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A few interesting economic facts

It's Friday after all...

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UK Government debt now GBP£2trn (>100% GDP) https://www.bbc.co.uk/news/business-53859299

Apple now worth USD$2tn https://www.dailymail.co.uk/news/article-8643751/Apple-company-worth-2-t...

UK house prices at record highs https://moneyweek.com/investments/property/house-prices/601803/uk-house-...

Unemployment soaring at record rates (or will do when Government support ceases in October) https://www.bbc.co.uk/news/uk-england-53819623

Gold and Nasdaq also at record highs recently.

Low interest rates and money printing are of course the main reasons for most these facts, but I cannot believe there won't be a big property market crash within the next 2-3 years (which itself would lead to a recession if big enough). Something has to end the asset bubble party sooner or later (possibly the mother of all crashes if the bubble continues to inflate at its current rate).

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By thomas34
21st Aug 2020 10:17

Not quite correct.

Low interest rates probably account for two of the five facts. Money printing has little connection to any of the five facts.

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Replying to thomas34:
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By Justin Bryant
21st Aug 2020 11:04

Last time I checked basic economics 1.0, money printing (i.e. credit creation from government borrowing mainly) is (all else being equal) inflationary (due to basic supply & demand principles). This is why USD$ is currently weak, as the Fed is basically the world's biggest money printing machine right now.

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Replying to Justin Bryant:
Hallerud at Easter
By DJKL
21st Aug 2020 14:15

What happens if everyone does it is the big question?

The reason it we may need to increase interest rates is because one needs higher interest rates to prise savings from other economies to then get deposited here when our currency is weak, but if we all are printing so much that in relative terms we all then stand still, what then?

Economics 1.0 may indicate what you say but you may have forgotten the ceteris paribus part, all other things are certainly, currently, not equal (Except that most Western economies are possibly equally printing fast)

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Replying to thomas34:
RLI
By lionofludesch
21st Aug 2020 11:25

thomas34 wrote:

Not quite correct.

Low interest rates probably account for two of the five facts. Money printing has little connection to any of the five facts.

The use of money has taken a dive during the current pandemic.

Just ask Birds Bakery.

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Replying to lionofludesch:
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By Justin Bryant
21st Aug 2020 11:27

But over 90% of world money = electronic bank account deposits (not physical paper money/coins).

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Replying to Justin Bryant:
Hallerud at Easter
By DJKL
21st Aug 2020 12:44

Just blame the Italians and their Fiats.

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By AWeb72
21st Aug 2020 10:27

Easy for Apple to make money when they use slave labour to make overpriced products. Emperors New Clothes fable springs to mind.

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Replying to AWeb72:
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By John Isabel
21st Aug 2020 14:08

Could equally apply to Xero (or anyone using GoProposal)

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By Thomas654654
21st Aug 2020 10:40

MMT here we come

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Red Leader
By Red Leader
21st Aug 2020 10:44

Has this affected where you invest your long-term money? Interested to hear.

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Replying to Red Leader:
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By Justin Bryant
21st Aug 2020 11:09

As my granny said, they are not making any more land and so it invariably goes up long term (due to inflation or whatever). There is a roughly 18 year boom-bust cycle, so you can usually avoid investing before a crash if you're sensible.

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Replying to Justin Bryant:
David Winch
By David Winch
21st Aug 2020 11:08

I seem to remember a while back someone was selling building plots on the moon!

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Replying to davidwinch:
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By Justin Bryant
21st Aug 2020 11:13

Subject to it being legally effective (which I doubt), that would probably be a sensible very long term investment in my view (e.g. if you wanted to set up a wealthy charitable foundation after your death).

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Replying to Justin Bryant:
Red Leader
By Red Leader
21st Aug 2020 11:13

Except commercial retail.

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Replying to Red Leader:
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By Justin Bryant
21st Aug 2020 11:15

Agreed. I would never touch that. Some muppet investors piled into UK shopping malls a few years back and all my clued-up property clients said they were mad and they have been proved right of course.

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Replying to Red Leader:
Hallerud at Easter
By DJKL
21st Aug 2020 12:07

Do not ignore leisure , it is also going to suffer as is, to a degree, the office sector.

Growth likely in small studios/workspaces/workshops (as redundancies etc increase more people likely to set up working for themselves) and logistics/distribution warehouses both large out of town ones as hubs and in town smaller ones as local distribution centres - both ought to be in demand.

I have been telling our banks for over twenty years that having a broad swathe of small commercial tenants, in smaller size units,as we have, is safer than having large institutional tenants. Whilst we have since March had a few voids appear we have also filled most of them with new tenants- maybe the Chartered Surveyors ought to reconsider how they value tertiary investment properties and reduce required yields re their investment valuations, we carry a fair few in our accounts that, per their Red Book valuations, get valued at 10-12% yields- it has always been madness, a well managed broad tertiary city portfolio is safer than a shopping centre, imho

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Replying to Justin Bryant:
RLI
By lionofludesch
21st Aug 2020 11:28

There's a plot of land available in Dounreay.

Bit of a long term investment, though. You can't use it until 2333.

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Replying to Justin Bryant:
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By Clinton Lee
21st Aug 2020 13:09

Of course they're still making land.

Relaxing of planning permissions is effectively making land.

Don't go too much by what granny used to say.

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Replying to Clinton:
RLI
By lionofludesch
21st Aug 2020 13:11

Clinton wrote:

Of course they're still making land.

There's always Surtsey.

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Hallerud at Easter
By DJKL
21st Aug 2020 11:46

So you are not buying into some of the Stagflation arguments currently being mooted?

The trouble with record highs re gold/property etc is that in the long term every price , with hindsight,tends to be merely a step to a new record high.

Whilst I agree there will be some major changes within commercial property valuation metrics, the future here is not the past as the economy accelerates its change of direction towards steering a very different course from what it was on before Covid ( the trends were already there before), I am just not that convinced there will be that much of a residential downturn- there is still a wall of money moving into UK residential, build to rent continues to grow.

As an example a reasonable size commercial site we own , capable of converting to blocks of flats, has has a few out of the blue enquiries over the last couple of years, it is always prospective build to rent schemes(well it at least makes a change from student accommodation and before that care homes)) and the financial institutions need places to park their cash as do the overseas investors .

If sterling weakens , say if no agreement in the current EU trade talks (as is starting to look a very distinct possibility), then the wall of overseas cash will be massive. A fair few Edinburgh developments already have their penthouses etc snapped up by overseas buyers before general release and I see that trend continuing.

The fact is housing is predicated on people needing a place to live, there is a shortage which is not going to change that quickly (reduced net arrivals into UK coupled with more new builds will assist but will take years), in meantime either landlords or owner occupiers will continue to buy.

When the banking system froze in 2008/2009/2010 yes prices softened, but it sorted itself with the supply of properties being marketed dropping, people just sat tight, the forced sellers got a bit burnt, the volume of transactions reduced, but by 2015 in Edinburgh we were back up to 2007 prices again (I followed this period very closely as we sold 60 flats from 2010 to 2015 due to pressure from our bank)

I personally do not like gold (except hanging from my wife), it generates no income, but I certainly do not want to be in cash right now . I still remain pretty fully invested in shares/ITs etc, the only change is I hold more now within Asian, Pacific and Chinese markets, a bit in North America, a bit more in emerging and my UK exposure is down to near 20% of the total now and my property investments are now in logistics warehouses etc rather than more traditional retail,leisure and office sectors.

The catch with economics is there are no certainties, Stagflation within some theories ought not to even exist, yet it does.

Most of my university economics and economic history has over the years departed my brain and therefore I these days tend to just steer using gut instinct, some I get right (I did very well predicting the outcome if Brexit vote was yes and positioned accordingly) some I get wrong (mistimed Covid drops and caught a falling knife) and some are neither up nor down( then partially recovered and am now only 6-7% down from pre Covid)

When most western economies are spending what they do not have, and there is no certainty they will try to revert to a balanced position re their deficits, probably most economic theory departs- its relevance depends upon governments reacting to market pressures, borrow too much we punish you etc, but if everyone borrows too much what then, how does say a currency devalue when its neighbours are as errant as it is?

In my, very humble opinion, we are heading into uncharted territory, there be dragons ,but what sort nobody really knows, so in absence of better information I run with:

Where in the world has the most abundance of the factors of production , I believe this is the Pacific so I invest in that region (albeit be careful as legal rights can get a tad flexible)

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Replying to DJKL:
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By Justin Bryant
21st Aug 2020 12:03

No-one can predict the future. Period. All you can do is make sensible bets based on sound long-term economic judgement (that's basically all Warren Buffet does).

Currently central bank policy (low interest rates & money printing) is creating a modern day version of feudalism between the haves & have nots re inflated asset (mainly property) prices (e.g. how long does a graduate have to work to buy a house from average after tax earnings and expenses - a long time). All I'm saying is that that is not sustainable and a (possibly very big) crash is inevitable (at some unknown future time).

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Replying to Justin Bryant:
RLI
By lionofludesch
21st Aug 2020 12:02

Justin Bryant wrote:
All I'm saying is that that is not sustainable and a (possibly very big) crash is inevitable.

Ach - it'll be grand.

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Replying to Justin Bryant:
Hallerud at Easter
By DJKL
21st Aug 2020 12:18

Not so, my daughter's boyfriend has just purchased an Edinburgh flat, he is circa 28-29, he has purchased it in his sole name just based on his earnings (Scot Gov Employee), she is not a party to the mortgage. (She is actually working down in England , likely for at least the next 18 months)

My son who will be 29 this year graduated about six years ago, earns a decent amount as a contractor (software developer) and I suspect is only about a couple of years away from being able to buy an Edinburgh flat outright, without even a mortgage ,if he so wanted (He does not, he is trying to get married- wedding now delayed- and is then moving to New York)

The lack of affordability meme needs tempered region by region, city by city, the one thing about property is it is markets not a market.

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Replying to DJKL:
Red Leader
By Red Leader
21st Aug 2020 12:20

OT: we were in Kelso recently! Up from the big smoke for some fresh air both sides of the border.

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Replying to Red Leader:
RLI
By lionofludesch
21st Aug 2020 12:23

Red Leader wrote:

OT: we were in Kelso recently! Up from the big smoke for some fresh air both sides of the border.

Did you see Bonnie Prince Charlie's horseshoe ?

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Replying to Red Leader:
Hallerud at Easter
By DJKL
21st Aug 2020 12:49

The Borders are God's country (I am biased as I was born in Peebles)

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Replying to DJKL:
RLI
By lionofludesch
21st Aug 2020 12:53

DJKL wrote:

The Borders are God's country (I am biased as I was born in Peebles)

Love Peebles. I've done the walk up the railway line past Neidpath Castle and up to Lyne and back a few times. Lovely view up the river from the railway bridge.

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Replying to lionofludesch:
Hallerud at Easter
By DJKL
21st Aug 2020 13:13

We lived up the Lyne Water at West Linton until I was five. I do pop back there every so often to the one restaurant, the one remaining hotel (there were three) or to the cafe on the Green ,but these days even the bookshop has shut (the property was available to buy on Rightmove) notwithstanding West Linton now seems to have twice the number of houses it did when we lived there.

My last trip to Peebles was last year, it was a bit of a cheat as it was a day trip down to the Hydro which was looking a bit on the shabby side (afternoon tea).

Peebles is top of where , as a compromise,I would retire. If may work and be allowed by "She Who Must Be Obeyed" as it has the compromise of rural (me) , some local shopping (her) and not that long to visit Edinburgh (her).

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Replying to DJKL:
RLI
By lionofludesch
21st Aug 2020 13:27

DJKL wrote:

My last trip to Peebles was last year, it was a bit of a cheat as it was a day trip down to the Hydro which was looking a bit on the shabby side (afternoon tea).

The Scottish RL team stayed at the Hydro when they played at Gala. Only decent sized hotel in the area, so they claimed. Away teams were housed in Edinburgh, forty miles away.

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Replying to lionofludesch:
Hallerud at Easter
By DJKL
21st Aug 2020 13:48

Could be right, from memory there are not that many really large hotels.

Cringletie I believe is pleasant , I think I recall my wife having afternoon tea there but I was not with her, but no idea how many rooms it has. There is also The Macdonald Hotel at Cardrona, but hard to think of too many more.

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Replying to DJKL:
RLI
By lionofludesch
21st Aug 2020 13:52

DJKL wrote:

Could be right, from memory there are not that many really large hotels.

Cringletie I believe is pleasant , I think I recall my wife having afternoon tea there but I was not with her, but no idea how many rooms it has. There is also The Macdonald Hotel at Cardrona, but hard to think of too many more.

I couldn't think of any either.

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Replying to Justin Bryant:
Hallerud at Easter
By DJKL
21st Aug 2020 12:28

Justin

What is a big crash, what percentage is that?

Frankly if 2008, with the lending taps turned off, merely stunned the property markets, dropped them a bit for a few years, I just cannot see your big crash, frankly given Edinburgh's offers over system ranges up and down anyway by 10-15% ,depending on the market out there ,you need well over 25% imho to constitute any form of crash worth talking about.

A few facts, my first house purchase was 1985 for £14,500, my next was 1989 for £50,000 my last was 1997 for £105,000 and if I can ever be bothered to move my next will likely be in the £600,000 bracket, longer term there is only one direction.

My colleague at work a few years ago sold his father's house, it was purchased in 1959 for £2,500, it sold for > £500,000, there had been shocks to the economy right through that ownership and the general direction of travel has always been up.

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Replying to DJKL:
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By Justin Bryant
21st Aug 2020 12:45

No-one knows. Crashes are the inevitable consequence of unalterable human nature (greed & fear + stupidity of course). Some are bigger than others and once a century or so you get jolly big proper ones. I would not be surprised if the next (proper) crash is particularly big and not too far off for the above reasons (lots of assets/debts at record highs and still motoring ahead despite all the likely high unemployment etc.).

Ask yourself, is it more likely your house will double or halve in value in the next 2-3 years?

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Replying to Justin Bryant:
Hallerud at Easter
By DJKL
21st Aug 2020 12:58

Both have zero chance imho.

The trouble about drama scenarios is often they do not happen, you often just get a bit of a drop, a bit of stagnation, a bit of wage inflation and then the march starts again. (The balloon with a small hole model)

Whilst nobody know everything I do work for a couple of people who started their property business in the 1970s, they have been plodding along ever since, we buy and keep, buy and flip, buy and get planning then sell, buy, get planning, build, all variants- we are not the biggest small operator in Edinburgh but we are not the smallest, we have obtained planning for hundreds of flats since I started in the 1990s, and in all that period, from the 1970s until now, someone has said this/that bubble would crash re property and in all that time they have largely been wrong, we get tremors, dips but the upward march is relentless.

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Replying to DJKL:
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By Justin Bryant
21st Aug 2020 13:02

That was not the question. I asked which was more likely (all else being equal)?

For example, if inflation goes to 5-10% and interest rates stay at 1-2% no-one will invest in banks. They would all crash. So I think inflation will be what causes the next big crash (as interest rates would have to rise to stop banks crashing and that would cause assets prices to collapse etc.), but that is just my guess and no-one knows.

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Replying to Justin Bryant:
Hallerud at Easter
By DJKL
21st Aug 2020 13:18

They are as likely as one another as neither will happen, both have, imho, zero probability- change your percentages and I will change my answer.

Remember, supply and demand, with any dramatic fall in prices supply will reduce to a trickle which will then underpin prices, housing, like food is not discretionary , one either buys it (as owner or tenant) or one lives in a cardboard box.

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Replying to DJKL:
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By Justin Bryant
21st Aug 2020 13:37

I can assure you there is no such thing as zero probability for something that is physically possible. Read up on quantum mechanics for some really improbable but possible events.

If inflation does not go to 5-10% before too long then gold is vastly over priced and so something will crash heavily sooner or later.

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Replying to Justin Bryant:
Hallerud at Easter
By DJKL
21st Aug 2020 13:52

There is if there is a regulator that snuffs out supply, that regulator is human behaviour.

Your percentage drop is too much for the house owning public to stomach so you will accordingly cease to have a functioning market well before you reach that sort of level of price drop, nobody, bar forced sellers, will sell.

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Replying to Justin Bryant:
Hallerud at Easter
By DJKL
21st Aug 2020 14:02

Gold may well be- it has limited function whereas housing fulfills a basic need.

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Replying to DJKL:
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By johnhemming
22nd Aug 2020 08:04

The property uncertainty I see is that of demand with a reduction in overseas students (which with Brexit and the disputes with China many not be just one year) and potential a Brexit linked reduction in adult household demand. Otherwise bank forecasts tend to be in the realm of 10%.

One economic problem is that if the turnover goes down then the demand for turnover related goods (new bathrooms etc) also goes down. Hence I think the Stamp duty holiday is a good idea.

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Replying to Justin Bryant:
Hallerud at Easter
By DJKL
21st Aug 2020 13:59

Do you more mean deposits in bank rather than more investment in banks?

Where does this money go if withdrawn from deposit?

What is your inflation driver, prices or wages or both? Do you really expect 10%, if so why?

My memory re the different inflation drivers are a tad ropey , 1982, when I last studied economics, is a long time ago now and all we learned was based upon the then recent 1970s Oil Price Shock and then the rampaging asset price inflation of the 70s and into the 80s with an under invested post WW2 economy- we were even, back then, still studying Bretton Woods etc, but life has moved on. IMHO you cannot just assume high inflation, what is driving it within your forecast model?

I do expect some inflation, I think a no deal exit from the EU could in part cause some of it, but that may well be more a one off shock (Tariffs hit) rather than a year after year upward sustained push, I can see wage demands pushing it but how does that work with high unemployment, are we back to considering our Phillips curve here?

As I said earlier, the drama shocks are rare, economies and their finances are much more evolved than say the 1920s/1930s, they are even evolved since the 1970s, my money is more on disruption, discomfort, managed chaos rather than crash.

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Replying to DJKL:
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By Justin Bryant
21st Aug 2020 14:19

Modern fiat money is nothing more than electrons in bank accounts and is created by credit (loans) and destroyed by loan repayments. Politicians like to borrow for obvious reasons and central banks are happy to indulge them, hence the current situation (the music will have to stop at some point of course).

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Replying to Justin Bryant:
Hallerud at Easter
By DJKL
21st Aug 2020 14:43

Bit like driving a Fiat . (Though my wife's is nearly eleven years old and still soldiers on)

Perhaps instead of the Sex Pistols they put out a few slow waltzes for a few years, so the music does not so much stop as merely changes its tempo.

Justin, I do not disagree with your arguments re liquidity creation in Western economies, but where we differ is you seem to see a Big Crunch whereas I am not convinced one is needed.

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Replying to DJKL:
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By Justin Bryant
21st Aug 2020 15:30

And then there is this to look forward to also: https://www.bbc.co.uk/news/uk-politics-53854730

Here is short summary effect just on lawyers whether a deal or not: https://www.lawsociety.org.uk/topics/brexit/preparing-for-the-end-of-the...

Although no one can predict the future, I would be very surprised indeed if the economic picture is better in 4-5 months than it is now.

http://www.eureferendum.com/Default.aspx

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Replying to Justin Bryant:
Hallerud at Easter
By DJKL
21st Aug 2020 15:04

I know, I read Richard North's post every day with my first tea/coffee at my desk, it does not look good (then again it never did- the whole idea was daft day one and the execution by the current lot is making it even worse)

http://eureferendum.com/blogview.aspx?blogno=87706

Edit- you think lawyers have it tough, I still help out my Brother in Law with his business, he is connected with the pharma industry with circa 80% of his clients elsewhere in the world and most with HQs in Europe- he has already created a permanent establishment in Malta and talked to the authorities there to see if that may, and I say may, give him a gateway to operating in the EU after 31 December, but if his qualifications cease to be recognised (which now looks likely) and he cannot sort anything then likely that will be it, the clients will walk to an EU supplier of similar services as his business is a regulated activity.

Even UK lorry drivers may not readily be permitted to drive in the EU, we may have them unhitching at Dover or Calais instead.

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Replying to DJKL:
Red Leader
By Red Leader
21st Aug 2020 12:18

Gold as an investment has always completely puzzled me. I realise that empirically it does seem to serve a purpose in some portfolios, but still. It does seem like it needs collective agreement to believe in it, more so than most investments.

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Replying to Red Leader:
Hallerud at Easter
By DJKL
21st Aug 2020 13:55

Apparently it actually physically can be lost, handling the bars can rub away a fraction (bit like whisky and the Angels Share)- I just dislike its lack of earnings. I tend to buy investments with a yield though I do make exceptions accepting very low yields or no yield (Scottish Mortgage/Fidelity China/Berkshire etc)

Still gold is better than the leafs in the HHGTTG

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Replying to DJKL:
Red Leader
By Red Leader
21st Aug 2020 13:51

SMT and Fundsmith have propped up my portfolio's performance recently.

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Replying to Red Leader:
Hallerud at Easter
By DJKL
21st Aug 2020 13:59

SMT has been something else, I know someone who in percentage terms is very heavily invested in them but I am not that brave. I think they are at something like 6-7% of my pension and whilst I may slowly use dividends/contributions to buy some more I doubt I would ever let any single holding get over 10% of the total.

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Replying to Red Leader:
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By johnhemming
22nd Aug 2020 08:01

Buffett went for a miner. That does have earnings.

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