Because I could
by Doug Brodie
/1. Just one thing about pensions
We often get accused of using a lot of detail and we plead guilty, so in honour of the late Michael Mosley, we’re running a series of pension just-one-things.
To start, the cartoon here is very on point – you can retire now, you will have income and assets and if you don’t you’ll be eligible for state benefits, and if not then you’re probably in the wrong country entirely. You’ll have an income, the problem you’ll probably have is whether or not you have the right lifestyle to fit that income. Most people think they have to get the pension equation the other way round, and start with an income they want then try to get the pension income to fit.
Just one thing about pensions: live the lifestyle your pension affords you.
This doesn’t happen with people on final salary pensions. Unpicking the layers of human behaviour, natural inquisitiveness drives retirees to look, prod and ask ‘How much? When, Where? How certain?’. These questions never appear between the retired and a final salary scheme, in the same way that trustees of those schemes never complain about lack of engagement from retired members – there’s no engagement at all. Clearly, if the amount of income could be altered, member anxiety with fixed schemes would indeed appear.
/2. You owe how much??
Add the two together and you get $34.83 trillion. Against this is the US earnings of $27.36 trillion, so we have a debt/GDP ratio of 127% or 100.9% excluding the intragovernmental holdings. Does that look fair to you? Perhaps, and more so if we consider that Japan has survived (thrived?) on a 200% ratio.
/3. Cue the semantic debate?
However, if you look at the figures it’s the US government that owns the debt whereas it clearly doesn’t ‘own’ the GDP, the latter being owned by Apple, Coca Cola, Microsoft, Exxon et alia. Is it not more reasonable and transparent to compare the $27.6 trillion debt to the $4.44 trillion in tax receipts that it can use and does actually own?
As of June this year, the interest cost to the US government had climbed to $868 billion per year which is 17% of total federal spending and is 19.54% of tax receipts. At last year’s peak rates the cost was $1 trillion.
As we all witnessed with our own mortgages, it’s not the size of the mortgage that creates defaults and anxieties, it’s the affordability and that is the net interest rate cost. If the interest rate of a mortgage is more than the monthly wage then calamity ensues and drastic action needs to be taken.
/4. Supermarket Income REIT
The rent that Tesco pays for a supermarket building is fixed, and generally reviewed every five years upwards only, normally in line with inflation.
Let’s say they pay £300,000 rent; at a time when interest rates are 2% per year then valuing that rent at 5% per year allows for the potential risks over and above the income available from simply sitting on cash at the bank. That would put a capital value on the rented store of [300,000 / 0.05] = £6,000,000.
Now imagine interest rates jump to 5.25%, as they did with the Truss/Kwarteng debacle. The rent Tesco is paying doesn’t change, it’s fixed till the next review. To balance the investment books the value of the store has to change, to reflect that the margin above the cash rate still applies. If we add the same 3% margin to the cash rate, the arithmetic for the store value is the same [300,000 / 0.0825] = £3,636,363.
The building is the same, the tenant is the same, the rent is the same, the lease is the same.
This is a simplistic example of what happened to SUPR’s share price. They have recently reported a strong first half in results, and the research firm Edison has collated forward-looking figures based on rent and share price:
Don’t get suckered by the yield because that is just a function of an unknown share price which itself is a function of what market traders and investors need to achieve with their investment capital. What we look at is the rental income – that being the sole engine of this trust – and the resulting earnings per share. It looks good but we might never buy any more – why? If the share price goes to a daft height it may well bring the yield tumbling down to near cash, then what’s the point. Also, if the company issues more shares, say to repay debt, it will dilute the earnings per share and thus the dividends and thus the yield. We actually think the reverse – that rates will be cut, the share price will react accordingly, and that will enforce the normalisation of the yield.
/5. On Golden Pond
Nannette retired at 61 after 35 years of teaching in Colorado. She took up pickleball at the end of covid lockdown for company, to get out and to re-start socialising. When she retired she became a pickleball coach and ended up competing, including in Asia.
Having set up with a doubles partner the two of them started a coaching business together, with a mission to ‘empower women through sport’. Certainly re-introducing 60-somethings to the joy of physical exercise, competing and playing with others, has certainly struck a vein.
Our American chums are very good at being expansive in their thinking about the what, how and where of life and that undoubtedly fills in a lot of retirement gaps. If you’ve spent 40 hours per week for 46 weeks per year for 40 years… all at work, then you’re pretty conditioned to behaving in a set way every day, so when you get the 40 hours per week back you’ll be needing something to do. Maybe not pickleball, maybe not blacksmithing… Given the amount of free time you’ll have you could always follow in lacrosse teacher Alison Bradley’s shoes:
