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. 

 

 

 

 

 

  

Boring Bank no more

Posted by robin in Financial Articles Market Commentary Thursday November 6, 2008 4:37 pm

“Our ambition…is to be boring,” said Deputy Bank of England Governor, Mervyn King, back in 2000.

Scroll forward eight years and one credit crunch and the Bank of England has rarely been more interesting…

In what has been a hyperactive year today of bank bailouts, the MPC added to it today with the biggest cut in interest rates in more than a decade…a whopping 1.5%. Or 150 basis points in today’s parlance.

Half a point said the consensus beforehand, maybe more with some outlying talk of a bold 1%. But none of the 60 economists polled by Bloomberg saw this one coming. The UK base rate is now at its lowest level for 54 years says The Times. But why such a big move? Have the wise men belatedly panicked too as the economy slides rapidly into a steepening recession? Or is this at last the firm steer the City was looking for and the economy needs?

No doubt the shock output decline of 0.5% last quarter did much to focus minds. But fears remain and are etched in the twists and turns of today’s FTSE performance. It perked up briefly from a 200 point deficit to around 90 but not for long as the bearish doubts regained the upper hand and it declined once more.

A quick check of the inflation numbers reminds us that this extraordinary move comes at a time when the inflation read is more than double its target at 5.2%. But that fight is yesterday’s battle. “The risks to inflation have shifted decisively to the downside,” concludes the Bank in the wake of collapsing commodity prices, most notably the halving from its peak of the oil price. Now we must scramble to reignite growth. 

Here’s hoping this is good news for mortgage rates too.