Irregular Roundup, 3rd September 2024

We begin today’s Irregular Roundup with market turmoil.

Market turmoil

We finally got our rate cut here in the UK but after a few hours of optimism, weak numbers in the US triggered the biggest sell-off for a while.

• The bond market is now signalling a recession in the US, and it will be interesting to see if the fledgling recovery in the UK can survive that (along with the headwinds from a looming Labour tax grab).

The MPC only voted 5 to 4 in favour of the cuts (with Chairman Andrew Bailey voting with the majority) but it’s still a modest surprise that the BoE cut before the Fed. The MPC said:

It is now appropriate to reduce slightly the degree of policy restrictiveness. The impact from past external shocks has abated and there has been some progress in moderating risks of persistence in inflation.

But we shouldn’t expect lots more cuts:

Monetary policy will need to continue to remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2% target in the medium term have dissipated further.

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But the optimism from the UK cut and the strong hints from the Fed the day before was short-lived, as US data made markets think the Fed might be too late.

• Jobless claims are on a rising trend and their highest since 2021.
• The manufacturing supply survey gave its lowest reading since the pandemic (and the lowest outside of a recession for 21 years).
• The manufacturing PMI and new orders each slipped into negative territory.

Bond markets quickly priced in four Fed rate cuts before end-2024 (and at the time of writing are predicting six cuts of 0.25%, which since there are only four meetings means that at least two will be cuts of 0.5%).

The next day, US non-farm payrolls came in much lower than expected and stocks sold off some more.

• And the acceleration in the unemployment rate triggered the Sahm rule warning of a looming recession.

The inverted yield curve and the Conference Board leading indicators have been predicting a recession for close to two years now.

• 10-year bond yields fell below 3.8%

Over the weekend it was revealed that Warren Buffet had been selling stocks, and in particular, half of his stake in Apple.

• On Monday, the Nikkei had its worst fall in decades.

A 0.5% cut at the September meeting of the Fed now looks likely, and there could even be an emergency cut before then.

• It probably depends on whether the sudden fall has broken anything important, or merely lost investors a lot of money.

Tax options

Over on Tax Policy Associates, Dan Neidle looked at how Rachel Reeves might raise £22bn of tax in the October budget to plug the “black hole” she claims to have discovered.

• The UK raises around £1 trn in tax each year, making the £22 bn target appear to be a drop in the ocean.

But Labour has committed to protecting income tax, national insurance, VAT and corporation tax and also to reforming business rates.

• That leaves about £150 bn of taxes that they could target.

Now we need an increase of around 15% on that base.

The largest targets are council tax and fuel duty, neither of which is easy to increase politically (though a field duty rise could happen).

• Dan would like to see a land tax, but memories of the poll tax make this kind of radical reform unlikely.

My problem with land tax is that it would be difficult to implement without creating massive losers overnight, which is not the way the tax system should operate.

• Dan also points out that Labour has no mandate for this since they didn’t mention it in their manifesto.

Here are the changes that Dan thinks are likely:

1. Flat rate pension tax relief, probably at 30%.
   • Dan notes that 30% relief upfront and 40% tax in retirement would be a hard sell for higher-rate taxpayers.
2. Getting rid of the AIM share IHT exemption and  capping the size of family firms that are exempt from IHT
   • This would be bad news for the better AIM stocks.
3. Making pensions liable to IHT for those who die before 75.
4. Increasing CGT a little.
   • Equalisation with income tax rates would probably reduce the tax take, and would probably mean that indexation would need to be reintroduced.
5. Fix enveloped property loopholes (add stamp duty and increase the annual tax)
6. Increase the trust tax from 6% every 10 years to 9%.
7. Increase fuel duty and road tax.
8. Abolish entrepreneurs’ relief (now called business asset disposal relief).
9. Add a 0.5% property tax to all property over £2M.

And here are some that he thinks will not happen:

• End the pension tax-free lump sum
• Tax gambling winnings
  • But this would mean allowing tax relief on gambling losses (which would introduce scope for avoidance and evasion)
  • It’s also regressive (hits the poor the hardest).
• Cap tax relief on ISAs at say a £50K pot
  • 80% of ISAs are below £20K, but (1) many people will have more than one and (2) there’s already an annual contributions cap (as with the dreaded pensions LTA)
• Reduce the £90K pa threshold for VAT registration (collection)
• Raise the top rate of income tax to 50%
• Wealth tax on those with more than £10M of assets
  • Most wealth taxes fail, and there’s no mandate for a one-off tax

I think Dan’s likely list is not a bad shot at what might happen in October.

• The only one I would hate is the extra property tax – I have a thing about recurring taxes where you get no services in return.

Any of the items on the unlikely list would be problematic, but I wouldn’t rule them out.

HNW pension pots

In FT Adviser, Alina Khan reported that 96% of HNWs underestimate how much is needed for a comfortable retirement.

• The 2,000 participants in the latest Saltus Wealth index average £536K as a retirement target.
• Two-thirds thought that somewhere between £200K and £800K would be enough.

Saltus notes that £536K would only provide £21.4K pa of income (using the 4% rule).

• Over 55s were targeting £662K (£26.5K pa).

Saltus’ target was a £1M pot for £40K pa of income (the PLSA says £1.1M would be needed to produce the £42K needed for a “comfortable” retirement).

• Only 4% of respondents thought that this much would be needed.

Their actual savings were £484K (£19K pa) and £546K for those over 55 (£22K pa).

• On the plus side, average contributions were just below £3K a month (though 27% of respondents were cutting back on these).

Labour means-testing notwithstanding, we can factor in the state pension to bring these targets down a bit.

• But a pot of £800K is probably still in the right ballpark.

Generation gap

A second article from Alina looked at Ageon’s research into the policies people want from the new Labour government.

• As you might expect there’s a bit of a generation gap.

For those aged over 60, 45 per cent saw long term clarity on the state pension and the triple lock as a priority compared to 26 per cent of those in their 50s and only 21 per cent of under-50s.

The top priority for the under-50s was ‘new initiatives to help me / younger generations get on the property ladder’ (29 per cent). However, only 14 per cent of the over 60s chose this option as a priority while 20 per cent of those in their 50s chose it.

It’s hard to see this gap closing.

Dormant assets

Around £880M of “dormant” investment assets are to be given to charity after the scope of the dormant assets regime was expanded.

• Following the expansion in 2002 which added some pensions and insurance money, now client accounts will be included.

The scheme was set up in 2011 and has given away around £750M of cash from bank and building society accounts.

• One of my old bank accounts was closed this month (it only had £2 in it).

The scheme is supposed to use accounts where the customer can’t be contacted, but Halifax wrote to give me a month’s notice to take the money or lose it.

• And of course, to move it I would need to reapply for new credentials to access the account.

That was too much bother, so now it belongs to the National Lottery Community Fund.

The FCA said:

Our proposals should result in an increase of funds being released to support good causes from investment assets and client money assets that are transferred to the dormant asset scheme [DAS]. At the same time, our proposals should enable customers who have a right to reclaim dormant assets to do so without delay or difficulty, thereby securing an appropriate degree of protection for consumers.

I’m not sure what happens if you try to get your money back after it’s gone to the charities, so check your records now.

Labour watch

This week’s new government news was the withdrawal of £1.3 bn of funding for tech and AI projects that had been promised by the Tories.

• Most of the money was for an “exascale supercomputer” at Edinburgh University.

There are only a few of these in the world, and the new Edinburgh machine would have been fifty times more powerful than anything else in the UK.

The university website says:

Exascale will help researchers model all aspects of the world, test scientific theories and improve products and services in areas such as artificialintelligence, drug discovery, climate change, astrophysics and advanced engineering.

Quick Links

I have two for you this week:

1. Discipline funds said that Yes, You CAN Eat Risk-Adjusted Returns and
2. Alpha Architect looked at The After-Fee Performance of Private Debt

Until next time.