility) the less freedom that is available. The right tend to favour more individual freedom and responsibility and the left tend to favour greater collective responsibility and less individual freedom. The difference between laissez-faire capitalism and socialism is rooted in this simple distinction. This is a valid basis for the simple linear political right/left classification.

The philosophical principle that underpins the distinction is moral hazard. Every parent struggles with moral hazard. The more you take responsibility for your offspring the less they take responsibility for themselves and the more you feel entitled/obliged to manage their lives. The more you help them the less capable they may be of helping themselves. The same issue arises in charity. The more you bail people out the more dependent they become on bail-out. So it is with individuals in society. The higher the safety net the less afraid individuals may be of falling into it. Collective support elicits different types of individuals and individual behaviour. Looked at in this way it is possible to reassess many aspects of different societies in terms of the simple linear political classification.

The USA is, for example, a fundamentally right-wing society. The safety net is set very low. There is considerable freedom and with it the concomitant responsibility. Contrast this with the Nordic countries where the safety net is very high. One can also see ‘socialist’ ideas in regulatory frameworks. The regulator tries to protect people from their own ignorance and weakness. This is increasingly true in the world of finance. Caveat emptor or buyer beware, a standard position of the laissez-faire, is being usurped by ‘protections’.

My preferred spread betting agency just asked me if I wanted to be classified as a professional or retail client. On the criteria presented I am clearly a professional client. It is clear the two categories can be treated differently by the agency though it is less clear in what way. From (professional) experience I know that retail clients have more regulatory protection but also less choice in what they can do and the risks they can take and are subject to lots of pointless warnings (which they still ignore but it gets the agency off the hook). Caveat emptor is partially resurrected for the pro but removed entirely for retail. The regulator removes your freedom in order to protect you. Very left-wing.

Regulation seems to assert  ‘you are too stupid to look after yourself so we will do it for you but you must do what we say’. The greater the regulation the more people become dependent upon the regulator and the less they even try to think for themselves. Which brings me to the point of this blog. Individuals are afforded enormous protection from poor financial decisions but were felt capable of understanding and voting on one of the most complex economic, political, and constitutional issues of modern time. The usual protection of a representative parliament was eschewed for a referendum on whether to stay in the EU. You are required to take professional advice before giving up some pension arrangements in favour of income drawdown but you were deemed competent to judge the efficacy of leaving the EU both for yourself and the rest of nation!


There is a three-part drama on BBC 1 entitled Gunpowder. The final part will be screened on Saturday but you can watch on iPlayer anytime. It is not a remarkable piece of work. What is remarkable is that it was ever produced. Growing up in London each year we celebrated Guy Fawkes night. We let off fireworks and burned an effigy of Guy Fawkes. It was vaguely understood that he had tried to blow up parliament and given the way he was dressed we assumed he was a Royalist and undemocratic. The subject never came up in history at school and I did history up to A-level. I was in my early 30s before I realised that Guy Fawkes night was a celebration of burning catholics. Moreover, Guy Fawkes was not trying to blow up parliament. He was trying to kill King James I by blowing up the House of Lords during the state opening of parliament. Very much not a Royalist. Guy Fawkes night is about the religious conflict that once beset the British Isles, the legacy of which still haunts Northern Ireland.

England it seems was full of jesuit priests ministering to the catholic flock. They did so in secret. Some important advisers to the King felt they were radicalizing the catholic population in preparation for an assassination and introduction of a catholic monarch. Others argued that most were moderate catholics, loyal to the protestant King James I, and being driven to extremism by discrimination. The first episode contains an execution scene which drew considerable viewer criticism. My only thought was that given the mode of execution the true distress that the victims would have experienced and displayed was not adequately projected. It was greatly sanitized yet still too gruesome for the sensitivities of modern folk.

In the second episode Robert Catesby, leader of the band of catholic extremists planning to assassinate King James, visits Spain to seek help with arms and men to aid a catholic uprising in England. His moral claim is that good catholics cannot simply practice their faith in protestant England without oppression. The Jesuits he is visiting invite him to the live burning of a jewish couple. The irony it seems is lost on Catesby. He continues to press on with the plot.

The backdrop to the whole plot is the political situation. Spain, as protector of the ‘one true faith’ has a lot of influence in Europe and seeks to influence England. The latter naturally resists but both are weary of war and seek an accommodation. The situation is summed up in one line; This is England sir. Our laws have nought to with Spain. Sound familiar?

The social and political parallels with the present seem to be quite close. Spoiler alert! The plot fails and the plotters all die. But Guy Fawkes has nothing to do with democracy. It is do with royal power, religious bigotry, and extremism. We are celebrating the defeat of a catholic plot against a protestant King and the defeat of the influence of Spain and the Vatican in English political affairs.

The Bitcoin Phenomenon

Bitcoin, and cryptocurrency in general, has become something of a phenomenon. Bitcoin (USD)_20171023_08.13

I wrote about Bitcoin in my early blogs but made no attempt to buy into it. More fool me you might think. Perhaps. I drew a distinction between the technology, blockchain, and the use, to create a private money. I was concerned about the opaque quality of Bitcoin transactions and the function the private money might serve. Sooner or later I expected the authorities and formal system to become concerned and act. I suggested (in a published letter to the FT) that cryptocurrency might develop as an alternative to offshore banking, which is increasingly coming under scrutiny. The authorities are becoming less and less tolerant of areas they cannot regulate. Bitcoin and cryptocurrency is no exception. I suggested that when the Bitcoin economy intersects significantly with the formal economy it would start to come under scrutiny. It has begun.

Bitcoin could in theory function as a closed economy system. Only Bitcoin (or some private money) is used to transact and goods traded are traded within this informal closed economy. But the goods must come from somewhere. If the goods are drugs which are produced illegally this can work. If the goods are illegal weapons this can work. But if the goods come from the legal economy they will leave a trace and the closed system starts to leak. The ‘success’ of Bitcoin contains the seeds of its demise. The rise in the US Dollar price of Bitcoin in 2017 has been dramatic. Cryptocurrencies are now bought by legitimate people using legitimate currencies. There are formal exchanges and legally produced and sourced goods traded in Bitcoin. Governments, central banks, and commercial banks are taking note.

One of the big problems for commercial banks is money laundering. They have enough problems containing it in the formal economy using legitimate currencies. They have little chance of containing it in the Bitcoin world. If a legitimate bank allows a Bitcoin trader to have an account and this trader is implicated in money laundering they may find themselves in the dock. It is simply not worth it. Any banker is aware that money laundering legislation is unforgiving and totally overwhelming. It is not enough to say you did not know. You have to demonstrate you could not have reasonably guessed or had suspicions. Not so easy. So what is the response if you deposit a large profit made from trading Bitcoin?

The bank could ask you to show how you acquired the Bitcoin in the first place. Do you have a verifiable record? No? Oh dear. Then you under suspicion at once. If you are a legitimate business that accepts Bitcoin and pays with Bitcoin can you demonstrate where the customer got the Bitcoin? Unlikely. If you are a Bitcoin trading company or exchange can you demonstrate where your customers got the Bitcoin? Know your customer rules might apply even if you are not regulated. Banks are regulated and need to ask. They might reasonably not want to allow you banking facilities. The authorities might also want you to answer some questions.

Authorities are unforgiving and have long memories. They also often use retrospective legislation as anyone with an offshore account probably has worked out by now. Tax bills plus penalties from 20 years ago are now causing some people headaches. If the authorities decide to act you never know what problems you might encounter. You may have made a fortune in Bitcoin but  converting to Dollars or Euro may bring other challenges and they may come in 20 years time. Who knows?

One final comment on the above chart. No price rises like that without coming down at some point. Do you know when this will be?

Why do we read books?

Several conversations over the last year or so has left me pondering the motive for reading books. On the surface it seems like an uninteresting subject. People read literature for pleasure. True enough but why is it pleasurable? Others read for knowledge or understanding or inspiration. In the age of the internet are books the best source of knowledge or understanding or inspiration? Modern technology has made owning and reading books much easier. You just load a Kindle or iPad. No need for bookshelves unless you are old-fashioned like me and like the book as an object as well as a repository of words. Book-reading is alive and well. But why?

Literature enables us to share in someone else’s imagination and experience their ability to articulate this imagination. A particular phrase or expression can conjure up an idea or emotion that we have experienced but could never articulate. Well read literary types will quote from poems and Shakespeare at key points in conversation to add a sharpness to their own expression. They may refer to plots or ideas found in books. We are impressed. They are ‘well read’. However, does this simply not reflect a limited imagination and inability to express one’s own thoughts and emotions? What can literature offer that daydreaming cannot? Moreover, why does reading not develop the skill to articulate one’s own emotions and thoughts in an original way. It is interesting to note that in academic work quotation is frowned upon unless the quotation itself is the subject. Part of academic training is to express ideas ‘in your own words’.

Reading does develop imagination and skill in articulation. The implication of is that you should read more when you are young and in your developmental stage of life than when you are older and have more experience. If you are reading a lot when you are old then something else is probably going on. It is an escape from reality. A suspension of life. It is a form of self-medication with no side effects. The literature does not have to be ‘good’ merely far from your reality. I achieve the same effect watching TV dramas. The format is formulaic. The plot is predictable. The effort required is zero. If reading novels does it for you then keep doing it. Very healthy but don’t bore other people with what you have read.

Nonfiction is another matter altogether. The purpose is presumably to be informed. I have a great many nonfiction books very few which I have read from cover to cover. Increasingly, I buy less and less. Information is now widely available in appropriate packets and at much less cost. I have the advantage of years of training in the epistemology of social and medical sciences so have the ability to extract information from a wide range of sources. I do not need it ‘dumbed down’ for my consumption. This it seems to me is what nonfiction now offers people; a dumbed down package of information and ideas. The economics of publishing is now such that one has to reach as wide an audience as possible. So the books are pitched to the lowest common denominator ( I of course exclude textbooks from this comment though even these seem not immune from the dumbing down).

The dumbing down concerns me. I have read two nonfiction books cover-to-cover in the last few years. David Nutt “Drugs without the hot air” and Giulia Enders “Gut”. Both cover very technical subjects in a very accessible way. Both books contain a lot of information. The Enders book emphasises the importance of the gut in physical and mental health, and provides some detail. The Nutt book makes plain the inconsistency in UK drug policy and provides a lot of useful detail. Neither book is definitive but Nutt’s book is potentially dangerous. It presents a complete view of the world of drugs. It is influential and it is clearly designed to be influential. The reader is being persuaded of a view by someone in authority. It is not an unambiguously ‘correct’ view and critical reading requires considerable prior knowledge and thought.

This brings me to the main point of this blog. A book has at least n+1 authors, where n is the number of readers. It is not what the author intended that matters but what the reader understood and the behaviour reading induced. A book is worthwhile if it inspires thought and encourages further investigation. If it completes thought and gives the illusion of knowledge then it is dangerous. The problem I perceive is that in today’s busy world many people use books as a substitute for thought and articulation. Instead of expressing an idea in their own words and demonstrating their understanding they refer to a book. They may as well quote Shakespeare.

The conversations were useful in one respect. I was motivated to rewrite my ‘about me’ section and explain more clearly the purpose of these blogs. It also contains a philosophy of knowledge which can be summed up as society cannot acquire knowledge because it also defines what it is. This is my understanding of the loadstone of Derrida’s work. Some may also have noticed that my view of authorship originates in the work of Barthes. I have been influenced by these philosophers but what I write is mine. And what you understand is yours. The author can inspire you but ultimately what you understand is your responsibility. This is a great freedom but requires thought and imagination and both need exercise to stay sharp. Read less but think and daydream more.

Catalonia, Nation States, and the EU

The unseemly events in Catalonia over the weekend bring me back to a theme that has featured often in the blogs; the demise of the nation-state. The nation state grew out of royal kingdoms. These kingdoms did not recognise national boundaries or ethnic groups. If the inhabitants or, more precisely, the controlling war lords aka the local aristocracy, accepted the king’s tutelage then they became part of the ‘Kingdom’. They were referred to as ‘Kingdoms’ even when there was a queen on the throne. In the interest of gender neutrality I shall refer to them as empires.

Empires were diverse, pluralist institutions, distinguished more by loyalty to the King than location or ethnicity. Sharing the King’s religion was important, paying taxes, and delivering troops when required were the basic criteria for demonstrating loyalty. The drive for self-determination brought forth the nation-state. It was carved out of the remnants of the empire but did not necessarily constitute a ‘natural’ state. It often amalgamated a number of ‘natural’ states. The precise definition of a ‘natural’ state is unimportant. Suffice it to say that, if the inhabitants of a locale have a sufficiently strong sense of identity, for whatever reason, they may constitute a natural state. It is not uncommon for inhabitants of natural states to wish for autonomy and self-determination.

Natural states may be based on religion, ethnicity, history or all of these concepts. If the inhabitants identify themselves as sufficiently distinct from other inhabitants of the nation-state then they may constitute a natural state. The inhabitants of the rest of the nation state, and many that live within the natural state, may not concur with this self-identification, and conflict may arise. Catalonia may constitute a natural state and there are many possible examples throughout Europe (and indeed the world) of potential natural states. I emphasise ‘potential’ because there is no hard and fast definition of a natural state. It is a matter of perspective. So how does this help?

Many nation states are arbitrary amalgams of natural states. This is true within the EU. They have been the subject of conflict and demands for self-determination for long periods of time. The institution of the EU provides an opportunity to resolve these conflicts in a relatively painless way. Allow self-determination under the tutelage of the EU. The continuing integration of EU states means that the distinction of statehood rapidly loses its significance for member states. It increases the number of voices at the council level but this can be accommodated. Otherwise there is very little significant change. It does however hasten the demise of the nation-state but this demise is inevitable within the EU. It will be resisted by those that have a strong national (nation state) identity and that draw power from the institutions of the nation-state. This last observation encapsulates Brexit.

The desire for the UK to leave the EU is of course not a British desire but an English desire. The UK comprises a number of natural states that have been dominated by England since construction. England is the largest natural state and dominates the institutions of power within the UK. The English realise that their power is being diluted within the EU and seek to hold on to national power by leaving the EU. The EU does require a loss of sovereignty but the Scots, Welsh, and Northern Irish lose none. They gave it up a long time ago. It is the English that lost sovereignty. The Republic of Ireland has prospered under the EU and finally shed the influence of England. There is no reason to think the natural states of the UK would not do so as well.

The EU in its present form is an imperfect institution. There is room for improvement. It will improve. It provides an overarching framework in which natural states can achieve a degree of self-determination, and importantly, separate identity, with minimal disruption. Many long-standing community conflicts could be resolved in this context. The problem is that most of the power within the EU sits in the hands of the leaders of the nation states. It is to the EU parliament that Europe must look for change.


The Oil Price


Above I have inserted a daily and weekly chart of the Brent Crude spot oil price (courtesy of IG Index). My interest was piqued by a press report that producers did not expect the price to rise much above 60. What they meant of course is that they did not expect the price to average much above 60. This may well prove the case but this does not mean it will not rise above 60, albeit briefly. The time horizon of a trader is much shorter than that of a producer. Moreover, oil is a commodity and commodities have their own price dynamics. The two charts above suggest Brent crude could rise as far as 71 but might fall to 54 in the short-term. It appears to have closed around 56.7 on Friday. If one can enter a trade close to 54, with a stop not far below, this would constitute a good reward to risk opportunity.

How did I come to this conclusion? An experienced trader looking at the above charts would understand at once. They may not agree but they would understand. An inexperienced trader would probably not understand and hence should avoid the trade. The reason for highlighting this price is to attempt to illustrate some aspects of trading with a live trade. It will be live as I propose to try to enter the trade via IG Index (minimum bet size) at some point and will report the process as I go along. I may get stopped out (and lose some money) or I may make a nice return. Don’t worry I will bet responsibly.

Trading of course is nothing like investing. If you intend to invest in oil stocks (they have juicy dividends at the moment) you should be interested in the average price. It is this that will determine earnings, dividends, and stock value. You should also be thinking long-term, years rather than days. My trade could be over in days. In the long run, oil may be a poor investment as alternative, cleaner, fuels prevail. However, the long-run is a long time and the energy industry is not moribund. It is active and clever. Extraction costs have been reduced (I am informed) and this offsets lower oil prices as far as corporate profits, and dividends, are concerned. Cheaper fossil fuels will slow the transfer to cleaner alternatives. The long-run may be longer than you think.

You might be inclined to ignore oil and oil based investments on principle. The sooner we shift to cleaner energy the sooner we save the planet. This is true and my sympathy lies in this direction. However, this ignores the reality of the situation. A great deal of capital and employment is vested in fossil fuels. A great deal of government revenue derives from it. The inevitable and desirable transfer will meet resistance and inertia. Many have gas central heating and diesel cars. They have gas boilers because gas is cheaper than electricity. The next car may be electric (or at least a hybrid) but today’s diesel has little second-hand value so there is an incentive to run it into the ground and delay purchase of a new one. Personal and corporate behaviours and motives are not that different.

In the meantime oil and oil based investments are everywhere. If you invest in a fund they will be in there, unless you choose one that explicitly excludes them. There are not many of these. So we may as well think about this industry. It is not going away for quite a while.

The Politics of Fear

Fear is a primal emotion and plays an important role in the survival of mammals. An excess of fear however can lead to vulnerability and mental health issues. We have all seen the film and heard the glib saying, “fear leads to hate and hate leads to the dark side”. It may be glib, but it is not without some truth. Populism is not a political creed (as seems to be the popular view) but rather a political method that taps into the deep well of fear.  It is used to generate hate, a powerful but destructive emotion. It is used by all political creeds and it has created a toxic atmosphere in the global political scene. The dark side awaits us.

The populist right used fear to generate a small majority of votes cast (not a majority of the ‘people’) in the Brexit referendum. A substantial minority of (mainly english) people are fearful of having lost something profound and associate this loss with immigrants. It was not difficult to persuade this group of the threat of being swamped by EU migrants. One should not underestimate the impact of Nigel Farage and his poster of massed refugees walking across Europe. The profound sense of ‘loss’ involved identity and security, both personal and economic, and immigrants are blamed. Rejection of EU membership, an unlimited source of this threat, was not difficult to inspire. The positive aspect of this is that a majority of those eligible to vote did not experience this unhealthy combination of fear and hate. They either voted to remain in the EU or were sufficiently unafraid to not vote at all. Fearful people are not normally apathetic.

Theresa May, for reasons known only to herself, decided to call a general election. It was an opportunity for the Remain camp (and the previously apathetic) to take back control. The Liberal Democratic Party and the Greens offered a clear promise in this respect. The Labour Party committed to see Brexit completed. The vast majority of previous Remain voters, voted for the Labour Party. The reason for this incoherent behaviour? Hate entered the equation. The referendum had generated so much hatred of May and the Tories that it overwhelmed rational thought. The Remain voter wanted to punish the Tories and felt only Labour could offer a viable alternative. They convinced themselves that a Labour government could be persuaded to row back on Brexit, despite there being no reason to believe this. Today the Labour Party and its supporters reek of cognitive dissonance. Fear and hatred has led to a collective mental health issue among a significant proportion of Labour supporters and voters.

Politics today is all about tapping into deep wells of fear. It is evident in the USA, France, Holland, Germany, Greece, Poland, Hungary, Norway, and Turkey, to name a few important countries. Support us because only we can protect you against those that wish to destroy your way of life. The best way to persuade people who are insecure and fearful to support you is to tell them they are superior to others, that they will prevail, and somehow deserve to prevail. So is born the politics of hate. This simple process is evident throughout history, even recent history. It is not forgotten because there are still cultural reminders to this vicious destructive process screened every day on our TVs. Every wartime drama series or film has this theme not particularly well hidden. Individuals everyday look into this mirror yet cannot see themselves.

As a child I often heard this expression’ my dad fought in the war to keep people like you out of the country’. Yet the films and drama series were telling this person that her father fought in a war to keep views like that out of the country. She could not see herself in the mirror. Today I imagine people of my generation watching series such as ‘Foyle’s War’ and not realising they are the bad guys…Cognitive Dissonance has become the mental health issue of our time.

Asset Allocation

One of the most discussed and yet least understood aspects of investment is asset allocation. It is a fairly simple concept and poses the question of how to best achieve the investor’s goal. This requires the investor to articulate the goal, an agreed definition of ‘best’, and a full understanding of the factors that might help achieve, or cause deviation from, the goal. The discussion usually takes place in investment committees but I think it might be instructive to take it down to an individual level or ‘retail’ as the industry would have it. Let us consider a retired person with a pot of capital which needs to last (often two people) an unspecified period. How should this person (couple) approach asset allocation?

The individual does not know how long she will live or what care she might need. She will have a state pension and the right to certain state benefits in certain circumstances. She will be subject to higher rate taxes if she takes too much income in any one year. She might wish to leave a legacy or help non-dependent but cherished relatives. Even for an individual it is a complex problem. One must first present the problem in a tractable form. This will typically involve simplifications and assumptions. If the problem is not well-defined it cannot solved.

Quite often, and typically in my generation, the main asset will be an owner occupied house. Is this to be considered an asset? One could impute a rental value and add the rental value to income. If part of the goal is to live in this property until death one still needs to consider any IHT arising, and the impact on state assistance with care costs. One solution might be to extract equity from the property whilst retaining the right to live there until death. This is feasible but comes at a cost. The released equity could be used to generate additional income. It also reduces the estate value and residual value for care cost purposes.

Once the pot of investable assets is established then the investment decision needs to be addressed. The simplest decision is to buy an inflation-linked annuity. The provides complete certainty however long she lives. There is protection against inflation and as an insurance product FSCS protection (in the UK). So if an equity release scheme is used the right to reside in the ‘home’ is secured until death and the annuity plus state and other pensions define income. The annuity evaporates on death and the equity release almost certainly leaves nothing also. There is no legacy and no IHT and the annuity can defer care costs until death. For a single person not concerned about leaving a legacy and seeking absolute certainty of income (and not worried about paying higher rate tax), this is a reasonable asset allocation strategy. It can be adapted to a couple.

Now assume she wishes to leave a legacy and certainty of income is not so urgent. The estate may be large enough that income could incur higher rate tax and this might be deemed inappropriate. A large estate may also allow more risk to be taken. The income target is set at whatever keeps tax within the basic rate band. No equity release is necessary so the home remains an asset that will be available for inheritance. The investment strategy now becomes maximizing real return subject to keeping income at the maximum consistent with the basic rate tax band. The investment problem is now quite different.

One is now looking for assets that offer real asset value growth and not real income growth. Income incurs tax whilst asset growth only incurs CGT if realised and it can always be realised if need be. CGT is usually levied at a lower rate and there is a CGT allowance. If one is concerned about inflation one will seek assets that perform well in inflationary environments. One will be looking for ‘growth’ assets and not income assets, at least for part of the portfolio. This is not the usual recommendation for retired people but it follows from the objectives of this retired person. If the strategy is successful there may also be a need to transfer assets early to minimise IHT though if a large part of the portfolio is in drawdown this may not be necessary.

The point of the exercise is to illustrate that asset allocation begins with a clear understanding of a problem to be solved. It is not a one size fits all issue yet one size fits all solutions are common. In the UK the corporate pension plans regulator requires a funding calculation based (in effect) on how much it would cost to transfer the liability stream to an insurance company. This is equivalent to buying an annuity. This is why ‘deficits’ are so large. In practice there is an asset allocation strategy that would match the liability stream for considerably less. The solution is very similar to the one for the retired lady seeking a specific income and to leave a legacy.

The liability stream for a pension plan depends upon longevity, employment growth, wage growth, and inflation. All but longevity is a macro factor. Longevity has surprised on the upside in recent decades but it is not a linear extrapolation process. The macro factors can be related to specific asset classes and thus it is possible to construct portfolios that hedge these macro factors. In general any investment problem can be reduced to sensitivity to a set of macro factors and can be solved by a portfolio of assets which have the appropriate macro factor sensitivity. At any time the asset value can deviate from the central sensitivity but this is an opportunity rather than a problem. Sensitivities may also change and this may require portfolio restructuring. It is a continuous and dynamic process of monitoring and adjustment to ensure the portfolio matches the objective. This is asset allocation. Factor models ( such as Quant Insight ) provide the tools for constructing and adjusting such portfolios. But first, one must define the problem…


Self-medication refers to any course of treatment that is not prescribed by a recognised medical practitioner. Buying non-prescription medicines from a pharmacy or supermarket constitutes self-medication. We all self-medicate. Indeed our self-medication goes well beyond over-the-counter drugs peddled by Big Pharma. It goes beyond herbal or homeopathic remedies. It is endemic to all cultures.

Alcohol is a form of self-medication. Like most self-medication it treats the symptoms. The underlying problem remains and may even be exacerbated. Alcohol is a legal drug. Many illegal substances constitute self-medication. When viewed as self-medication then the whole approach to such substances seems quite ridiculous. Why are some forms of self-medication criminalised? All treat symptoms and addictiveness is not limited to the illegal forms. Addictiveness is less about the relief given by imbibing than about avoiding the pain of withdrawal. This pain is in part connected to the chemical consequences of the self-medication but also the result of the fact that the underlying condition is not treated, only the symptoms. This is true of many prescribed drugs also. The US has an opiate addiction epidemic and it arises out of legally prescribed opiates for pain relief. Similar problems exist with antidepressants.

The only material difference between self-medication with legal drugs and illegal drugs is the amount of knowledge we have about the legal ones and quality control. Big Pharma sells lots of over the counter medicine. They have been researched and comes with clear usage guidelines. The contents are known and pure. The drugs are not safe in all doses. Supermarkets have clear limits on how many pain killers they will sell at any one time. Illegal drugs are poorly researched and come with no authoritative health or usage guidelines. The quality control is non-existent and the content is often unclear. Adulteration is common. Dose size is unclear. There is no packet with a list of possible side effects. The only known consequences is that self-medication with illegal drugs could land you in prison.

Presenting illegal substance consumption as self-medication, analogous to cough medicine, may seem odd but it is not illogical. That it seems odd is a consequence of the generic disregard for mental health issues. Antidepressants and alcohol alter the state of consciousness. So do illegal substances. One can infer that the purpose of imbibing any is to alter one’s state of consciousness. The desire to actively alter one’s state of consciousness implies one is unhappy with the non-medicated state of consciousness. There is potentially an underlying mental health issue. Our society criminalises mentally ill people who resort to illegal substances for self-medication.

The source of this anomaly is that our society does not understand mental health and does not prioritize its treatment. Indeed large sections of the population regard mental ill-health in very simplistic terms. Either you are ‘mad’ (and should be sectioned) or you are conning people. The idea that people might have mental infirmities, just as they might have physical infirmities, that can be treated and enable them to lead ‘normal’ lives (whatever this might mean) is only now gaining traction. It may eventually lead to a better drug policy as well.

Not all mental health therapies involve substances of course. We also have the talking therapies or counselling. These come in many shapes and sizes depending on the particular line of psychology to which the therapist subscribes. Cognitive Behavioural Therapy is very popular but this might be because it is cheap rather than effective. Generally, talking therapies are expensive and the inclination to self-medicate naturally very strong. But how do you self-medicate a talking therapy? You could try talking to your friends and family but this is quite dangerous. So many turn to religion.

Religion has been the self-medication talking therapy since religion was invented. Indeed, maybe this is why it was invented. When Marx famously described religion as the opiate of the masses he was closer to the mark than many understood. Religion is to mental health what opium is to pain relief. It offers effective relief, it is addictive, and it does nothing to help the underlying condition. It can take over your life and ultimately it can kill you. Nevertheless, religion, like opiates, can be a useful medicine, which is why someone as non-spiritual as I am is so tolerant of religion. However, as with opiates it needs to be controlled and dished out in safe doses and not allowed to overwhelm the patient’s life.

The confessional serves many of the functions of a talking therapy as well as observing the same confidentiality ( I assume, as a I have never been to a confession). The Church provides a naturally supportive community, a sense of discipline, and purpose. Prayer can generate hope and help overcome a sense of fear and hopelessness. If one has an urge to talk to someone in one’s head there are plenty of candidates. In the Christian church the concept of forgiveness can help people ‘move on’. Jesus Christ, it seems to me, was an outstanding group therapist, and if it helps you think of him as a the son of God that was resurrected from death, why not? I am all for religion as a personal form of self-medication. However, I draw the line at pushing this particular form of self-medication much as I draw the line at drug pushers.

Drug pushers engage in aggressive marketing. They get people hooked and once hooked they have a ready market. There is no quality control and no after sales service. There are no side effect warnings. Of course many legal substances are aggressively marketed as well, notably alcohol, gambling, sugar products etc. These are materially no different to drug pushing. But the biggest danger of all is in pushing religion. Telling people your way is the only way and damnation or salvation is the binary choice you must make. It is the pious self-righteous religion pushers, that impose arbitrary and anachronistic values on society, that are the real villains.

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