The hosepipe ban approach to making big savings

Every year seems weird these days. Maybe it’s all down to the coming singularity.

Certainly 2022’s quadruple whammy of war, drought, inflation, and plunging equity and bond prices has provided enough contrast to please even a late-stage Picasso.

Crops wither while inflation runs wild!

Energy prices soar while portfolios plummet!

Or maybe it’s just the same story of everything running out: water, money, and investment returns.

I had feared tough times were ahead. For example I put wobbly markets and inflation on the agenda in late 2021, flagged underappreciated quantitative tightening in February, and by March urged potential retirees to check their sums ahead of what seemed a nailed-on bad roll of the sequence-of-returns dice.

And in June I – belatedly – warned of rising mortgage costs, too.

Some readers complained this blog was getting too gloomy about markets and the economy.

But if anything I was too bullish about the former, at least in the short-term.

Don’t forget the British Pound is down 15% against the dollar year-to-date before you reply that your subsequently puffed-up US-dominated global portfolio is doing very well, thank you.

Our money doesn’t buy as many US hamburgers as it so recently did – even before it’s been further withered away by inflation.

We voted to be poorer, too

I’ve also continued to remind readers that we’re still governed by the mendacious nincompoops who brought us the most delusional national vanity project since the Millennium Dome.

Every day, Brexit makes Britain poorer, more indebted, and facing higher inflation than where we’d be had it never happened.

The UK economy is an estimated 5% smaller as a result of Brexit.

Remember that’s a 5% shortfall versus the counterfactual every year.

The Treasury gets about £40bn less in revenues annually as a result. The politically neutral Office for Budgetary Responsibility continues to predict a 4% smaller GDP in the long run.

This gap means either taxes and borrowing will have to rise or services will deteriorate compared to a rational world where people didn’t pin their hopes on liars who promised nonsense on buses.

So far, so broadly predictable to all but Barry Blimp.

But please remember this when you hear talk about tough choices during the recession to come. We made things much worse than they had to be.

If you wanted Brexit for political reasons then fair enough, but spare me the financial fairy stories.

It may annoy some readers – which honestly isn’t my intention – but I will never let Brexiteers off the hook for the project’s economic consequences.

Sucker punched

So all that trumpeted, did I imagine consumer price inflation breaching 22% by early next year?

Not on your Nelly.

Obviously I also didn’t foresee a hot war on the edge of Europe with a nuclear superpower.

In fact I thought inflation would be rolling over by now.

Oops!

I’ve mostly expected this because I believed surging prices were much more a result of the on/off pandemic economy and the resultant supply chain disruptions than the Covid support packages that so many countries’ pundits are now fingering for their own state’s high price problems.

I read a lot of company earnings reports, and many of them talked about these difficulties all last year.

Of course massive fiscal support that put money directly into people’s pockets and near-zero interest rates that outstayed their welcome – along with home working proving much more productive than most people anticipated – did stoke the inflationary engine.

But it’s the wild swings in supply, demand, and the ability of economies to meet either – as well as surging gas and oil prices in 2022 – that has sent inflation ablaze.

There are lots of ways to show this, from changes in manufacturing output in various countries over the pandemic to the rise and fall of stay-at-home spending as economies shut then reopened.

But this graph of the cost of getting stuff from China to the US gives at least a taste of just one of myriad supply chain shocks to the global economic system:

Source: Global Trade

It’s not just that an importer might have had to pay ten times as much to bring in a container as they did six months previously.

It’s also the multitude of choices that spiral out from these shocks, that cascade to impact other companies’ supply chains.

A particular component of a car assembly, say, that never got delivered. Or, as I was told about last week, a shortage of cardboard due to the online shopping boom during 2020 that subsequently crimped the production of plasterboard which in turn hit housebuilders.

On. Off. On. On. Off. And so on.

No smoke without fire

Until recently – like, last week – the market seemed to agree this inflation had likely peaked. So it was relaxing its expectations for future rate rises from the systemically critical US Federal Reserve.

But Chairman Jerome Powell appears to have kicked such hopes into the long grass at the Jackson Hole pow-wow. And he administered his painful re-calibration via the groin area, to boot.

Meanwhile UK inflation forecasts seem to be rising every few days, with the latest terrifying forecast for energy bills for an average UK household hitting £7,700 a year in 2023.

Clearly this cannot hold – many people simply won’t be able to pay. But Government action to do something about it will only add more grist to the UK’s increasingly gummy economic mill.

Debt or taxes – or both – will have to rise to pay to offset at least some of the pain. And with UK government bond yields higher, financing state borrowing is getting much more expensive.

I still believe we should make the most of this energy crisis with a war-footing effort to cut energy use, insulate homes, and ramp-up investment in renewables and nuclear.

Simply subsidizing high energy bills will do nothing about any of that.

Incidentally if even this year’s extreme weather globally hasn’t been a wake-up call for you, then feel free to unsubscribe from Monevator from the comfort of your golf club’s air-conditioned Blimp pen, unless you’re (commendably) open to repeatedly hearing alternative points of view. (Also long known as the truth in this particular case.)

Environmental crisis is the biggest threat to our long-term wealth. I won’t be piping down.

Little savings vs big savings

To return to where we started, let’s conflate the water shortage we’re experiencing now with the predicted money drought to come.

We need to make big savings when it comes to both money and the wet stuff.

Yet most personal finance – including much on Monevator – is of the fix-the-leaks flavour.

For instance, you can:

Review and prune your regular outgoings.Ensure you’re getting the best interest rate on your cash.Wear a jumper inside until December and keep the heating off.Consider remortgaging to a cheaper deal.Start a low-effort side hustle.Do 101 other little things to save money.

Most of these things individually won’t move the dial much. If you’ve been asleep at the wheel for a few years then you might make some big savings if you come off a standard variable mortgage rate. But otherwise we’re talking £10 here, £20 there.

However do enough of these and soon you’re saving £500 a month. Every little helps, to borrow someone else’s intellectual property.

Notoriously however, the water companies are apparently not doing enough to fix their leaks.

Britain’s pipes are said to be leaking 2.4 billion litres a day. But the corporate calculation seems to be that redressing this up-front means huge investment for long-term returns that will only inflate some future fat cat CEO’s bonuses, while doing little to keep water in the reservoirs for now.

So instead, it’s a hosepipe ban. And while nobody much likes them, they are said to cut water usage by 10% at a stroke. Big savings indeed.

It got me wondering what would be a similarly drastic response in personal finance terms?

Maybe:

Postponing your retirement for a year.Selling your second home……or downsizing your main residence.Becoming a one-car household.Renting out a spare bedroom.No foreign holidays until inflation abates.Getting a second job.Extreme frugality.

Now we’re talking! These sorts of interventions are the equivalent of turning your water-starved English garden over to weeds. They’re a big deal but you’ll potentially save a fortune.

They can compound, too.

If you sell your second home, maybe it’s easier for your family to get by with one car. Energy use will plummet with just the one property to light and heat. You could spend your weekends on a side hustle instead of doing holiday home repairs, making further big savings. If you find yourself with a huge cash surplus you could buy more equities while they’re cheap, boosting your future wealth.

Both routes to saving are valid. All will be highly personable.

If you’re a wealthy 1%-er with a second home in the countryside where you tend to leave the outdoor swimming pool heated most weekends – yes, I know such people – then with energy bills set to quintuple compared to a few years ago, you know what you need to cut first.

For more modest Monevator readers, trying to combine the commute with an old-fashioned weekly shop at an out-of-town discount grocer might be more the order of business.

Where will you make big savings if you need to?

The point is that if the worst-case scenarios come true – inflation running at 22%, interest rates above 5%, the Bank of England’s predicted 18-month long recession, energy bills that could put a child through college, higher taxes, and worst of all rising unemployment – then now is the time to act.

Remember: the first cut is the cheapest.

You do not want to be taking actions under duress. At the very least, start bolstering your emergency fund if you can.

Monevator has a very economically diverse readership. Our subscriber base ranges from students interested in investing to at least the several dozen multimillionaires that I am aware of.

One reader stated in our comments that not even household energy bills of £20,000 a year would see them return to the office to reduce their own costs.

Meanwhile a young reader asked me recently if I thought they should suspend their pension contributions or instead sell their car and walk one hour to work.

These two individuals face very different choices.

Please keep this in mind before you share any overly disparaging opinions in the comments below.

Onwards and upwards, via a bit of downwards

Yes, things could turn out better than feared.

Indeed even now there are reasons to be cheerful.

Joblessness is very low, for starters.

Higher interest rates haven’t crashed the housing market yet – frustrating for first-time buyers but better for most of us than the alternative, at least short-term.

As far as I can tell we haven’t had a truly hugely significant Covid mutation since 2021’s Omicron.

And while I am very far from a Liz Truss fan, at least she seems vaguely interested in being a politician. I’d prefer a rest from this current crop of political pygmies, but for now I’ll take a change.

Even lower stock and bond prices are great news if you expect to be saving and investing for decades to come. The bond price reset is particularly welcome, given the portfolio buffering potential of higher yields. Albeit forecast returns are still deeply negative in real terms.

Personally I long for a few boring years where nothing much happens and the return of drizzle in the autumn.

But we don’t get to choose the weather – whether that’s economic, political, or atmospheric.

Let’s hope for the best but prepare for the worst accordingly.

Are you making any changes to your saving, spending, work, or retirement in the face of the cost-of-living Ragnarok? Let’s us know in the comments below!

The post The hosepipe ban approach to making big savings appeared first on Monevator.

Every year seems weird these days. Maybe it’s all down to the coming singularity. Certainly 2022’s quadruple whammy of war, drought, inflation, and plunging equity and bond prices has provided enough contrast to please even a late-stage Picasso. Crops wither while inflation runs wild! Energy prices soar while portfolios plummet! Or maybe it’s just the
The post The hosepipe ban approach to making big savings appeared first on Monevator.

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