Doctors, Davos and deflationary deposits

21/01/2015

Charlie Ansdell

Reputation and overconfidence

IPSOS Mori released their annual trust survey last week.  Once again, Doctors top the list of those that the general public believes are most likely to tell the truth, with 90% believing this.  Business leaders score a miserly 34%.

However, academic research (Plous, the Psychology of Judgement and Decision making (1991)) shows Doctors believed themselves to be correct in their assessments of their patients 90% of the time, but were actually right less than 15% of the time.

Doctors clearly believe they’re telling the truth, as does the public.  It doesn’t mean they are.

Davos: the dangers of global scrutiny 

Davos remains the flagship event for global CEOs and politicians to rub shoulders at.  This year, the unlikely pairing of Al Gore and Pharrell Williams launched the Live Earth concerts, to combat climate change.

While ostensibly good publicity for all involved, it hasn’t taken long for the media to note the 1,700 “gas guzzling” private jets that took the world’s power brokers to the summit.  CEOs looking to plug their green credentials may find eyes glued to their Gulfstream instead.

This goes back to the importance of leadership as part of communications strategy.  With smartphones and social media ubiquitous, it’s not enough to just talk the talk, you have to walk the walk.

Changing Savers perceptions in a deflationary world 

Over the past six years, since interest rates dropped to 0.5%, savers have complained of a raw deal.  In many ways they’ve a fair point – until recently, inflation has remained stubbornly high.  Simultaneously, savings interest rates have plummeted – meaning savers have seen a fall in the real value of their income.

However we’re now facing the prospect of deflation.  In deflation, the value of any income and indeed capital increases over time.  The trouble is, savers think in terms of gross income, not real income.  In a deflationary environment, a saver could cash in some of their savings capital to release income and still retain their capital value in real terms.

Conceptually, this is difficult for most of us to get our head round – most of us are used to the “bird in the hand” attitude when it comes to income.   However, this is a concept the financial services industry must work to convey quickly.

The Government recently launched 4% pensioners bond over three years – an absurdly high rate in a near deflationary market.  In October 2008, before the Armageddon of the financial crisis, inflation was 5.2%.  The best buy interest rates at the time, from the soon-to-be-bankrupt Icelandic banks was 7.67% - 247 bps above inflation on a three year bond.

With current inflation at 0.5%, the pensioners bonds are 350 bps above inflation.  This is way above what the government can borrow at, meaning the taxpayer picks up the bill. 

This is not sustainable in the long term.  Instead, it’s important the financial services industry educates people about deflation.  Savers –including pensioners – need to understand that they don’t need a high gross income in a deflationary world, and can sell assets without eroding capital.

If we don’t change perceptions, younger generations will end up footing the bill again.

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