Bad but by no means the worst

By the standards of our lifetimes this will be one of the more unusual Christmases we have ever experienced. Large parts of Europe are living under lockdown conditions and many millions of people will be separated from their extended families, in many cases not having seen them since last Christmas. Undoubtedly many of us have been inconvenienced but spare a thought for those who have lost loved ones during the year. Spare a thought, too, for those in front line service jobs who have worked to look after us and provide the services that have kept the economy afloat. Health professionals (doctors, nurses and the ancillary staff who keep the system running) have had a tough year and they will continue to work over the holiday season. Special thanks are also due to those who have kept the lights on, delivered the goods to our doorstep and the countless other services which have allowed us to maintain a semblance of normality in 2020.

All of this did get me wondering how badly this year’s Christmas stacks up against past years. It certainly will not be the worst in history. The outbreak of bubonic plague in Europe between 1346 and 1353, which is estimated to have killed 60% of the population, would have made for a truly frightening experience. In a forerunner of today's social distancing, cities such as Venice and Milan put emergency public health measures in place to limit personal contact whilst the Adriatic port city of Ragusa (modern-day Dubrovnik) was the first to pass legislation in 1377 requiring the mandatory quarantine of all incoming ships and trade caravans in order to screen for infection. Well-documented outbreaks of bubonic plague afflicted large European cities over the next 300 years with outbreaks in London in 1563 and 1665 particularly noteworthy. Ironically, plague outbreaks tended to subside during the winter months as the disease vectors (rats and their fleas) retreated in the wake of colder weather. Christmas may thus have seemed a miraculous interlude in an otherwise endless cycle of misery.

Christmas during periods of war are also dreadful. We have been regaled over the decades with stories about how bad Christmas was in the UK during World War II with 1944 described as “the most joyless Christmas of the war.” One amusing anecdote from that period is that such was the lack of alcohol that year “that, of the half million inhabitants of Kensington, Hammersmith, Fulham and Chelsea, in London, only one woman was arrested that year for drunkenness over the holiday.” There was nothing to laugh about in Germany in 1944. Supply shortages were almost intolerable in cities which were ruined shadows of their former selves whilst weekly working hours had recently been increased to 60 hours to free up labour for the war effort.

Of course, war and disease were not the only dampening factors on Christmas celebrations. Before the Reformation in 1560, Christmas in Britain was celebrated as a religious feasting day. But the rise of the Puritan movement in the seventeenth century meant that the season was increasingly frowned upon as a frivolity associated with Roman Catholicism. In 1640 the Scottish Parliament passed a law that made celebrating ‘Yule vacations’ illegal. In 1643 the English parliament followed suit, passing a law calling on the people to treat the mid-winter period 'with the more solemn humiliation because it may call to remembrance our sins, and the sins of our forefathers, who have turned this feast, pretending the memory of Christ, into an extreme forgetfulness of him, by giving liberty to carnal and sensual delights'. In 1644, parliament followed this up by abolishing the feasts of Christmas, Easter and Whitsun altogether. From this point until the Restoration in 1660, Christmas in England was officially illegal. Even after the law was repealed in Scotland, Christmas celebrations were frowned upon for a long time afterwards. It was not until 1958 that 25 December became a Scottish public holiday.

Many of the non-conformist Puritan movements which left Europe for the New World in the seventeenth century carried this attitude with them. The Plymouth Pilgrims in 1620 spent their first Christmas Day, in what later became the United States, building their first structure. The following year new arrivals, who spent Christmas Day celebrating rather than working, found themselves at odds with the original settlers. It was not until 1681 that laws forbidding the celebration of Christmas were repealed. But “as late as 1870, classes were scheduled in Boston public schools on Christmas Day and punishments were meted out to children who chose to stay home beneath the Christmas tree.”

However inconvenient this Christmas will turn out to be, for the most part it pales into insignificance compared with past privations. Stay safe and enjoy the festivities as best you can – even if is only via Zoom. All the best to you and yours at this very unusual time.

Cards and other Christmas traditions

Whilst you enjoy a well-earned rest in the company of your family and look forward to your Christmas dinner, spare a thought for those who have to work over the festive season. According to the TUC, more than one million British workers will be giving up their time over the holiday season – around 3.4% of those in employment. For those in the caring sector it’s just another day with nursing staff and doctors having to work over the festive period as illness knows no seasonal bounds. Indeed, I have good reason to be thankful for their efforts as I was forced to take an elderly relative to hospital one Christmas Eve. It is also a busy day for the clergy with the TUC estimating that there will be around 25k working tomorrow – as many as are employed providing care for the elderly.

But whilst Britain appears to shut down over the holiday season, it is worthwhile recalling that it did not used to be this way. Whilst Dickensian Christmas themes have become a seasonal staple, the poor working man did not get much time off over the festive period in Dickens’ day. Although Christmas Day was inaugurated as a bank holiday in 1834, Boxing Day only became a public holiday in 1871 – a year after Dickens died. But the passage of the Bank Holiday Act of 1871 meant that workers were now entitled to six whole days of holiday per year – many people will be taking more than that amount of time this Christmas alone.

Another of the great Christmas traditions dating back to Dickens' time is the widespread exchange of cards (see chart for more facts and figures).  Apparently, we send enough cards that if we placed them alongside each other they would cover the world’s circumference 500 times, which is an awful lot of paper. As one academic article put it “Every year, the British public celebrates Jesus's birthday by cutting down eight million trees, wrapping enough presents to smother Guernsey, binning billions of greetings cards, and then throwing away £1bn worth of food.” Whilst this sounds somewhat Scrooge-like, there is a serious point to be made here that the average UK household raises its monthly spending by almost one-third in December on things we may or may not want.

Many of the cards we send will be decorated with traditional winter themes but ironically it does not snow very often in Britain around the Christmas period. That said, winters tended to be much colder in the nineteenth century than they are today and this historical echo goes a long way towards explaining why winter themes dominate our cards. In fact, there is more chance of snow between January and March than there is in December, and the change to the Gregorian calendar in 1752 effectively pushed Christmas day back by 12 days thus further reducing the chance of snow on the big day. Moreover, the evidence does suggest that northern hemisphere winters are getting warmer. Climate change, which makes the northern European climate warmer and wetter, is likely to further reduce the chances of snow on 25 December. To the extent that environmental considerations are increasingly impacting on the choices people make, it is likely that in future we will celebrate Christmas differently compared with today.

One of the longer standing Christmas traditions is to look back to the past and argue that it always used to be better. As The Scotsman newspaper reported at Christmas 1900, “The seasons seem to have undergone so much change of late that orthodox Christmas weather, with its associations of frost and snow, and its exhilarating atmosphere, would appear to be almost a thing of the past.” Much as I fear the effect of global warming, somehow I don’t miss all that frost and snow. Merry Christmas to you and yours.

Not seeing is believing

Last week the world was abuzz with the story of how Gatwick Airport had been closed due to sightings of a drone dangerously close to the runway. Cue social media outrage that something must be done. Get the military in to shoot them down! I even read how Dutch airports are training eagles to take out rogue drones. The general tone, even from the more sober elements of the media, was that the government’s credibility was somehow damaged. All pretty depressing stuff.

So imagine my surprise that it now transpires no one in authority has actually seen the drone in question. According to the police, there was “always a possibility that there may not have been any genuine drone activity in the first place.” There were no pictures or video of the drone incursions into the airspace around Gatwick; there was “no available footage and [officers] are relying on witness accounts.” I was not one of those affected by the disruption and my sympathies go out to those that were. But you have to see the funny side, particularly at this time of year.

After all, we tell our children that a portly gentleman dressed in red manages to park a sleigh driven by nine reindeer onto the roof of our house, drops down the chimney and delivers unsolicited presents. Strangely we never hear him. Nine reindeer on the roof! Coming down a chimney! And although he is such a great house breaker, he never takes anything away. Indeed, he leaves stuff behind! No wonder we celebrate at Christmas: the guy is a phenomenon.

Santa Claus is testimony to the power of belief. As children we are willing to suspend our critical faculties because the payoff is so good that it pays to be a believer. It gets harder to suspend our critical faculties as we get older but people are still able to do it. After all, if it weren’t for the belief in an invisible Deity, we would not be celebrating Christmas. But Santa Claus today has competition in the form of Amazon, which is able to deliver goods to virtually anywhere in the world. Better still, they operate all year round whereas the man in red operates on one day only. There again, I would rather have Santa dropping down my chimney than Jeff Bezos.

The power of ideas is one of the most powerful of human forces. So let’s not knock those who thought they saw a drone at Gatwick last week. Maybe they did. Maybe they did not. Or maybe this was Santa doing a bit of drone testing in order to keep up with the competition. After all, reindeer are expensive costing around USD 2000 per year in upkeep. That’s a decent outlay when you are a pensioner working one day a year for free and who gives stuff away.

Increasingly we have to suspend our disbelief at the events unfolding around us. So I’m going to give the benefit of the doubt to those who thought they saw a drone at Gatwick last week. Just because you can't see it, doesn't mean it wasn't there - after all, they laughed at Einstein. It just remains for me to wish you and yours a Merry Christmas and may you continue to travel safely in 2019.

The costs (and benefits) of Christmas

According to a survey conducted by the National Retail Federation, the average American plans to spend $967.13 on gifts during the 2017 holiday season (defined as spending over November and December), which represents an increase of 3.4% on 2016. Cheapskates! According to the Christmas Price Index calculated by PNC Financial Services Group, the basket of goods which one’s true love can be expected to send over the twelve days of Christmas (a partridge in a pear tree, two turtle doves etc.) costs a whopping $34,559. If you follow the sequential purchasing of the presents (12 partridges in pear trees, 11 times two turtle doves etc.), the total cost amounts to almost $160,000.

Over the last 33 years, the average cost of Christmas on the basis of this index has risen by 2.9% per year. But significant volatility is introduced by the price of swans. PNC thus suggest that a core Christmas index can be constructed excluding this item, although this does rather change the nature of the index as it is by far the most expensive item, accounting for 50% of total outlays (down from 78% in 1984). If your true love is not particularly partial to swans a-swimming, this reduces the total cost of the basket to just below $80,000. Quite the bargain! In terms of inflation, however, the core index has increased at a rate of 4% per year since 1984. For the purposes of comparison, US headline consumer price inflation since 1984 has averaged 2.6% per year (core: 2.7%).

Assuming that the UK imports all of these goods from the US (I know, but we are not being entirely serious here), the total cost of Christmas in the UK has increased at an average rate of 2.5% per year. However, it probably makes more sense to focus on the core index since the Queen owns all the swans in the UK (technically, she owns any unclaimed mute swan in open water in England and Wales but let’s not split too many hairs). This measure of the UK core Christmas index has posted an average inflation rate of 3.6% per year since 1984. Last year was a particularly painful one given the collapse in sterling which raised the UK Christmas index by 20%. It has since fallen back a bit on the basis of a slight rally in sterling but clearly even Christmas is not immune to the costs of Brexit (so thanks for that Nigel and co). 

Of course you can avoid the whole rigmarole by refusing to play along. Back in 2001,the economist Joel Waldfogel argued that there is a significant deadweight loss associated with Christmas primarily because the consumption choice is made by the giver of gifts rather than the final consumer. As he put it “it is more likely that the gift will leave the recipient worse off than if she had made her own consumption choice with an equal amount of cash.” This deadweight loss is estimated at between 10% and 33% of the value of gifts. So if you are thinking about buying someone a book for Christmas, you should probably follow Waldfogel’s advice and not buy them a copy of his book Scroogenomics.

Indeed, Waldfogel is guilty of making the classic error of focusing purely on those quantities that can be assigned a monetary value. The whole point of giving a gift is a sign of appreciation that we value the recipient, and it should be seen as a signal that the giver is prepared to invest time and effort to demonstrate individual recognition that is absent at most other times of the year. It is thus probably going overboard to purchase the 364 gifts required in the old Christmas carol (assuming a partridge in a pear tree is one gift). Indeed, if someone were prepared to spend the $157,558 that PNC calculates that the basket of goods cost, I think I would rather have the cash if it’s all the same to you.

But even if Santa Claus somehow forgets to bring you an envelope stuffed with that amount of cash, I wish you and yours a Merry and Peaceful Christmas.

All I want for Christmas ...

… is a Ferrari 250 GTO. Admittedly it’s not a modest request – the last recorded auction price of this widely revered classic was a cool $38 million and there is one on the market today for a reported asking price of $56 million (here). When new in 1962, they cost $18,500. To put this into perspective, I have converted this using prevailing exchange rates into sterling values in order to compare with other so-called safe asset values such as housing.

According to data from the Nationwide Building Society, the average price of a UK house in 1962 was £2,600 – around one-third of the price of a Ferrari 250. By 1965, when the 250 was auctioned for the first time, the selling price was 25% of the original list price and it could be purchased for 40% of the average UK house price. Up until the early 1970s, the selling prices of the 250 were never higher than average house prices but from the middle of the decade, prices began to ramp up hugely (see chart). 

The first $1 million sale occurred in 1986 and by the late-1980s – the peak of the bubble in classic car prices – the 250 GTO was selling for prices in excess of $10 million which was 125 times the price of an average UK house. Following the early-1990s crash, which saw Ferraris changing hands for a mere $3.6 million (42 times house prices), prices began to edge up again but it took until 2010 for prices to exceed the previous 1990 peak. It is notable that the ratio of Ferrari prices to house prices has already gone above the 1990 level and if the current prospective seller realises their expectations, the buyer could in theory buy more than 200 houses for the same money.

If someone had bought this wonder of engineering new in 1962 and sold it for $38 million in 2013, they would have realised an annual average return of 16%. Had they waited until 1965 to buy at auction, they would have realised a gain of 21%. It’s a much better rate of return than housing, where prices have risen at an average rate of 8.5% since the early 1960s. However, the FTSE All-Shares index has posted an average return of 13% since 1962. Investors would not, of course, have realised such stellar gains as they would have had to adjust their equity portfolio holdings in order to replicate the index which would have resulted in transactions costs which eat into returns.

On balance, therefore, the Ferrari 250 looks like a great investment compared to other forms of asset. But we are not all fortunate enough to have the wherewithal to afford such an outlay. Most classic car enthusiasts have to start much more modestly and prices have risen much more slowly over a longer horizon. In any case, the market is highly segregated with top brands showing significant gains whereas at the lower end of the spectrum price inflation has been less dramatic. However, the Historic Automobile Group International (HAGI) index suggests that over the last five years, classic car prices have risen by between 25% and 30% per year. I would attribute this at least in part to the low rates of return on financial assets which have forced investors to look at alternative investment products. It may be a market which, when it pops, does so with a vengeance.

Unfortunately for me, I do not own a classic car, so I am speaking from observational rather than practical experience. But as a reader of classic car magazines in my youth, I used to scan the adverts to check what I may one day have been able to afford. In the late-1970s I recall seeing an ad for an Aston Martin DB5 which was described as being in need of some loving care. I subsequently came to realise that meant a total wreck which was probably held together by rust. However, it was on sale for a mere £750 (no – I have not missed a zero) which was cheap even by the standards of 1978. I barely had 75p to rub together in those days so it was a little out of my league. But a DB5 in even fair condition is today valued at £438,000 with a top notch model able to fetch £958,000. Allowing for £10,000 of maintenance to bring it up to concourse standard, that would have provided a cool annual return of 12.5% over the last 38 years.

They do say that this is the season when dreams come true, so if you’re listening Santa … Merry Christmas!