Three big things I read this week

I read three big things this week in the news that might interest financial independence campaigners.

1. The Governor of the Bank of England doesn’t want you to ask for a pay rise

Seriously. Andrew Bailey was reported in the BBC as telling firms to show restraint in pay negotiations. When asked by the reporter specifically whether he was telling workers not to demand big pay rises, he said “Broadly, yes”.

Now, on a macro level, he has a point. Well, sort of. If everyone gets more pay, they can spend more, so demand for goods and services increases against supply… causing price inflation. Well, Andrew, you’re not wrong.

Thing is, that inflation is happening anyway. We’ve printed a ton of money over COVID via the Bank of England agreeing to buy a ton of government bonds. Yes, his bank, the one he runs.

You can read about how money is literally made by our banking system on my post about how money is made.

We’re also in a situation where worker shortages – by Mr Bailey’s own assessment – are prolific. Simple market forces should enable workers, who are in short supply and high demand, to charge more for their work.

I don’t think that the government was necessarily wrong for borrowing money from future generations to fight COVID-19. Emergencies are, well, emergencies. Inflation is a stealth tax that affects everyone equally (i.e. uniformly, as opposed to equitably). However, to suggest that for the good of monetary policy the individual should not take advantage of being on the favourable side of market forces is ludicrous.

Also: read the room, Andrew. With your £575,538 pay and benefits, the decisions you take are barely going to affect you. The rest of us need to plan against this, so let us plan.

Here’s a fun fact that will make you panic-check your portfolio: the FAANG stocks (Facebook/ Meta, Apple, Amazon, Netflix and Google/ Alphabet) make up a huge chunk of the S&P 500. In August 2021, Investopedia reported this as 19% of the index.

So what?

Chances are, your global index fund has a big lean in to Meta. Yes, if you invest in a global index, you have thousands of shares. However, the growth will largely come from those five companies.

I don’t think it’s time to panic. The potential damage is small.

My concern is that a lot of the growth in any index tends to come from a few leading shares – like the FAANG shares in the US.

If I were to take the bold strategy of investing simply in the S&P500, I’d be relying on these 5 x FAANG stocks performing. With the cost of living increases, I don’t know how well these will perform in the next decade as none of them are providers of “essential” services.

Well, maybe Google.

3. Energy price cap is increasing by 54%

This week, the energy price caps raised by around 54%.

Interestingly, this doesn’t affect everyone equally. It’s a ceiling increase for standard tariffs. You might have a different arrangement with your supplier – Ofgem has an explainer on its website to help you figure this out.

The big thing here is the size of the increase. By every measure, 50-odd-percent is a no-joke jump on a bill that pretty much affects everyone to some degree.

Inflation that you see in the news isn’t necessarily the inflation that you experience. Everyone’s spending is different, there’s no way a picked basket of goods and services is going to suit everyone. However, energy bills are basically inescapable for most people. I suspect that everyone is about to experience a large and sustained inflation in their spending for the next couple of years.

Thoughts overall

I don’t agree with the idea that 7% inflation is likely to be temporary. If it were, Andrew Bailey wouldn’t be afraid of pay rises and the energy price cap would have been increased more conservatively.

No, I think we have a few more years of high inflation to come, and I suspect that Facebook/ Meta’s results signal a change in how we can expect US equities to perform in the next decade.

This is basically all negative news for financial independence campaigners. That sucks. However, if we can’t change the news, we can at least control how we respond to it.

As I said in my 2022 campaign plan, I’m hoping to relocate this year. On arrival, I aim to boost my investments in equities.

I think I’m going to look more at REITs and traditional, dividend-paying stocks in industries like consumer staples. I’m probably bound to invest through index funds and ETFs due to my work (lawyers often can’t invest into individual public companies as we might have insider knowledge), but I will have a long think about my equities investing strategy.

It may be that I stick with the global index funds, but it might be that my pension remains in global indices while my other investment accounts diversify into a different strategy.

I’m probably also going to invest in some good warm layers for next winter…