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Kids off to Uni? Congratulations – but have you been saving enough?

Archive for October, 2018

Kids off to Uni? Congratulations – but have you been saving enough?

Wednesday, October 10th, 2018

The Institute of Fiscal Studies suggests that the average total debt incurred by today’s university students over the duration of their studies will amount to £51,000. This figure comes as those in higher education saw the interest rate on student loans rise to 6.3% in September. Total student debt in the UK has now risen to £105 billion as of March 2018, a figure £30 billion higher than the nation’s total credit card debt.

The rising cost of higher education perhaps makes it unsurprising that 40% of parents are now beginning to save towards future university costs before their children have even been born, with one in five hoping to have saved £2,000 by the time the baby arrives. Frustratingly, however, around two thirds of those who are saving are doing so by simply placing the funds in an ordinary savings account, meaning their money is earning them very little in interest.

An alternative option to consider is a Junior ISA (JISA) in the child’s name, which they can then access when they turn 18. The account currently allows £4,128 to be saved every year, and the best rate market rate for a cash JISA offers 3.25%. Saving the maximum amount at that rate for ten years would result in a nest egg of £49,427 tax free to cover university fees with plenty left over for other expenses.

Whilst a cash JISA offers dependability, a stocks and shares JISA is also worth considering as the potential reward on your investment can be higher. Both types of JISA can be opened at the same time with the allowance shared between them, so spreading your savings between the two can pay off in the long run.

Using your pension to save towards your child’s university education is also an option, thanks to the pension freedoms of recent years. With the ability to take a lump sum to put towards fees and other costs when you turn 55, pensions offer a tax-efficient way of putting away for both your child’s future and your own. This is an option which needs careful planning, however, as you’ll need to make sure you have enough for your retirement before paying for your child’s education.

For those able to do so, it may also be worth speaking to your own parents about helping towards their grandchildren’s university costs. Rather than leaving money to a grandchild in their will, a grandparent might consider gifting towards fees and other expenses or placing the money in a trust, reducing their inheritance tax liability and allowing their grandchild to benefit from their legacy when they really need it.

Make sure you don’t lose out by shunning guaranteed annuities

Wednesday, October 10th, 2018

Since increased pensions freedoms were established in April 2015, the FCA says that £3 billion worth of annuities have been rejected by over 55s. Now, nearly three in five over 55s are refusing the guaranteed annuity rate (GAR) offered to them by their pension provider. Of these, nine out of ten are taking the cash instead.

A GAR means that if you use your pension to buy an annuity, you are guaranteed the rate that you get paid until you die.

Nowadays, a worrying proportion of pensions with large GARs are being cashed in, indicating that people might not be thinking through their decision because some GARs can provide a very generous income for retirements. Hargreaves Lansdown report that GARs are being rejected on 35% of applicable pensions worth more than £30,000.

If you have a GAR, you might be losing out over the course of your retirement if you decide to cash it in.

GARs were a common feature of pensions that date from the 80s and 90s. The rates on these are typically much higher than the best rates on the open market today, because they were set at a time when annuity rates were greater. In the 1980s and 1990s you could buy an annuity with a considerably higher rate than you could find today.

When making a decision to cash in your pension, doing the following will make you less likely to lose out:

  1. Check your paperwork. Although you probably feel like you have an unfeasible amount of pensions paperwork, take the time to sift through it to find out if you have a GAR. If you aren’t sure, call your provider to check. Remember that if you’re still unsure, you can get in touch with the Pensions Advisory Service for free help.
  2. Have a look at the terms. Even though a GAR could boost your retirement income, their terms can be a little rigid. Some GARs apply to your dependant’s pension, others don’t. Often, GARs are very inflexible about when you are able to take your income.
  3. Take an integrated approach. It’s unwise to consider all of your pensions in isolation. Instead, it’s best to consider them as individual building blocks that contribute to your overall retirement income. A holistic approach will help you consider in which order to draw on your different pension pots. Usually, it’s best to use a pension that doesn’t have any guarantees if you plan on retiring early.
  4. Get a requote. If you don’t think that the terms of the offer suit your circumstances, talk to your provider to try to find an alternative option. Chances are your provider won’t volunteer this option so it’s always best to ask.
  5. Think about a partial transfer. If you have a larger pension with a GAR, transferring out a portion of the money could be an option while buying a fixed rate annuity with the rest. This would mean that you maintain the benefit of higher annuity rates whilst getting a cash lump sum.

October market commentary

Thursday, October 4th, 2018

Introduction

On Tuesday, 3rd November 2020 the United States will go to the polls to elect its next President. All the indications are that Donald Trump will stand for a second term and if the words of Bill Clinton – “It’s the economy, stupid” – are to be believed, he will win.

While not wanting to make a political comment or endorse his policies in any way that be welcome to some extent – he does provide plenty of news and entertainment for these commentaries, after all. September was no exception, as he ramped up the trade war with China, ordering tariffs on a further $200bn (£154bn) of Chinese imports, which will include electronic products and consumer goods such as handbags.

These tariffs will see the cost of the Chinese imports rise by as much as 25% and – not surprisingly – Beijing was quick to respond, slapping tariffs of between 5% and 10% on a range of US products. Especially targeted were agricultural products, which largely come from states which have strong Republican majorities – a point which the President duly made on Twitter.

It is interesting to look at the relative stock market performance in the two countries. Despite the trade war, the US stock market is up by 7% this year. Although tech stocks were hit by the latest round of tariffs, the US stock market loves Donald Trump. The Dow was below 20,000 on his Inauguration Day in January 2017: it closed September above 26,000.

What happened in the rest of the world? There was the usual mixed news in the UK and – as we shall see – absolutely no progress on Brexit. In the US, Amazon became the second company to be valued at a trillion dollars – roughly £770bn. The country was hit by Hurricane Florence, but far more damage was done in the Far East by Typhoon Mangkhut, which hit the Philippines, Hong Kong and Southern China.

On the world’s stock markets it was generally a good month: India was the only major economy on which we report to see a significant fall during September. More worryingly, however, the oil price hit a four year high of around $81 a barrel, as both Saudi Arabia and Russia rejected President Trump’s calls to increase production.

UK

As with every month this year, September brought more gloom for the beleaguered UK high street, as Debenhams called in advisers from KPMG amid suggestions that it may close up to 80 stores. There were no ‘suggestions’ from RBS, who announced that it would be closing a further 54 branches and John Lewis – long held out as the one bright spot among department stores – saw its profits crash by 99% when the latest results were announced.

Tesco, though, was in a more buoyant mood as it launched Jack’s, the ‘pile it high, sell it cheap’ arm of the company we wrote about recently. The aim is to wrest market share back from Aldi and Lidl: we shall see whether it succeeds or whether Tesco simply ends up competing with itself.

In the wider economy, there was some good news, as the UK benefitted from the warm weather and the World Cup. Figures for July showed that the UK economy had grown at its fastest pace for a year, and the Office for National Statistics announced that the economy had grown by 0.5% in the last three months of 2017, compared to the previously announced 0.4%.

Unemployment came down by a further 3,000 to 1.44m: that means that the UK has an unemployment rate of 4.3% – the lowest for more than 40 years. However, inflation did edge back up to 2.7%, the highest level for six months.

…But no doubt, Chancellor Philip Hammond, will soon have that under control. Having given every indication that he would deliver his Budget speech in November, he has brought it forward to 29th October. He had apparently intended to deliver the speech on 31st October until it was pointed out to him that the Budget would coincide with Hallowe’en and that the headline writers would have a field day with ‘Hammond’s House of Horrors.’ So Monday 29th it is…

In construction news, it was announced that London’s Crossrail project will open nine months behind schedule and HS2 – latest projected cost £56bn – promised to deliver between 15,000 and 30,000 new jobs.

The FT-SE 100 index of leading shares had a quiet month in September but at least it moved in the right direction, rising by 1% to 7,510. The pound was more or less unchanged against the dollar and ended the month at $1.3031.

Brexit

So here we are: less than six months to go until 29th March 2019 when the UK will – in theory – exit the EU. The countdown has begun – although the word ‘countdown’ rather implies that something definite is going to happen. Right now any option still appears to be possible: in fact, a new option seems to crop up every day.

We left this section last month with Prime Minister Theresa May having presented her ‘Chequers’ plan for Brexit. September started with Tory MPs from all sides of the party rubbishing the plan and the EU’s chief negotiator Michel Barnier dismissing it as unworkable. ‘Barnier Rubble’ was the neat summary in one newspaper’s headline.

Throughout the month there were increasingly dire warnings of the consequences of a ‘no deal’ Brexit. Both BMW and Jaguar warned of factory closures and Bank of England Governor Mark Carney said that house prices could fall by 35% over 3 years in the event of ‘no deal’ – although if you, or your children, are struggling to get on the housing ladder you may regard that as no bad thing.

Theresa May duly trooped off to Salzburg to meet the other European leaders and according to your viewpoint, was either ‘ambushed’ or got exactly what the UK’s negotiating position deserved. ‘EU Dirty Rats’ proclaimed the pro-Brexit Sun.

So another month has passed and once again we are no further forward. The Prime Minister danced on to the stage at the Conservative party conference and in her speech dismissed calls for a second referendum – defending her plan for a free trade deal that would provide ‘frictionless trade in goods’.

Meanwhile, there will be calls for a ‘Canada-style’ deal, Boris Johnson will continue to promote ‘Super Canada’ and pro-Remain MPs will still call for a People’s vote.

Europe

Perhaps the big story in Europe came in Sweden, where both main parties saw a sharp decline in their votes as the nationalist, anti-immigration Swedish Democrats won nearly 18% of the vote. The country’s Prime Minister Stefan Lofven was ousted after losing a no-confidence motion and the country now faces a period of uncertainty as the politicians try to form a workable coalition.

The politics of Naples have, traditionally, been rather simpler. It has a tradition for pizza and the Mafia. But now the city – like so many in Europe – is seeking to re-invent itself as a tech capital, with both Apple and Cisco setting up academies in the Southern Italian city. Hopefully, this will reverse the brain-drain which has seem so many of Southern Italy’s young graduates leave for jobs abroad, or in the north of the country.

On Europe’s stock markets the two major indices went in opposite directions in September. The French index was up by 2% to end the month at 5,493 but the German DAX index slipped back by 1% to close at 12,247.

US

In September, Donald Trump tied up a US/South Korea trade deal and has just negotiated a ‘modernised’ trade deal with Canada to replace the North America Free Trade Agreement.

Away from the Oval Office, it was generally a good month for the US economy, which added 201,000 jobs in August as unemployment remained low at 3.9% and wage growth rose by its fastest pace for nine years, reaching an annualised rate of 2.9%.

However, this did prompt the Federal Reserve to raise interest rates by a further 0.25% taking them to a range of 2% to 2.25%. This was the eighth rate increase since 2015 – with another one expected later this year – as the Fed maintains its policy of gradual rate rises.

As we noted in the introduction, Amazon followed Apple in being valued at more than a trillion dollars as its share price reached $2,050 (£1,577). Not to be outdone Apple unveiled a raft of new products including yet another version of the iPhone: it’s called the XS if you want to upgrade.

There was less good news at Tesla as Elon Musk’s behaviour became increasingly erratic and the month ended with him being accused of fraud and removed as the company’s chair, after he reached a deal with US regulatory authorities over a tweet saying he planned to take the company private. Quite what the future now holds for him and the loss-making company is anyone’s guess.

It was another good month on Wall Street: as we mentioned in the introduction, the threat of a trade war has seen the Chinese stock market fall 14% this year. In contrast the Dow Jones index is up by 7% for the year-to-date, and rose by 2% in September to end the month at 26,458.

Far East

Donald Trump was not the only one shaking hands and smiling for the cameras after making a deal. Also getting in on the act were Kim Jong-un and Moon Jae-in, the respective leaders of North and South Korea. President Moon made a historic trip to North Korea, and the meeting moved the de-nuclearisation of the Korean peninsula significantly closer, as Kim promised to close one of his country’s main missile testing and launch sites.

Sadly, it wasn’t just Florida that was hit by hurricane season, as Typhoon Mangkhut, which killed dozens of people in the Philippines, moved on to batter Hong Kong and Southern China. The bill for the clean up is already estimated at $120bn (£92bn) and is likely to rise further.

We have commented below on the expected rise of the Indian economy over the next ten years: HSBC’s report also forecast that growth in China will continue to outstrip the West. A further report – from London based think tank Z/Yen – suggested that the growth in the Far East is going to put increasing pressure on London and New York as financial centres. Far Eastern cities such as Shanghai, Shenzhen and Beijing are surging and Hong Kong, Singapore and Tokyo have been long established among the world’s leading financial centres.

In company news, founder and CEO Jack Ma announced that he would step down from his position at e-commerce giant Alibaba next year, to let ‘younger, more talented people’ take on the leadership roles. Mr Ma has a net worth of around £28bn, so goodness knows what ‘more talented’ people will achieve.

September was a good month for Far Eastern stock markets. The Chinese Shanghai Composite index shrugged off the worries about a trade war with the US, rising 4% to 2,821 (although it remains down for the year as a whole). Pride of place went to Japan where the Nikkei Dow was up 6% to 24,142. The South Korean market was up 1% to 2,343 while the market in Hong Kong was virtually unchanged, closing September at 27,789.

Emerging Markets

As far as newspaper headlines went, the big story in September was Venezuelan President Nicolas Maduro being photographed eating steak cooked by Turkish celebrity chef Salt Bae – while at home millions are starving and the country sees the biggest mass migration of people in South America’s history.

In rather ‘harder’ news, economists at HSBC have forecast that India will overtake the UK, Germany, France and Japan to become the third largest economy in the world. The forecasters are expecting growth of 6% in India, with China’s growth slowing to 5% per annum. India will, however, lag a long way behind the world’s two biggest economies, with HSBC forecasting that by 2030 China’s GDP will be £26tn, ahead of the US on £25.2tn and India on £5.9tn.

So good news for India but there was far less good news for Argentina, which is fast becoming South America’s equivalent of Greece. The country’s GDP has fallen sharply, the government is implementing widespread austerity measures and the International Monetary Fund has had to increase its three year bailout programme to $57bn (£43bn) from the $50bn previously announced.

Despite the optimistic forecasts, the Indian stock market had a disappointing month, falling by 6% to end September at 36,227. In contrast, the other two major emerging markets we cover were both up, with Brazil rising 3% to 79,342 and the Russian market rising an impressive 5% to 2,475.

And finally…

At the beginning of this month, it was reported that the Coca Cola Company was buying Costa, the coffee chain which dominates the UK high street. It seems a ‘trip’ to town may be about to take on another meaning.

According to Canada’s BNN Bloomberg, Coke is in talks with a local producer – Aurora Cannabis – about developing marijuana-infused drinks. Before you dig out your flares and queue outside Costa, we should stress that the aim of the drinks is to relieve pain: Coke describes them as ‘functional wellness beverages.’ But who knows? A mix up in the bottling plant and suddenly your local high street might look a rather different place…

Already apparently ‘under the influence’ are the customers of Derby ice cream maker Gavin Murray, who faces a bill of £1,000 from his local council after not quite getting the balance right in his ‘rum n’ raisin’ flavour. Mr Murray started his business four months ago, but the killjoys at the council have decreed his ‘rum n’ raisin’ to be ‘too alcoholic.’ He now faces paying the council the money for the correct paperwork – or modifying his ice cream making to burn off the alcohol. And presumably disappointing a large queue…

Finally, this month there will be people – especially with the Christmas party season on the horizon – who find that their clothes have mysteriously shrunk. The traditional answer was to nip down to Weight Watchers – but not any more. The company has jumped on the re-branding wagon by shedding the ‘weight’ and will henceforth be known simply as ‘WW,’ which, the company says, reflects its focus on ‘overall health and wellness.’

There’s that ‘wellness’ word again. Perhaps WW could link up with Coke. And if that doesn’t work there’s always Mr Murray’s rum n’ raisin…

10 years on from Lehman: what have we learned?

Wednesday, October 3rd, 2018

The financial crash after the Lehman Brothers collapse saw the biggest global monetary crisis since the end of WW2. It led to a lost economic decade for many – average incomes in the UK still languish far behind their 2008 peak.

15 September 2008, the fall of Lehman sent shockwaves around the world. It was (and still is) the largest bankruptcy of all time. The colossal investment bank fell with $639 billion in assets and $619 billion in debt.

Founded in Montgomery, Alabama by German immigrants in 1850, the firm grew towards the end of the 19th century as America became an economic powerhouse. For an investment bank that survived the railroad bankruptcies of the 1800s, the Great Depression of the 1930s and two World Wars, it was a reckless rush into the doomed subprime mortgage market that proved a fatal error.

What happened?

In the early 2000s, the US housing boom (read, bubble) was well underway. After the dotcom bubble burst around the year 2000, investors began to put their money in real estate, causing its value to rise. In addition to this, in order to widen their customer base, mortgage lenders began to offer riskier mortgages.

Interest rates plummeted and strict lending requirements were abandoned, meaning many Americans were buying homes they otherwise wouldn’t be able to afford under normal circumstances. There was a home-buying frenzy that drove prices up between 50 and 100 per cent, depending on the part of the country.

US bankers had developed the lucrative business of buying up subprime mortgages (high-risk mortgages offered to borrowers with low credit ratings), packaging them together with other mortgages using vastly complicated equations to create derivatives which obscured the actual level of risk present in the security.

It was in this environment that Lehman Brothers acquired five mortgage lenders in 2003 and 2004, including a lender that offered subprime mortgages. At first, Lehman reaped significant rewards from its foray into the mortgages market. Its mortgages business drove record growth – Lehman reported record profits every year from 2005 to 2007.

However, things were about to take a turn for the worse for this finance giant. In the first quarter of 2007, cracks in the housing market were becoming clear. Investors were quickly withdrawing and prices began to fall fast. It was clear that the high house prices were supported by speculators, rather than home-buyers themselves.

When prices started to decline, there was a mass sell-off of mortgage-backed securities. Concerns that problems in the mortgage arm of the business would spread through the rest of the firm caused its stock to suffer the largest one-day drop in five years on 14 March 2007.

Over the next year, the firm remained on the rocks. Hedge fund managers began questioning the valuation of Lehman’s mortgage portfolio and Bear Stearns – the second-largest underwriter of mortgage-backed securities – nearly collapsed. By June 2008, the bank was reporting large losses. Over the summer, Lehman attempted negotiations to a number of potential partners, with the hope of attracting investments. All were unsuccessful.

In September 2008, worldwide equity markets began to plummet and Lehman’s stock plunged to new lows. The firm reported huge losses during the third quarter and Moody’s announced that Lehman Brothers would have to sell a majority stake to a strategic partner in order to avoid a ratings downgrade. These proved a fatal blow, on 11 September stock fell by 42% on a single day. Last ditch efforts to save the bank were unsuccessful and on 15 September the investment bank finally declared bankruptcy.

The financial crisis

Lehman Brothers’ collapse wasn’t the start of the financial crisis. Rather, the fall of the fourth largest US investment bank signalled just how bad things had become and caused US and international markets to roil for weeks afterwards.

For previous years, bank executives had been over-investing their profits (and bonuses) by running down their protective capital, making them increasingly vulnerable to deteriorating market conditions. They had a relatively low amount of stable assets or cash available to sustain them during difficult times. Lehman Brothers, for instance, was incredibly over-leveraged. Its ratio of total assets to shareholders equity was 31 in 2007.

As a whole, the global financial system had been under severe stress for over a year. While Lehman Brothers were allowed to fall, many others were bailed out. JPMorgan Chase & Co, Citigroup and Wells Fargo & Co were bailed out to the tune of $25 billion by the US treasury and this side of the pond RBS received £45.5 billion from the British government. Money that Sir Howard Davies, Chairman of the bank, admits is “unlikely” the government will ever see again.

In the UK, every man, woman and child effectively underwrote the country’s financial sector by £19,271 each. While income inequality has decreased since the 2008 crash in the UK, in America things are worse than ever. In 2016, the median net worth of black families was 30% below pre-crisis levels, at $17,150. The financial crisis ushered in a legacy of poverty for the poorest American families. This begs the question: ten years on, what has the financial world done to prevent it happening again?

How much has global finance changed since 2008?

It is difficult to say…

On the whole, global financial markets haven’t changed greatly since the crash. But, some of the standout practices that caused the financial crash are prohibited or strictly regulated and banks are probably slightly safer than they once were.

Many critics cited a ‘greed is good’ culture, driven by a thirst for bonuses as integral to the financial crash. Bosses and traders were rewarded with cash bonuses for achieving short term goals. Bonuses in the UK have fallen year on year since they peaked at 34% of average total pay for finance workers in 2008. In 2016, they amounted to 22.7% – still a sizable sum – but a smaller sum nonetheless.

After the financial crash, in 2014 the EU introduced a cap on bankers’ bonuses at 100% fixed pay or 200% if they are agreed by shareholders. However, Bank of England Governor Mark Carney indicated in November 2017 that the UK will review a cap on banker bonuses after Britain leaves the EU. Just ten years after the financial crisis, we look set to return to a landscape of unrestricted bonuses.

Contrary to the expectations of many, McKinsey report that global debt has grown by $72 trillion since 2007. Many saw the crisis as a direct consequence of unrestricted borrowing and hoped that the pace of borrowing would decrease. However, much of this debt is from developing countries or corporations within them. Maybe, then, the West at least has begun to see that the pitfalls of unrestricted borrowing potentially outweigh the benefits.

Nowadays, banks may be more resilient to financial crises. International liquidity standards mean that banks must have a higher ratio of equity to debt. This has meant that banks have more capital to absorb temporary losses. As of 2017, US and European banks had on average a Tier 1 capital ratio of 15%, compared to 4% in 2007. Now, it is less likely that an economic downturn would result in widespread government bailouts for banks, as happened in 2008.

However, the financial sector is still voracious for high returns, delivered fast. Many of the senior bankers and bosses responsible for the crash faced little sanction. Most are either retired or in other senior roles. Despite his catastrophic mismanagement, Lehman Brothers’ final CEO Richard Fuld recently made a Wall Street comeback. He is now running a fund manager, Matrix Private Capital. Perhaps he has been forgiven and his past forgotten slightly too quickly. As for the rest of the financial sector, although it may be more resistant to financial crises of the future, there is little to suggest that the culture which caused the financial crisis has greatly changed.

September market briefing

Wednesday, October 3rd, 2018

September has a reputation for being the worst month for investing, something the figures confirm. Since 1950, the Dow Jones has declined by an average of 0.8% in September and similar results can be seen across a range of stock indexes. There are many theories to why this is the case, none of which offer much in the way of a concrete explanation. Thankfully, this year stock markets bucked the trend and, generally speaking, September saw the global markets perform strongly.

In London, the FTSE 100 had an unremarkable month, seeing a rise of 1% to 7,510. Ultimately, a rise is still a rise so this should be welcome. Elsewhere in the British economy, the news is a mixed bag. The high street had a ghastly month; Debenhams suggested that they may close up to 80 stores and RBS announced the closure of 55 branches. Even John Lewis, the ‘golden boy’ of British department stores, saw its profits crash by 99% this month.

Unemployment – at just 4.3% – is at its lowest for over 40 years. However, the threat of a ‘no deal’ Brexit would mean that unemployment will rise substantially. During the month, both Jaguar and BMW warned of factory closures in the event of ‘no deal’. What’s more, Mark Carney, Governor of the Bank of England, said that house prices could fall by 35% over 3 years if the government and the EU can’t come to an agreement. So as well as the high mobile phone roaming charges which are thought to return after Brexit, you might also find yourself in negative equity.

Whatever you think of Donald Trump, the US stock markets love him. September was another good month on Wall Street. The Dow Jones rose by 2% during the month to end up at 26,458, a 7% total rise since the start of the year.

Otherwise, Trump continued his assault on Chinese trade. He announced during the month a that a further $200 billion worth of tariffs would come into effect later this year. China seems to be fairing much worse than the US in their ‘trade war’; its stock markets have fallen by 14% since January, though the Chinese Shanghai Composite index did rise by 4% during September.

Over the summer, the Japanese economy returned to growth after shrinking in Q1 of 2018. The Nikkei 225 index in Tokyo was up 6% to 24,142 at the end of the month. Elsewhere in the Far East, the South Korean market rose 1% to 2,343 and Hong Kong ended the month virtually unchanged at 27,789.

The big news in emerging markets was that HSBC economists have forecast that India will soon become the third largest economy, leaving the UK, Germany, France and Japan by the wayside. Following this good news… the Indian stock market had an awful month, falling by 6% to end September at 36,227.

October will be an interesting month. Chancellor Philip Hammond will announce the final budget before Brexit on 29 October, which should outline his answers to the following questions: a) What is the best way to bring down the country’s 2.7% inflation rate? b) How to fund £20bn extra for the NHS by 2023? c) Is raising taxes or borrowing the best way to fund public services? There have even been rumours of a new form of tax, although the details of this are unknown…