Quantitative easing…inflation teasing?
Posted by robin in Financial Articles Market Commentary Monday March 16, 2009 4:42 pm
Spring sunshine. Strong enough now to feel it’s heat on your back.
With it London at last morphs from grey urban jungle to aspirational metropolis.
The economic gloom continues - the G20 meet is the “probably the global economy’s last chance to avoid a depression,” writes Wolfgang Munchau in today’s FT - but it’s easier to take with a blue sky above. (Let’s ignore for the moment the ides of climate change.)
Maybe the stock market has noticed Spring too. It starts the week positively, continuing last week’s 6% gain for the FTSE 100. There’s an encouraging report from a British bank. Barclays has enjoyed a ’strong start’ to the year` reports The Telegraph.
For the average investor it’s all a bit academic at this point. Like a bloodied boxer who has been decked repeatedly, managing to stagger to his feet for the final count. The lure of the investment game has long since died. Unfortunates holding long-only equities in ISAs, SIPPs, personal pension plans and endowment policies are punch drunk and glassy- eyed, some mutter darkly about reinvested deposit savings under the mattress.
The received wisdom of investment orthodoxy has been skewered along the way. Equities go up in the long-term they say. They may do, it just may not coincide with your life span. Diversify they say. Yes but when the universal floor of easy credit suddenly gives way, all asset classes fall together.
Now we have quantitative easing to confront deflation. The electronic printing of money by the Bank of England to buy up gilts. £75bn worth, about a third of the entire market according to one commentator and a further £75bn has been earmarked. This combined figure is about three times the stock of notes and coins in circulation says Edward Chancellor in the FT. He goes on to warn of the inflation threat that might flow from it. Both Japan in 1932 and the Fed after the war tried it. Both saw double-digit inflation as a consequence. “Owners of Treasury bonds suffered heavy losses.”
This is clearly one in the eye for the deflationists and follows similar warnings from Buffett, Faber and numero uno bond investor, PIMCO. Leading London hedgie Crispin Odey believes “a major leap in inflation is almost certain”, according to a report in the London Evening Standard. On such weighty authority, where now is the best place to put your money? Gold, perhaps, now in high fashion both as a currency and inflation hedge and equities, too, maybe, though hardly fashionable. ‘Linkers’ too suggests Chris Dillow in the Investors Chronicle - index-linked gilts - though not if you’re worried about yields going up.
Where’s the worst place for your money? Treasury bonds, says Chancellor. “Owners of gilts should be quaking in their boots,” he warns. Presumably some are following the first undersubscribed gilt auction yesterday (25th March). for 11 years.
A New Bull and Some Dead Sacred Cows…
Posted by robin in Financial Articles Market Commentary Tuesday November 4, 2008 6:46 pm
The mood lifts.
Morgan Stanley are turning bullish on equities and the FTSE has just notched up a sixth positive day.
A “full house buy signal” was launched by Morgan Stanley on 31 October, reports the Mail, was based on its four main indicators: valuation, capitulation, risk and fundamentals.
Meanwhile the skewered sacred cows lie all around…
Hedge funds – created to produce “absolute returns” – i.e. make money regardless of the direction of the market. Absolute returns..? Absolute rubbish. Even Goldman’s finest couldn’t ride the financial storm with their flagship fund. The Goldman Sachs Investment Partners hedge fund, launched in January, was almost $1bn lighter of its $6bn initial capital by the end of September reports the FT today.
Gold – an insurance against financial catastrophe. In dollar terms it peaked at more than $1,000 back in March when Bear Stearns went down. The nationalisation of Fannie and Freddie and the destruction or absorption of the other big US investment banks seemed a big deal at the time but not as big a deal as Bear, according to the dollar-based gold price which is down about a quarter since.
Of course, the ascent of the greenback as currency of last resort when the chips really are down and the brutal force of deleveraging caught everyone a little off guard. The finest gold bugs are scratching their heads. This from Joe Foster, portfolio manager of $9bn Van Eck International Investors Gold fund, as posted on Bullionvault.com:
“We are going through a period right now which we have never experienced in history. What we thought would be a normal reaction in these circumstances just doesn’t hold right now. We’re getting massive liquidation across all asset classes, with a huge deleveraging going on among institutions, hedge funds, etc. People are selling everything regardless of fundamentals, and gold is caught up in that. It’s dropped lower than you ever thought it would.”
There you go. There’s history, there’s stress-testing and then there’s mass fear…
Diversification – bogus much of it. Fraudulent diworsification. A bit in equities, a bit in property, some trendy commodities perhaps… When big leveraged players need to liquidate in a hurry they all get flattened in the stampede for the exit. Government bonds and cash have more claim to be “uncorrelated” assets…though the latter only up to the compensation limit, which could be two cents of sweet FA from an Icelandic bank.
AIM - the booming London junior market boasts more than 1,600 opportunities to lose your shirt. Everything from Chinese orange growers to Heart of Darkness hit and hope miners. The AIM All Share began life at 1,000 and today sits at 464. And that after assorted investor carrots that helped siphon good money into this market in the name of tax planning.
Commodities – it may or may not be a demand “super-cycle” but it ain’t no insurance against deleveraging. Prices got smashed across the board with the bellweather oil price now down from $150 to around $60.
Rating Agencies - well paid on the sell side, complex derivatives got badged with a shiny top AAA rating to blind the unwary that there was little risk when, well you know the story…
With-profit bonds – the default choice of financial advisers for widows and orphans across the country. They were already on their last legs after the bear market of 2000-03. Unsurprisingly, they have disappointed again this time around as their fabled, nay mythical, “smoothed” returns – keeping some back in the good times to pay paying bonuses in the bad – once touted as low risk have proved anything but. Bonuses have been axed and the drawbridge has been pulled up for many wanting their money back. Penalties apply today on bonds from the big names.
Legal & General 0-23%
Norwich Union 13-22%
Prudential 4-11%
Standard Life 12-22%
Pension funds – ouch! If your pension plan is a dressed up savings plan, forget it you’re not retiring unless you’re sitting in cash. If it’s a promise from your company for being a loyal wage slave, just hope like hell the lifespan and solvency of your organisation outlives your own.
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