Good morning everyone,
And here we are on the last The Week That Was of 2017. Following the half-year round-up last week, this week, I’ll be covering July through to December of this year.
The move to 68 as the age you can draw down your state pension moves from 2044 to 2037. This wasn’t big news in itself, but it will affect 6m men and women currently aged between 39 and 47. And it reminded me of a view I’ve long held: that, being 27 now, I will never receive a state pension.
I’m going to borrow from a BBC article which sums up why well: on the 1st January 1909, over half a million means-tested over-70s queued up to receive an old age pension. They got five shillings – about £20 in today’s money. Today, almost 13m men and women over 65 and 64 respectively receive the state pension – in full, around £160 a week (£8,300 a year). Almost 2m people in the UK survive only on that money.
The state pension costs £100bn a year, but those costs are rising. They’ll double to £200bn by the mid-2030s, and then double again to £400bn in the 2050s, according to the Office for National Statistics. On top of that, over the last 70 years, life expectancy has increased by 17 years.
The state will have to get a lot smaller (ie provide fewer public services) in order to be able to offer all citizens any kind of payout – or we can look forward to a tax regime that makes the 1970s look like fun.
Staff at the Bank of England issued a warning about car finance. Again, this sounds fairly pedestrian, but the rise of “personal contract purchase agreements” used to buy cars has contributed to sky-high consumer debt. In 2014, consumer debt was running at 4 percent. In 2016, it hit 12 percent. An October survey from Comparethemarket found that the average Brit is £8,000 in debt – and that’s not including mortgages.
In September, the Bank issued another warning saying that banks would accumulate £30bn of losses on personal loans, credit card lending and car finance if unemployment rose sharply. That’s not where we are at the moment (it hit 42-year lows this year), but wage growth (or lack thereof) is something to keep an eye on.
If people are spending and borrowing and not saving, and inflation is coupled with stagnant wages, they may not be able to keep up with repayments. Money then starts sliding out of the fractional-reserve banking system, which is what prompts deflation, then recession.
If you’re after some good Christmas listening, I’d love to recommend David Graeber’s Promises, Promises: A History of Debt, which courses through Assyrian debt resets to the fallout of giving people money on plastic cards. It’ll change the way you think about debt, and money.
Catalonia kicked off. September was the month of protests and on the 6th September the independence referendum (which was held on the 1st October) was declared illegal. Out of a 43 percent turnout, 92 percent voted in favour of forming a republic, independent of the Spanish state.
I think we should expect more events like this, dogging the already embattled EU. Yet breakaway demands from rich regions – think Tuscany, Bavaria – can’t become commonplace as far as the European project is concerned.
In the meantime, shock events can offer opportunities for investors. With the Catalan dispute, for example, European bond markets reacted with a widening of the spread between the yields on Spanish and German 10-year sovereign obligations.
2018 will be another year where geopolitics feature more heavily in the minds of investors, and it’s the smaller things that are worth keeping an eye on. It is not outside the realms of possibility that the EU will suffer an existential crisis on the back of something we can’t quite anticipate. The Spanish government has said it’s willing to discuss greater fiscal autonomy for Catalonia, the German elections demonstrated a move towards separateness and borders – at a time when the leaders of Europe are looking for closer union and debt mutualisation. Oh, and the Italian banks are still far from sorted. There’s a good piece about that here.
We got a better idea of the size of the impending tsunami that is techbanking. Back in January of this year, Accenture published a survey that was only quietly reported: one in three banking and insurance customers globally would consider switching their bank account to Google, Amazon or Facebook, if those firms offered financial services. In Brazil, half of people said they would; in Italy it was 42 percent; in Indonesia 47 percent. It’s not the fintech startups that pose the existential threat – it’s the tech leviathans.
In October, a McKinsey survey corroborated this. It found that 73 percent of US millennials (who can’t be too different from our own) would be more excited about a new financial service rolled out by Amazon, Google, Square or Paypal than from their own bank. One in three, incidentally, reckon they don’t need a bank at all.
This will be a huge shift over the next five years. Challengers face an enormous task: acquiring customers. How many of us already use one, if not all, of the above? Apple’s iOS11 started enabling people to send money to other iMessage users. It’s not a new technology, but in countries like Britain where Square and Venmo haven’t really taken off, the addressable market is vast. Facebook is integrating person-to-person PayPal accounts into its messenger app. And Amazon is already lending to tens of thousands of SMEs across the globe – how long before that isn’t just a merchant offering? Alibaba has already done it in China: it’s also an asset manager, lender and payments firm.
Banking’s success has been down to keeping customers through walled garden service provision. Watch while the tech giants do the same.
A troll farm reminded us that robots are getting good at some things. Last month, researchers at Edinburgh University found that more than 400 Twitters accounts operating out of the Russian Internet Research Agency tried to influence UK politics in the run-up to the 2016 referendum. Or, to borrow the Guardian’s excellent wording: “a St Petersburg troll farm tried to sow discord between Britons”.
An Indiana University study of more than 14m tweets spreading 400 disputed claims found that social bots play “a key role” in the spreading of fake news: “Successful sources of false and biased claims are heavily supported by social bots.” These bots are effective because they are very active at the early stages of a viral claim being spread. Then they target individual users via replies and mentions, rather than writing broader posts or retweeting. The reason this is so effective is that it pushes the claim into a close-knit human network. Bots also change their location to fool human users.
And the human actors are the issue here. The study goes on: “Humans are vulnerable to this manipulation, retweeting bots who post false news.” As with biases built into machines and then strengthened by human reiteration, it is we who unwittingly perpetuate made up pieces of news.
The academics behind the study suggest two ways forward: platforms curbing social bots, or using CAPTCHA technology to prove humanness. The issue with the former is how we’ll all react to having accounts suspended in the face of a false-positive error. With the latter, it is again clunky for the human user – but at least you won’t feel censored.
Everyone is talking about bitcoin. I wrote a couple of weeks ago on cryptocurrencies and bubbles. Bitcoin’s value has this month topped $17,000 per coin. And you can now trade bitcoin futures on Chicago’s CBOE exchange.
Hard luck, then, on the Welsh bloke who says he’s mislaid $75m (£56m) of Bitcoin in a landfill site.
All this has given the cryptocurrency’s financial-system-toppling philosophy a patina of legitimacy, but there are still some question marks hanging over bitcoin, viz whether there’s anything concrete propping up its current valuation, and if it could ever match the liquidity and stability that traditional stores of value offer.
Anecdotes they may be, but it’s telling that the world’s largest ever bitcoin exchange (until it went into liquidation in 2014), Mt. Gox, was a way for Magic: The Gathering players to trade their cards like stocks, and that the Ethereum blockchain was recently clogged by the buying and selling of digital cats. It’s hard to believe this is the death knell of the financial behemoths that run the global economy.
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