Firstly let me just benchmark inflation. The retail prices index – RPI, which is represented by the olive line, is current year on year running at 3.7% and since 1991 the arithmetic average of the monthly year on year percentages has been 3.5%. Of interest also is that the inflation trendline is heading in a downwards direction.
Winner – Homeowners (red line on chart)
Since 1991 the arithmetic average of the monthly year on year house price increases according to the Nationwide dataset has been 5.9%. However looking at the current year on year figure we are at 9.2% which is some 5.7% above RPI! The government and Bank of England have managed to achieve all of this during one of the worst economic periods in history. Some achievement. Look however at the trendline compared to inflation. I could understand increases above inflation in a couple of scenarios:
- Banks accepted more two person mortgages rather than one. This is not good news for the family but unfortunately the reality more and more today.
- Earnings were increasing at a rate well above inflation consistently. Unfortunately as I’ll show in a minute this is not the case so doesn’t seem a reasonable explanation.
- Easy lending and monetary policy has allowed a bubble or at least froth to form on the housing market. This I certainly agree with and show over and over again throughout my blog.
Loser – Workers (blue line on chart)
So while it’s all exciting out there with asset price inflation (house price increases) through policy unfortunately I can’t see how any of this is helping the economy long term. Unfortunately however, those that do go out to work for a living are being punished by the government and Bank of England even though they are the people who are adding value long term.
Since 1991 the arithmetic average of the monthly year on year earnings increases according to the Office for National Statistics dataset LNMM has been 4.1%. However looking at the current year on year figure we are at 1.2% which is some 1.3% below RPI! It must be a great comfort [sic] to know that when you go out to work today what you earn has less spending power than you did yesterday. In effect a pay cut.
The government and Bank of England must be proud of their achievements.
As always DYOR.
Glad to see you posting on hpc again, as I have read your blog before, found it very interesting but failed to bookmark it, now remedied. Inspired by your blog i've been looking at building my own ISA fund, using Mebane Faber's system of rotation and 10month moving averages. I've detailed the plan over on the financial/investment section of hpc, with a link to my google spreadsheet with backtest data. I wonder if you could take a look and see what you think as I'd value your opinions.
ReplyDeleteHi djia
ReplyDeleteThanks for the comment.
It's funny however that you mention Mebane Faber. Warren Buffet once said something like "1. Don't lose money. 2.Don't forget rule number one.". I don't have the exact quote to hand but it's been bugging me. This seems so obvious but I've been looking for methods that might give exit points to at least avoid the big drops in the market. If you can avoid just one of those over an investing life your average yearly increase would be I'm guessing greatly improved.
During this search I came across a paper by Mebane Faber called "A Quantitative Approach to Tactical Asset Allocation" which uses 10 month moving averages as timing indicators. This sounds similar to what your talking about. I've only just started working on it so can't really comment but once I've understood fully and if I calculate that I could combine it with my current strategy then I'll be sure to post about it here.