Financial Bubble Still Here with Yet More to Unravel?

Is there such a thing as a secular financial bubble? Has the financial sector become bloated out of proportion to the economy over the last few decades and is there be a contraction in store, abrupt or prolonged, back to a smaller financial sector? Was the crisis of 2008 merely the start?

I'm not sure of the answer but a couple of data points have stuck in my mind recently:

1) Below is a copy of two charts from the paper Fundamental Indexation by Rob Arnott, Jason Hsu and Philip Moore. Note how the Financial sector, both on a cap-weighted market value basis, the upper chart, termed the Reference Portfolio and on a fundamental accounting basis, the lower chart, has expanded steadily since the 1970s and now has become the dominant sector of the US equity market. By comparison, the Tech bubble was a fleeting aberration, now absent from the trends. In the same charts, updated to June 2007, found in their book The Fundamental Index, there was only a slight pullback in the share of the Financial sector in the Fundamental chart while the market value chart looked the same. Unfortunately, there are no numbers visible so it is hard to compare with today's data and I wish and hope that the folks at Research Affiliates where messrs Arnott et al work will do updates.


2) Financials have bounced back from 11.6% of US total market cap at the end of February 2009 to 16% in 2010, according to the proportions of holdings in Vanguard's Total Stock Market ETF VTI.

3) In Canada, one could almost say that the equity market consists of Financials and a few other bits and pieces - by market cap, Financials occupy 31% of the iShares TSX Composite ETF (XIC), while the Canadian RAFI Fundamental Index ETF of Claymore (CRQ), which contains 65 of the largest companies measured by a combination of sales, cash flow, dividends and book equity, has no less than a 47.4% weight in Financials. The folks who make the RAFI indices describe them as representing the companies' economic footprint. Is that really what the Canadian economy now consists of, and is it normal or healthy such that a change may happen sooner or later? The comparable market cap ETF to CRQ is iShares TSX 60 (XIU). Interestingly, it shows the market under-weighting Financials, especially insurance companies like Manulife and Sunlife, by some 13.4% (i.e. Financials are 34% of XIU) compared to CRQ.

4) The UK's FTSE All Share Index still has about 21% of its market cap weight in Financials as of the end of February 2010, judging by the db x-trackers ETF that tracks this index. Again, it is the single largest sector, though just barely ahead of oil and gas.

Ordinary People Still Getting Squashed by Crippled Mortgage Market in Canada and UK

Today's Globe and Mail article Never missed a mortgage payment and still facing foreclosure about the nasty fallout on innocent responsible homeowners reminds me of a situation just as bad, if not worse, in the UK. A family member who has had a mortgage with lender Nationwide for the past two years is being refused a new mortgage for an attempted trade-up to a larger property. Like the unfortunate Ms. Matthews in Canada, this person has never missed or been late on payment, nor missed any payments on loans of any sort.

Worse than the Canadian situation, the person has an impeccable credit rating and a highly secure job. The reason given for the refusal of a new bigger mortgage - the person has used on a few occasions the planned overdraft facility on a bank account, an overdraft which was promptly paid back. It's ironic and laughable that a convenience which the banks happily provide and promote (for all the fees they garner) has been used as the excuse for the refusal.

I don't know for sure but I suspect that Nationwide in reality probably doesn't have the money to lend in the global aftermath of funding scarcity described in the Globe article. Even before the crash Nationwide had begun severely restricting mortgage availability according to the March 2008 Times article Nationwide shuts door on mortgage hunters.

The immediate consequence is one less house in Scotland that will be sold. We've gone from credit gluttony to credit starvation.

Watching the UK Get Older - What Effect on Government Finances?

Found on the BBC website Maps chart UK's ageing population this brilliant animated map (compare the map to Statistics Canada's yawn-inducing text Population Projections for Canada, Provinces and Territories) that shows the steady ageing process as the years roll on. Starting from 1992 and projected to 2031, the inexorable slow ageing process is visually striking as the map gets more and more of the darker coloured areas indicating the ageing. Whether the measure is median population age or 65 and older, the pattern is the same. Increasing longevity is evident too as the over 85s triple their share of population.

One interesting phenomenon is that there was not much change through the 1990s but suddenly around 2002 the phalanx of those of State Pension Age or older begins to rise from 18.3% of the population to 19.5% by 2010. That's over 730,000 extra people potentially drawing State Pension. It surely doesn't help government finances. Just as a period of negative market returns is a bad time to start drawing on one's retirement portfolio, so it is for a country, except that the UK government has no choice.

UK Immigration Rules Ruin People's Lives in Order to "Protect" Them

Through a sad and bizarrely crazy new set of immigration rules, the WWB (World Wide Bureaucracy) has struck again in the UK as a happily and voluntarily married young Canadian-Welsh couple will be obliged to live apart for a couple of years due to regulations supposedly designed to protect young British women of Pakistani or Bangladeshi origin from being forced into marriage. The woman involved is not British (she's Canadian), she has no Pakistani, Bangladeshi or any remotely Asian roots by all appearances ... I know, I know, I'm revealing my deep prejudice by coming to that conclusion by looking at her name (Wallis), her white face, her red hair ... and both she and her husband vehemently deny any coercion to get married.

She's not especially young either, being 19 years old, and sounding rather mature in the BBC news interview found in the above link. It's interesting that UK law permits 16 and 17 year olds to get married with their parents' permission. Above that age, Brit teens can marry if they like. By the logic of the regulations which deny marriage visas to foreigners under 21, the implication is that pure Brit teens are superior to non-Brits.

This case leads one to wonder if the new regulations were cast in such an un-necessarily broad ill-fitting manner to adhere to political correctness and avoid singling out a particular country or ethnic group. The "for the greater good some have to suffer" explanation put forth by the Home Office is laughable. Since all of the cases cited in the What is a forced marriage? booklet of the Forced Marriage Unit website involved teens travelling to another country, maybe the government should simply have banned all foreign travel by British citizens under 21?

As a Canadian who, though considerably older than this couple, came to the UK through marriage to a British citizen and experienced frustrations dealing with the Home Office in getting the necessary visas, I have a great deal of sympathy for Adam and Rochelle. I really hope their problem gets sorted, though the bureaucratic stonewalling and circling of wagons to back up the idiotic Home Office regulations is all too evident in the BBC account.

HSBC Lets You Trade Around the Clock

The title of my post is a bit of a teaser. HSBC InvestDirect Canada has actually just announced that it is adding direct online stock trading in the three major European markets - the London Stock Exchange, Euronext Paris and Frankfurt Stock Exchange. HSBC already offers direct online trading to the Hong Kong market as well as the usual Canadian and US market access. There's a market open somewhere to trade in 24 hours a day for you trading junkies.

The HSBC accounts offer the ability to settle trades and hold account cash in 10 different currencies. That is beneficial to avoid currency exchange costs and may be useful to Canadians like me in foreign lands who want to hold the local currency.

HSBC's action of enabling online DIY online access is a step in the right direction of making investing worldwide a level playing field. As I noted recently, the TSX is getting to be a thinner market all the time so diversifying internationally is necessary.

It is possible to diversify internationally using index ETFs through US markets but purchasing individual company shares is limited to a few ADRs. (It is interesting that the US ETF for the UK FTSE index, symbol EWU on NYSE seems to do as good a job tracking the index as the one in pounds sterling traded in London under symbol MIDD.)

HSBC needs to do one thing to make their offering more compelling and competitive - lower the trading fees. The minimum trade commission is £55, or about $100 for the London exchange. That is steep for a "no advice" service. I find it strange that their UK arm can offer trades for a flat price of £11.95. Why not in Canada too?

CRA Investigating Canadians in the UK

Canadians in the UK beware. A note on the TopTenTaxTidbits web page - see the 3rd bullet down - updated in February 2009 says that the CRA has obtained the UK bank records of Canadians in the UK and is checking whether they have declared the interest income. Too bad my bank hasn't actually paid me any interest that I could declare.

Some Media, Politicians, Businessmen Hard at Work Making the Recession Worse

Yesterday, UK government minister Vadera in an ITV news interview said that a few green shoots of economic recovery were appearing. Welcome news one would think, that would be played up positively. Not a bit. With opposition politicians weighing in with criticism that this was "insensitive" to the many being put out of work and at least one business association leader saying he couldn't see any positives, the minister later apologised. Unbelievable!

If there is anything that is most needed now, it is a dose of positivism instead of the doom and gloom that now pervades business and economic reporting. Half the problem these days is one of confidence, for banks to lend to business, for consumers to spend. We need more commentary like Sir David Tang's Optimism is the Cure for the Downturn (kudos to BBC for posting something positive).

As for being insensitive, someone who has been laid off (I claim some credibility from having been through that twice) would much rather hear that things are starting to get better to give hope and confidence in the job search.

In economic terms, it is now January, we are in proverbial frozen-over hell and a person looking outside might believe that spring and warm summer will not come again. It will be a while before it happens but it will.

The current pessimism means opportunity - now is the time for investors to be looking for the best bargains in the stock market.

Credit Crunch? Depends How You Look At It

An interesting direct mail advertising offer popped into our mailbox a few days ago. Provident Personal Credit is actively offering cash loans from £500 to £500. Huh? Everything one reads these days about credit is that no one can get a loan, even the most creditworthy. But Provident is gung ho seeking clients, even if "you have been turned down before, you have a poor credit history, you're not working at the moment"!

How can they do this successfully? As their flyer says, "We'll base your loan on your circumstances and how much you can afford to repay." The parent company Provident Financial's Interim Management Statement of October 22nd gives further clues to a tightly run operation:

"... all loans are underwritten face-to-face in the home, which provides a sharp assessment of each customer's character and current circumstances. Home credit loans are for small sums repayable over a short period of typically a year and agents visit each customer on a weekly basis to collect the repayments, thereby continually updating their view of customers' circumstances. Not only are customers and their circumstances well understood, but since agents are paid commissions based upon collections rather than on the credit issued, there is no incentive to extend credit that the customer is unable to afford."

There is none of the sub-prime mortgage loan nonsense of agents paid for originating loans that were then sold off in parcels to other banks far away who had no clue of loan quality or contact with the debtors.

And the results bear out the accuracy of management's words. The July 30th, 2008 Interim Results showed a 34% increase in Profits before tax and a 28% rise in earnings per share, with loans and customers also growing. The company is hiring too as these ads on MyJobSearch.com show, another sign of continued growth. No credit crunch here it seems.

Management's forecast is quite positive: "... Our conservative approach to lending, combined with the group's strong balance sheet and funding profile, means the group is well placed to continue to generate high quality customer and profits growth."

The share price (PFG on London Stock Exchange) is down only 3.8% over 1 year, a darn sight better than the minus 33.5% for the FTSE All-Share. Thanks to Google Finance for the graph below.

What's the catch? Depends on your viewpoint perhaps but the 183.2% typical APR interest rate exceeds the bounds of reasonableness. The rate is plainly and prominently visible on the ad and on the website home page, so no one can complain they don't know what they are signing up for. And considering that clients are often those who cannot qualify for, and do not have, loans elsewhere, maybe there is some value to those who borrow from Provident. Still, 183.2%!!!

The downside for borrowers is the familiar debt trap, where people get in and cannot get out, as this one tale from a Provident customer demonstrates with an interesting response from a Provident agent. Crunched by credit indeed.

Financial Education in Kind at LTS Scotland

Learning and Teaching Scotland is the organization whose aim is to prepare young people for life in the modern world through the creation of programs and teaching material for schools, including those that develop financial capability.

Here is lesson 1. Dangers of online impersonation and scams. Instead of http://www.ltscotland.org.uk/, the correct URL for LTS Scotland, type in http://www.ltsscotland.org.uk/. Note the extra "s". You are brought to an ad page which offers online degree programs. I especially love the one at the bottom of the screenshot below for Ashwood University where you can obtain a PhD in only 7 days with "no studying required", a delicously ironic case in point of the need for programs in financial education.

Junk Mail, Telephone Advertising Calls and Privacy in the UK

Worthy of note:
IT Security Expert published an excellent article Why UK Privacy is Dead on the dangers of identity theft and the lack of privacy in the UK, whose risks are unintentionally heightened by such lists as the online electoral register. He includes links and telephone numbers for getting oneself removed from the lists of direct mail advertisers aka unsolicited junk mail and similar phone calls. Both take requests for removal online or by phone.

• Mail - go to Mailing Preference Service
• Phone calls - go to Telephone Preference Service

To get removed from the visible online electoral register at http://www.192.com/, one must apparently download a form and mail it in. The page where the form download link is located reveals that credit checking firms conducting credit checks can access the register and check your details even if you have opted out.

While unwanted mail and phone calls are annoying and time wasting, the criminal use of personal details to effect fraud through social engineering is far more damaging when it happens. The Electoral list, BT Phone Book and online job search websites can all be leveraged by fraudsters. One must consider the benefits and the risks of providing one's data or allowing it to remain public. Unfortunately, as IT security Expert notes, the default is that an individual's data is published and available unless it suits the commercial or organizational interest of the body that has collected the data.

Why I Have Reduced my Allocation in US Investments

Last Friday October 17th, I made some major changes to my portfolio allocations:

• total US investments reduced from 19% to 4%
• European equities, much of it in fact consisting of the UK, also reduced from 19% to 17%.
• Canada upped from 44% to 55%
• Far East raised from 5% to 6%
• Developing countries raised from 4% to 5%
• Global increased from 9% to 13% through addition of the Vanguard Global Index Fund VEU

The reason in a nutshell - the aftermath of the debt crisis, which raises the risk of US investments, both for market results and for currency.

How so? Starting with the anecdotal but startling nevertheless - the clock tracking the US national debt in New York city has run out of digits the debt has ballooned so much. All the various bailout measures to shore up banks may have stabilized the system but the debt has not gone away and is now on the books of the US government/taxpayer. The negative consequences are likely to be severe and long term.

More substantial evidence:

• Contrary Investor details the US Federal government's rising debt, its dependence on foreign sources of funding in Fun with Funding and shows that they are losing confidence and pulling out in The 'Other' Consumer Confidence Survey.
• Sudden Debt posts on the level of personal debt in the US and how far it has to go to drop to a reasonable level with other posts on how consumer spending is already dropping.
• Cause for Depression has an informative graph of the deteriorating balance sheet of the US Federal reserve as well as a series of posts describing the financial crisis from its origins to the present; the blogger is a a US economics prof
• Market Ticker in Fiscal Cat 5 Hurricane Warning describes how US debt markets could totally collapse unless the government imposes some very harsh medicine
• Market Oracle discusses the impact on US government debt of the Fannie & Freddie bailout.
• Financial Times reports possible weak interest / few buyers for US debt in upcoming auctions.
  

Contrary mainstream views do exist:

• National Bank's Oct.17 Economic Weekly newsletter says the impact of the $700 billion rescue package on US government debt is inconsequential.
  

Of course, there's a song to go with the theme, Crash Dance by Versus (I recommend all their brilliant satirical parody songs). The same group has another great song The Dollar and Its Diving that express my fears that the USD while strong now, may not be so for long.

On the other hand, the increasing allocation to Canada, despite the consequent lessening of diversification, is to reduce the extreme USD currency risk and market risk. In contrast, Canada's debt levels are low enough and stable. No banks are going under. Times may be tough during the worldwide recession but survival is sure and Canada's eventual prosperity I feel confident in.

European countries and the UK in particular, may warrant a further reduction. Generally I have read that debt levels are high in the UK and the government's borrowing is at record levels - see BBC's UK Borrowing Hits a 60-year High - so there is increased risk there too. The big question is whether it has become unsustainable as in the case of the USA, a conclusion I have not reached yet.

Update October 25th ... A GlobeAdvisor article says the USD may suffer a crisis. It's nice to find supporting opinion but am I deluding myself? Need to find contrary views...

UK Bureaucracy Ponders Allowing Me and My Wife to Live Together

A few years ago, when I, a Canadian, married a wonderful Scottish lady I obtained permission to stay in the UK on a two-year leave to remain permit. Applying for permanent residency becomes necessary two years after entering the UK on the temporary residency permit. In order to continue to be allowed to live with her here in the UK, I have thus recently applied for permanent residency, or indefinite leave to remain, using the SET (M) form. What follows is thus based on my personal experience.

The UK's process to obtain permanent residency (described on the UK Home Office Border Agency website) seems designed to trip up applicants, to presume guilt and suspicion of wrong-doing, to impose considerable cost, inconvenience and stress and to punish those who fail to tick all boxes correctly or abide by the tricky rules. Whether it is deliberate or merely inadvertent the process is highly unpleasant.

Problem #1 - Complicated and Changing Process and Forms
First, you must figure out which of the many forms to use. In my case, as a spouse it is SET (M). The form is 17 pages long, the instructions another 7 pages. There is lots of information and documents required -photographs, bank statements, passports, bills with addresses. Almost all of the information requested is exactly the same as was asked for in the original application to enter the UK.

The forms and the requirements have changed several times during 2008. The authorities added a new requirement since I arrived in 2006. Since the beginning of the year, applicants have to pass a test of English language and UK knowledge, called Life in the UK.

The application form itself includes some bizarre questions. Check out this snippet of Form SET(M):

That's right, perpetrators of mass murder, genocide and terrorism are kindly requested to identify themselves and to provide details of their acts in a box on the next page. Terrorists are apparently likely to be found amongst spouses seeking to live happily with their loved one. What prevents the Border Agency from utilising police and security sources of the government to check whatever it wants about individuals by itself? What leads the Border Agency to believe that such nasty individuals will volunteer such information? When I applied for an account, a foreign exchange dealer was able to verify my name and address instantaneously. Why can the government not use its far greater sources to do employment, financial and criminal checks?

Problem #2 - Too-short Time Window in which to Apply and Severe Penalties for Missing It
One may not apply earlier than 28 days before the expiry of the initial residence permit, nor after the expiry. If you are too soon, they refuse the application with no refund of the fee. If you are late, you are in the country illegally. There are harsh sanctions. First, being late means you have no right of appeal if you are refused, e.g. fail to tick a box on that form and you could be on a plane back to where you used to live. Second, you are then not allowed to apply in person, only by post, which takes a lot longer. Third, the time to process becomes indefinite and longer than the announced objectives below. At least the Border Agency won't put you in jail and deport you, while awaiting a decision on a late application - at least that's what they said when I phoned to ask.

Meeting the narrow window is made more difficult by the necessity to take and pass the Life in the UK test. Despite being easy enough, if you already read and write English fluently, some study is required so you must get hold of the book, spend a week or two studying it. The testing is only done in government test centres and time slots for taking the test are only available, in Glasgow at least where I took it, three or more weeks ahead. Fail it and you must start over. The pass certificate must accompany the application. If you do not know English very well, things get even more onerous since you must learn first. Of course, you can apply for other temporary extension visas if you are having trouble passing the test but all this schmozzle increases the chances of people missing the deadline.

Problem #3 - Ridiculously Long Decision Delay
Here is what the Border Agency website says on waiting times:
"Our service standards set out how quickly we aim to decide applications ... we will:

• decide 70% of postal applications within 20 working days;
• decide 90% of postal applications within 70 working days;
• decide 90% of applications made in person at a public enquiry office within 24 hours."

Note that 70 working days is about 3 and a half months. Yikes! We are told that applications that are not "straightforward" take longer. Years perhaps? How is that postal applications take so long while in-person takes 24 hours? Do all the cheats mail them in? Could it have anything to do with the fact that an in-person application costs £200 more, at £950, compared to the postal route at £750, i.e. the Border Agency is forcing applicants to the costlier route? Shades of sleazy marketing indeed!

Also note the masterful bureaucratic language which promises nothing - the Border Agency only "aims to" but does not guarantee, it only will "decide" not necessarily approve, not even with a caveat such as "if you meet all the criteria", and there is the last 10% for which there is not even a target. You could be waiting indefinitely and have no cause for complaint.

Problem #4 - Passports Held Ransom and Travel is Not Permitted
Passports of the applicant and the spouse must be sent in with the application. That means no travel is allowed, potentially for months. Prisoners of the UK you are! Since you have no idea when the application will be decided, let alone approved, you cannot make holiday plans, travel back to see family or friends or whatever.Suppose you are in the 10% taking more than 70 working days, how can you plan ahead at all? I've already been waiting five weeks and had to cancel a trip back to Canada, losing money on that, and now I'm worried about Christmas.

Should we need our passports back to travel for an emergency, the Border Agency will happily do that, though it means the application is considered cancelled and the £750 fee is lost and one must re-apply from scratch. On top of that, if you leave the UK after expiry of the initial permit, you must apply anew from the foreign country, possibly having to stay for months while it is processed. That's not very family friendly, to say the least.

Why exactly does the Border Agency need to hang onto those passports, especially that of the UK citizen?

Problem #5 - Absence of Transparency and Progress Status Information
The only information the Border Agency will supply about your application is a letter of acknowledgement that it has been received. Your application then disappears into a bureaucratic black hole. You will only be allowed to request status information after the 70 working days have past. This final element creates a sword of Damocles over the innocent applicant, with all the attendant stress and anxiety.

Problem #6 - High Cost
The cheaper but deadly slow and opaque postal application route costs the rather pricey £750, on top of which is the £34 for the Life in the UK test and the associated study material £10. Two years ago, the initial temporary permit (you may not apply right away for the permanent permit) cost £395 (postal application) or £595 (in-person). That's in addition to the £515 paid to obtain the visa to get into country initially.

The fast-track in-person application costs a princely £950. Only the well-off can apply it seems.

Suggestions for a Kinder, Gentler (and probably More Effective for the Government) Process:

• get rid of those stupid paper residence permits glued into the passport - all those agents at airport kiosks have computers don't they? So let them have access to the database that shows if I have a permit; that obviates any need to hang onto people's passports for months and months
• put the application form online so that you can fill it in and submit it electronically with scanned copies of the required documents; if such methods are sufficient to control money laundering, why not residency permits?
• with all the information then being electronic in the government's hands, automate the assessment and screening process, just like the tax and customs people do to detect suspicious patterns; it will be much faster to everyone's benefit
• pro-actively send out notifications when requirements, deadlines or anything else changes and especially in advance of a looming expiry date; whether it is by snail mail or email, follow the example of every other business and many government departments; it sure would have helped me
  
• further automate cross-checks with other databases; if in doubt how, check with the credit card companies how to do this
• set up an online web application tracking and status information tool so people can check themselves; consult the zillion online companies who do this routinely as part of customer service to find out how; no doubt all those telephone agents who now have to spend their hours answering phone calls on the existing "info" line from desperate people would be freed up to do real work assessing marginal or suspicious cases.
• shorten the decision turn-around goals to 90% within 24 hours of receipt (the same as the in-person route) with 100% substantive answer within two weeks i.e. if the Border Agency cannot approve within that time, they should state a reason and the need for further investigation

Right now,my wife and I are living on tenterhooks while the UK Border Agency decides whether we will be allowed to continue to live together in the UK. Since we are about as mainstream, ordinary and conforming to the criteria as it is possible to get, I figured my application would be speedily rubber-stamped. Wrong! Five weeks later, here I am still waiting unable to obtain the slightest information about what is or is not happening. And we are unable to travel anywhere or even make travel plans.

Update Nov.28 - Good news at last! The passports have arrived back with residence permit included. The secret to success? We asked for and received the support of our local politicians - councillor Robert Barr, MSP Jackson Carlaw and Member of Parliament Katy Clark who wrote to the Home Office on our behalf. Off went the letter and presto, a week later the permit arrived. Kudos to them as, unlike the bureaucracy, they were very accessible and sympathetic and responded immediately. Total time elapsed from application to receipt in mail - 67 days, more than two months.

Signs of the Time We Live In

A 24 year-old arrives for his first day at work as a trader at Lehman in London only to find that everyone has been fired and he will have no job (see BBC It's Like a Massive Earthquake. His starting salary was to be £45,000. A Head Teacher (a Principal in Canadian terms) of a primary school in Scotland, responsible for 300 children and a staff of 20 after 30 years experience earns a few thousand more. Perhaps like those in the tech industry where the crash forced lots of smart, ambitious people into other industries where their talents could be applied to better uses, this young man might also redirect his future?

A UK consumer misses their payment of a very small balance on a credit card. Instead of happily letting the balance accumulate interest and perhaps even increasing the credit limit as in former times, the UK credit card company freezes the account and tells the person that this is for their own good! Person pays off balance (with punitive fee) but is unable to make purchases on the card for a week. Economy gets zero discretionary spending during that week. Said person had never previously missed a payment, this one being forgotten due to the small amount. Said person also has zero other debt and healthy bank balance that could easily support a balance ten times the amount paid late. Is the financial sector in a state of panic tightening that will unduly restrict spending and deepen the recession now underway?

Book Comparison: UK and Canadian Citizenship Test Material

Before you can become a citizen in either of Canada or the UK, you must pass a written test of knowledge about the country. In the case of the UK, those who want to be apply for indefinite leave to remain (i.e. to live in the UK as long as desired without need for further visas, aka permanent residency) must also pass the test.

The purpose of these tests is, as the UK Border Agency explains in its FAQ document, to "... ensure that migrants have an understanding of life in the UK and the requisite skills to allow them to fully integrate.", or, in Canada's case to "... help you prepare to become a Canadian citizen."

How the two books compare? What do they reveal about each country? Are they useful to an immigrant?

Canada's Book: A Look at Canada (2007) - 47 pages
The UK's Book: Life in the United Kingdom - A Journey to Citizenship (2007) - 146 pages

Test Knowledge: - The bar is set much lower in Canada: its test only requires a pass mark of 60% vs 75% in the UK, and if you fail, you can go for an interview with a Citizenship judge who can decide if you meet the knowledge criteria despite the test result. In the UK, fail and you get to try again after paying the £34 fee again (there seems to be no separate fee for Canada's test - It looks to be included with the citizenship application). Plus, if your written English or French is too poor, in Canada they will give you an oral test. Plus, if you are over 54 in Canada, you don't need to take the test at all, whereas it is 65 in the UK. The UK does allow you to take the test in Scottish Gaelic or Welsh ... now I wonder how many people living outside the UK and wanting to immigrate who aren't already citizens can write those languages fluently enough for a written test?

There is lot more to be learned by the immigrant in the UK, despite the fact that only chapters 2 to 6 of the UK book, or 60 pages, is actually test material. A glossary takes up a whopping 30 pages of the remainder, including such obscure terms as "cannabis: an illegal drug that is usually smoked" and "conquered: beaten in battle". But there is only about 40 pages of test material in Canada's book after subtracting a half dozen pages pages devoted to intro material and test suggestions at the end. Those 40 pages contain many photos - just about on every page - and there are many fewer words on a typical page.

Content
Canada book - a combination of politically-correct boosterism and indoctrination on geography and civics written at a grade-school level. Its practical utility is more or less nil, except for explaining how federal voting works.
UK book - practical explanations of all aspects of living, both public/government and private (like buying a house, renting, credit cards, opticians, churches, marriage, employment, sports, driving licenses etc) with web references, addresses and phone numbers. If you do know all this info, then no doubt you will be able to do what you need to cope with life as well as the native-born. But why give and test this info two or even five years after the person has arrived? It's material that someone needs upon or before arrival. In fact, I would recommend this book as a handy all-in-one primer on the practical side of living in the UK for those coming here. For a facts and figures overview of the UK, read the UK Wikipedia entry.

Consider this contrast - the UK book has a section on sports and states that football (soccer for Canadians), rugby, tennis and cricket are the most popular sports. Nowhere in the Canada book does the word hockey even appear. Is that a proper "Look at Canada"? Similarly, the UK book spends several pages detailing ethnicity and religion, whereas the only mention of religion in Canada's book is the phrase "freedom of religion". On the other hand, Canada's book starts off with a chapter on environment and sustainable development where the preaching and talking down to the reader is enough to make one nauseous. The UK book doesn't even mention the environment. At least the Canada book has a map though! One would think the UK to be disembodied country floating in space. Sadly, neither book touches upon literature, fine arts, media, all essential parts of a country I would venture to say.

It seems that to become a UK citizen you need to know the practical "what to do or not do", whereas in Canada you must know the proper way to think and have the correct attitudes.

It is true that advice on practical matters can be obtained on the federal government's Citizenship and Immigration Canada website under Live in Canada Before You Arrive and After You Arrive. Check out the Wikipedia Canada entry for summary and figures.

The Citizenship test itself is thus another way in which Canada is more favourable to immigration than the UK. Maybe it should be no surprise - without immigrants Canada's population would be falling, while the UK has been flooded with migrants from new European Union countries like Poland (who have a right to live and work in the UK and don't need to pass the test) and so doesn't particularly want or need any immigrants from other places (like Canada).

Book Cost and Source: Why should one be obliged to pay anything for the UK publication, which costs £9.99 at the official government publisher TSO? Worse, the government publisher charges more than booksellers such as Amazon, where it costs only £7.52? Why can the UK not publish the document as a pdf like the Canadian book, which is available for free here as a pdf download?

The Test: Now that I've taken the UK's test, I can say that any reasonably intelligent person should be able to pass it on the first attempt with 3-4 hours of studying. If you already have a general familiarity with the answers to the topic areas in the What You Need to Know at the official Life in the UK website, you might even be able to pass without studying at all. Remember that it is multiple choice so it is only testing recognition memory, much easier than having to supply your own answers from nothing. One thing they could state in their background info, which I did not see anywhere, is that the test appears to be customized to the local part of the UK where you live, whether it is Scotland, England, Wales or Northern Ireland. Half the confusion I had studying was keeping straight the different rules for each area like education, water rates etc. It took me all of 5 minutes to complete the 24 questions, including double-checking all my answers, out of the 45 minutes allotted - a skoosh, as the Scots say. Some smarty-pants young woman finished before me, harrumph!

Successful International Funds Transfer with CanadianForex

IT worked!

I finally have done the deed and transferred funds from Canada to the UK using a foreign exchange (FX) dealer - in this case CanadianForex - instead of the bank-to-bank wire transfer method I had used before.

Back in April I posted the results of my research (#1 Options, #2 Fees & Exchange Rate, #3 Extra Services & Practical How To, # 4 FX Dealers into the use of FX dealers to move and convert money and it appeared to be an attractive option in terms of speed, cost and convenience.

I am happy to say that it all went smoothly, the money arrived safely in my UK bank account with no extra fees and within the total 8 business days from end to end, i.e. from my Canadian bank account to my UK bank account. The process was almost completely electronic, online and automated, with only a phone call from the FX dealer, done within minutes of my booking the transfer online, to confirm the arrangement (perhaps a good thing since one must initiate the transfer of funds - also done online through the bank website - from my Canadian bank account to CanadianForex).

Perhaps the only disappointment is that within days of locking in the transfer and exchange rate, the CAD/GBP exchange rate went down from about $2.03 to $1.95. That cost me quite a bit but it was unforeseeable and unpredictable as it could just as easily have gone up. However, I might try booking a forward rate (CanadianForex allows one to lock in a rate for a future transfer up to one year ahead) if it goes down to the low $1.90 level.

Book Review: How the West Grew Rich by Nathan Rosenberg & L.E. Birdzell, Jr

Exactly how have Canada, the USA, the UK and other western countries grown so rich in comparison with the rest of the world? Is it just a matter of luck for if that is the case, inevitably luck runs out and we will lose our edge. This book published over twenty years ago (in 1986) still rings fresh and topical, particularly during the present credit crunch and worsening economic conditions.

And the answer folks, based on my understanding of the book and the fact that I have been convinced by its argument, is that while we cannot relax, we can have confidence that our material well being will not collapse and dissipate like a house of cards.

Another happy and positive message of the book is that we need not feel guilty or morally deficient about the manner in which the wealth has been generated. It is not the result of exploitation of labour, slavery, imperialism or colonialism.

This book is not, however, a polemic or a manifesto. It is a work of scientific research by two scholars, who start with all the suggested explanations and look for evidence to accept or reject individual forces at play. There are many footnotes and an extensive bibliography but they don't get in the way. Very often they are delightful sidelines.

Most interesting is the authors' demonstration of the interplay and interdependence of the many causal factors of growth - none is individually sufficient and all are necessary: science, technology, resources, political freedom, commercial freedom, laws, pluralism, property rights, flexibility of institutions, new forms of corporate organization, the list goes on and on. The primary drivers of growth have evolved over time and today, Rosenberg and Birdzell maintain that innovation is the key. For a book written before the explosion of the Internet, that conclusion seems very accurate and prescient.

The authors' style avoids hyperbole, bombast and breathless drama. There is no mystery or coyness, the conclusions are stated up front. But the story is exceedingly well laid out and I got much intellectual pleasure from seeing how all the parts fit together. It is a book for the curious layman (though I also notice it referenced admiringly in another very serious economic book I am reading now by Richard Lipsey).

One thing that is dated is the recurring discussion of Marxian economic analysis, always to show how wrong it is. The Berlin Wall has fallen since the book's publication and nobody even refers to Marx or takes him seriously anymore, and such discussion seems weird.

Quotes:

• "... the West has created a powerful system for economic growth, of a sort which could keep generating growth and even substantive advances in material welfare for decades after the spirit had burned out of it." (page 8)
• "... the West's system of economic growth offered its largest financial rewards to innovators who improved the life-style not of the wealthy few, but of the less wealthy many." (p.27)
• "Sometimes the success of an innovation means the end of an entire industry, entailing large capital losses as well as the loss to their employees of their human capital of training and experience." (p.30)
• "... there is no reason to believe that the expansion of knowledge has any inherent limits, so that the growth of technology is especially appealing as an explanation of the persistence of Western economic growth." (p.262)
• "In a constantly changing world, it is not necessarily a rational investment strategy for employees to invest both their careers (their human capital) and their personal savings in the same enterprise." (p.316)
  

Surprises and Not-so-Trivial Trivia

• the accumulation of capital actually contributed very little to the growth that has generated all our wealth - i.e. there isn't much capital in capitalism! success is all about innovation and starting small with little capital
• famines in France - one of the more advanced regions of the world - were frequent up to the 18th century
• sieges in the Middle Ages often failed because the besiegers often starved before the besieged
• the three-masted sailing ship, double-entry book-keeping and the skills of clockmakers were key ingredients to economic growth in the past
• the Magna Carta principle that property should be protected from arbitrary expropriation by the government arose as an accident of a power struggle between elites of the time, the king and the nobles, though it has been hugely important as a protection for everyone since to retain the benefit of their ingenuity and labours

Lessons and Take-aways

• our material prosperity is robust, i.e. let's not despair folks, the market will come back sooner or later; one can view the current turmoil as getting rid of the bad stuff, a process the book describes as being as important as the creation of the new
• our material prosperity is not guaranteed or inevitable; many successful elements play a part and they must be defended against the corrupt, the misguided, the power hungry
• fast growth can be sustained through innovation in the creation of new products and services; the past of hundreds of years ago or even a only a hundred years ago was not like the present;
• small companies are the drivers of growth and the winners of the future; many will get launched and fail but a few will succeed spectacularly; big old companies are destined to eventually fade away despite their seemingly unassailable power and prosperity today

This book is a classic, a valuable source of understanding how our current material well-being came about. Its lessons are still very current.

My rating 5 stars out of 5.

Faster Electronic Payments in the UK ... Possibly

An article on the BBC website Faster Bank Transfers Underway lets us know of the start-up today of a worthwhile service that allows people to make same-day transfers from their own bank account to someone else's bank account. The existing electronic payment service (called BACS) saw the money disappear from the sending account and then show up three days later at the recipient's account.

The drawback is that not all the banks are starting up at the same time (see this previous BBC article How Fast is Faster Payment Plan?) and some are phasing in the amount that can be transferred, starting with small amounts now and upping it later to the eventual maximum of £10,000. This is apparently to avoid the "Terminal 5 Effect" (thank you British Airways for enriching our language with a delightful new phrase that denotes big bang cutover disasters). Instead of Terminal 5, we have the equivalent of a gradual shift from driving on the left to driving on the right - motorcycles the first week, trucks and buses the following week, cars the third week and so on. It will likely be mid-2009 before we can count on the new service.

The launch is so low-key that Lloyds TSB, one of the first banks supposedly offering the service today, makes no mention of it on its website, or even in the payments function inside an account.

Nice try APACS (the UK payments association), which has a checker to verify if your sort code is able to receive one-day payments. We' ll rate this 5 out of 10 for now. Why could the existing same-day transfer service called CHAPS not have been made free and expanded to everyone? Does it have to do with another hoary but true axiom of the IT world that describes the difficulty of modifying an operating application, "God could not have created the world in seven days if He had had an installed base"?

Lessons of a Failed Endowment

An acquaintance here in the UK recently received the annual statement for a Life with Profits Endowment policy. An endowment is a kind of investment whose purpose is to provide a target lump sum a specified number of years in future, when it matures. Most often, as in this case, it is meant to pay off an interest-only mortgage when the mortgage ends. The word "Life" means that there is also a life insurance policy that pays off the lump sum if the person dies before the policy matures. The "with Profits" bit refers to the method of crediting the profits generated by the underlying investments in stocks and bonds (the details of which are hidden and unknown to the investor). The profits are dribbled out in the form of so-called bonuses to smooth out returns from year to year. The proceeds are normally free of further tax in the hands of the investor since the life insurance company has already paid taxes. Endowments were often touted as "tax-free" investments when all that really meant is that they were tax-prepaid. For a longer explanation, read this page at InvestmentGuide.co.UK.

In this case, the endowment was to generate £24,000 over the twenty years, starting in 1992 and maturing in 2012. My acquaintance would pay £49 a month during the twenty years. That's about a 6.5% rate of return. It would actually be a little more since the insurance component costs something and not all goes into the investment component, but the insurance cost is minor - less than 10% of the premium.

"RED ALERT: HIGH RISK OF SHORTFALL" read the top of the statement in big bold (though not red) letters. You're not kidding! The plan as of May 2008 was worth £13,162. That's about 4% return per year. The statement also provides low/medium/high projections of possible value at maturity in 2012 were £16,400, £17,500 and £18,600 using 4%, 6%, 8% growth rates. Hmm, wonder which one to count on? High risk of shortfall? Is this the British fondness of under-statement?

To put this abysmal rate of return since 1992 in perspective, consider that the FTSE 100 index has risen about 5.3% a year since 1992 (see EconStats for the numbers). That's not even counting the 3% or so per year in dividends distributed by those companies, which would give an annual return of 8.3%. In that context, the 6.5% per year that would have been required to produce £24,000 seems quite achievable, even if lower yielding bonds were added to the mix.

I suspect that fees and expenses ate away the returns as much or more as Standard Life's investment incompetence. Whatever the cause, the result is awful, especially since the person is still locked in and cannot cash out, or even suspend payments, without paying severe penalties that would be worse than simply sticking with it for another four years. Caveat emptor indeed!

The lessons I draw from this:

• don't invest in something merely for tax savings or a tax-free payoff
  
• fees and expenses are a critical investment evaluation factor, the lower the better
• passive index-type investments will more often do better for the average person than any type of active fund management, even when the approach of the fund company is conservative - the fund performance is just under a lower bar
  
• a complicated product like an endowment should be subject to much skeptical scrutiny - e.g. why is an endowment better than simply buying term life insurance separately and getting a repayment mortgage? If you cannot understand what you are buying, there is a significant chance you will be taken advantage of - see ThisIsMoney article amongst many, on how mis-selling of endowments caused enormous criticism and compensation for some has come about.
  

Canadian Earning UK Income and The Double Taxation Convention

A reader asks:
"I was wondering if you could help shed some light on the double taxation convention between the uk and canada. Currently I'm working in the UK for over a year, but im still a Canadian Resident. I've been paying my taxes here in the UK, however I found out my accountant wants around 9500 Canadian as well. I'm still considered a resident in Canada because I'm paying healthcare and have bank accounts, but no income made in Canada. I was wondering would the Double Taxation Convention apply to me? And would I just tell his to my accountant to work out?"

It sounds as though you would be considered resident for tax purposes of both countries. In the UK, you are Resident if you spend more than 183 days in a tax year from April 6th to the following April 5th (not the calendar year). In Canada, it depends on your ties to the country, the most important so-called primary ties being a spouse, family/dependents and a home but others like those you mention also being included. The onus and burden of proof to becoming non-Resident seems to be to actively sever ties, otherwise you are likely to be still considered Resident.

When you thus become Resident of both the UK and Canada, the Canada-UK Tax Treaty I wrote about on March 25th comes into play to determine how the two countries divvy up your tax money.

In the case of employment income, the country where you earn the salary gets first dibs and deducts whatever taxes are owing according to its rules, in your case, the UK. Then, because you are also Resident of Canada, you have to report the same income again on a Canadian return, calculate the Canadian taxes owing on the same income by the Canadian rules, claim a credit for the taxes deducted in the UK and if you owe anything more, pay that to the Canadian government. In fact, you almost certainly would owe Canada some more since Canadian tax rates on income are higher than those of the UK (see comparative table here). But that's a good thing since you cannot get a refund from either country if you overpaid according to your "home" country.

The Canada-UK Tax Convention says that the UK can tax your employment income earned in the UK in article 15.

For convenience, I've made a table that summarizes the different ways that the Treaty deals with various types of income and taxes, like dividends, capital gains, pension payments, annuities and interest.


Maybe the $9500 is the extra your accountant figures you owe the CRA. Any good accountant should be aware of the treaty so you should be able to get confirmation from him/her about the above.

Malt Whisky: Investing in an Alternative Asset Class for Pleasure and Profit

A professor stood before his class with a selection of items in front of him. When the lecture began, he took a very large glass, filled it up with large stones. When the glass was full, he asked the students :
"Is the glass filled up now?"
Everyone agreed that it was.
The Professor took some very small stones, and placed them gently into the glass while shaking it very carefully, causing the smaller stones to go in between the larger stones.
When the glass again was filled up to the edge he asked once more :
"Is the glass filled up now?"
Everyone agreed that it was filled up.
When the professor placed a bag with sand on the table the students laughed, because the professor could add sand between the stones, and he filled it to the top.
"Now!" said the professor "Please imagine that this glass is your life!"
The large stones are the meaningful things in your life, family, girlfriend or boyfriend, kids, your health etc. things that are important and will always be a part of your life. The small stones are stuff not that important , like your job, house, car and the sand is everything else.
"Please notice ! If the glass is full of sand there will be no room for small and large stones. It's the same in life, if you use your time and energy on small stuff there will be no room for important and meaningful stuff.
Always focus on which things are important for you, and your life will be great and happy.
Play with your kids, see the doctor, take care of your health. Spend time with your partner, there will always be time to work, clean up the house and the other smaller stones!"
"Fill up your life with large stones that really matter. Check and arrange your large rocks and stones and keep in mind that the rest is only smaller stones and sand."
All the students nodded as they saw the point!
The Professor then looked over the students and took a glass of whisky, which he carefully poured between the sand, the smaller and the larger stones.
He looked up again and said:
"And the moral is - No matter what happens in your life there will always be room for whisky!" (joke taken from the Alternative Whisky Academy Funstuff page)

One of the many gifts that Scotland has given the world along with curling and golf, not to mention legal, intellectual, engineering, educational, literary contributions (for a highly enjoyable and informative book about this, have a go at Arthur Herman's The Scottish Enlightenment) is Scotch whisky, especially the single malts.

I was reminded last weekend while stopping in Inverary (in the attached photo, that's the whole of the tiny town behind one of Her Majesty's warships in Loch Fyne) at the Loch Fyne Whiskies Shop that malt whisky can be an investment as well as a taste delight. There on the shelf behind the counter sat a bottle of 1919 Campbelltown malt, for sale at the modest price of £14,000! He said that it was one of two bottles left in the world and that as soon as it was sold the price would likely go up to £20,000! No one should ever drink it since it would likely not be that good. The imagination and the mystery from the old unopened bottle, like owning a living bit of the past, would give far more pleasure to the owner than the actual taste.

However, if that's the kind of profit that can be made, maybe it's worthwhile to consider as an alternative investment. According to a 2004 FAQ on the price of whisky, the record price was £29,400 for an 1850 bottling of Bowmore.

In answer to my query, the proprietor confirmed that there is an active market for collectors and investors in rare and old single malts. The interest is worldwide. Swedes and Germans are apparently very fond of the "water of life", or uisge beatha in Gaelic, but there are many other lovers of a dram.

The proprietor warned against trying to invest via cask purchases due to the practical difficulties of bottling and storing and marketing (who will want to buy your whisky?). He advised that buying individual bottles is a better method of investing. Bruichladdich (a lighter, less peaty Islay malt) is one distillery that offers to sell casks to individuals. Buying a 2008 cask at £1100 (bourbon) or £1450 (wine) would produce 300 to 380 bottles after ten years. Are you that patient?

Good Investment in Bad Economic Times? - The BBC reports that whisky producers find that sales increase when the economy slows down. Given the current state of the economy, maybe it's now (Sept 2008) a good time to look at whisky, including mainstream drinks companies like Diageo (NYSE: DEO) and Pernod Ricard (shares on Euronext).

Markets and Prices: Thanks to the Internet, there is an active and visible market, in which prices can be researched. These consist of auction sites:
eBay - search for whisky
McTears - live auctions in Glasgow in March, June, September and December; past sale prices are archived and available for reference
Whisky Auction - online auctioneer

General Knowledge and News: There is no shortage of websites for aficionados with plenty of links, descriptions, tasting notes, live events.
DramNation - reviews the above auction sites, has a on-line shop, lists the many distilleries, user discussion forum
VisitScotland - primer on whisky, links to events in Scotland, tours and travel info
Alternative Whisky Academy - lists and comments on shops around the world, index of whiskies, lots of links to whisky related websites

Books: Books are a great way to learn about whisky, the history, the variety of malts and opinions on what tastes best. The longest list of books I've found is at The Whisky Exchange, where they can be ordered online along with malt whiskies and other exotic alcohol.

Single malt whisky has been around for hundreds of years and it is a hugely successful product, whose popularity has not stopped rising. The inherent quality and pleasure of a good malt gets a price boost from a certain snob appeal in certain quarters. Old bottles are getting scarcer and even new supply is constrained by water supplies (of all things in Scotland!) and even barley I was told at one distillery.

Ultimately, the problem for any potential investor is trying to predict what will be popular. Even bottlings that are generally considered to be fine tasting today may go out of style. The one bottle worth a lot in a collection (portfolio?) may be weighed down by a number of others whose value stays the same. The Scotch Whisky Review from Loch Fyne Whiskies recommends collecting for pleasure but not investing. Even if one does try investing and it does not work out, at least there is the means at hand to drown one's sorrows!

Slainte Mhath!

Update Nov.3, 2008 - Signs of supply constraints - the CBC reports that Diageo is withdrawing brands from New Brunswick because it is a low margin sales area, i.e. they can make more money in places like India, China and Russia. This confirms an article in the Guardian from last December that reported rumours of such impending action.