Archive for December, 2018

More Brexit planning assumptions

December 21, 2018
gauke

Man looks at unicorn and remains unconvinced

We have been asked for some further planning assumptions to go with the original set.  These are given below.

Asset prices

The optimistic assumption would be that Brexit does not happen or happens in a way that is not harmful so some of the correction is recovered from what had been priced in on that account.  So say a loss of 10%.  And the middle option would be 20%.

Investment performance

The most optimistic figure that has been canvassed is 3.5%, but this is surely too optimistic in the circumstances.  Say 3%, with a middle figure of 2%.

Cash

The question here is really what the difference between inflation and interest rates will be.  The BoE forecasts suggest a real interest rate of around -2%, as at present.  To be more scientific, real interest rates are currently something like -1.75% (0.75% Bank Rate – 2.5% inflation).  The BoE forecasts tend to imply a real interest rate of about -2%, but it would depend on how the rate was adjusted to counter inflation.  Say -2.5%/-2%/-1.5% for pessimistic/middle/optimistic.

As for inflation itself, the optimistic forecast would be that MPC manages to hold inflation to say 2.5% over the period, giving overall inflation of 13%.  So we take 22% as the middle point.

CS Pension

There seems to be no room for variation here.

State Pension

If one assumes 2.5 % inflation then the only room for growth even under the ‘triple lock’ would be if earnings rose faster than inflation.  The latest ONS figures show essentially no real growth in earnings over the period from 2005 (!), so one cannot expect any real increase there either.

Tax rates and allowances

Hard to see any room for giveaways here!

> 60 concessions

Too make things easy for ourselves, we assume that in the optimistic case these survive for the next 5 years, while in the middle case half of them do.

plantable21

Table of assumptions (unless otherwise stated in real terms and for period 2019-20 to 2024-25)

Discussion

The pessimistic scenario reflects a coherent view of unmediated Brexit plus asset price correction while the optimistic scenario also reflects a coherent (but unlikely) outcome where Brexit is rendered harmless.  It is hard to give such a definite interpretation to the middle scenario and as such it should be treated with caution.

The treatment of tax and pension changes  as proxied by >60 concessions is very likely insufficient–at the very least, one could consider allowances as being constant in nominal terms, thus reducing in real terms.

The present treatment also implicitly assumes that things remain as they are for the remainder of 2018-19, which is certainly open to challenge.

Planning assumptions for Brexit and after

December 17, 2018

plantable1

Having grown tired of insomnia, our client has now fled the Civil Service and hopes to avoid starvation by a combination of his investments in bonds and equities, a Civil Service Pension (soon) and a State Pension (not so soon).

He writes:

Meanwhile, I need to make some concrete plans without knowing exactly what is going to happen around Brexit and indeed asset price correction generally. I would like some planning assumptions–the idea is to give a solid basis for planning on the basis that things should not realistically be worse than this.

Our advice is as set out above.  We draw on on the Bank of England forecasts.  These have been criticised on the grounds that:

i)  they take no account of any policy response;

ii)  they are phenomenological, based on observed correlations more than causal modelling.

The point about a policy response is that it can spread the effect out to different times or different people but cannot in general create value from nothing.  So this is really a question of distributional effects–who gets how much of the pain and when–rather than the quantum.

As for correlations, there are times when you need to produce numbers and don’t have time to model the economic universe in detail.  The effect size claimed is similar to that of the credit crunch of 2007/08, which is the nearest–if hardly most similar–comparator.

In summary, our advice would be to look not so much towards the destruction of value (something between significant and staggering) to be expected over the next year but at the effect changed circumstances might have on the revaluation of pensions.

Taking a rather more short-term view focused on the immediate future, our client says:

Applying this set of assumptions to my circumstances, I come to the conclusion that I would lose money that I can afford to lose, which is irritating but no worse than that.

There’s nothing like a satisfied client!  But we can hardly say we have always been in the Brexit loop.  On our first encounter, we took three days to work out what it was, and a further two to decide it could hardly happen.

This analysis has now been extended here.

Recommending a dictionary

December 14, 2018

dictionary

We were asked by a Russian contact to recommend an English dictionary. I think I would plump for the Concise OED.

Naturally enough, both dictionaries of American English and dictionaries for learners of English are beyond my ken.  A very long time ago (probably before I left school) I got myself a Concise OED.  When I had worn that out I got a copy of the Chambers dictionary (in 1989) on the grounds that it had more words.  The corresponding Wikipedia article has a different opinion, but as they say it depends on how you count entries.

Anyway the single-volume candidates that a native (but non-specialist) English speaker would use seem to be the Concise OED and the offerings from Collins and Chambers.

I had a look at what was available in the shops today.  As for new words, the Concise OED had entries for hashtag and flashmob (as flash mob) while the Collins Reference dictionary didn’t (although it was published later).  It also had something useful to say about the stressing of controversy, while the  Collins Reference didn’t do pronunciation at all.  The large Collins was covered in cellophane while there was no sign of the Chambers.

Back home, I was able to compare some bits of the large Collins and the COED on Amazon.  The Collins annoyed me by including encyclopedia-style entries, which I don’t like, while for  the terms aorist and accusative the Collins tended to flap around giving examples while the COED gave concise, pointed definitions.

While I can’t judge how up-to-date the Chambers is on the basis of my 1989 copy, the definitions of aorist and accusative there are a lot better than the ones in Collins if not quite as good as the Oxford ones.

In general terms, I think that the Oxford dictionaries:

i)   have the most systematic infrastructure for capturing new words and usage;

ii)  have the best definitions and etymologies. (In fact I think that in many cases they have the natural definition since they were there first and other dictionaries have to work round it for reasons of copyright or at least embarrassment);

iii)  are taken as the default in libraries and schools.

So in general you would take the suitable size Oxford dictionary as your default and look to something else only if you had particular needs.  The Concise OED also happens to be cheaper than the other candidates.

Turning now to the Internet, if you’ve got a word that refers to something reasonably definite and you’re dealing with widely-used languages (like English and Russian), your best bet is often to turn to Wikipedia where you can see a picture/chemical formula/mathematical definition/Linnean binominal and compare what the corresponding articles say in the two languages.

Nowadays, if I find that I don’t know an English word it tends to be something I can either look up on Wikipedia or find in the Urban Dictionary.  And there are also resources like OneLook that will search the free online versions of numerous dictionaries for you.