Five things investors learned in the last week

21st June 2013

1) The Fed may commence QE ‘tapering’ by the end of this year and finish the programme next year. Fed Chairman Ben Bernanke surprised experts with something close to a firm timetable as FoxBusiness reports. Cue market mayhem and indeed falls in equities, bonds and commodities. Mindful Money’s economics writer Shaun Richards says reversing the policy was always going to be difficult and never thought through.

2) Investors learned that Government may return the 40 per cent of Lloyds banking group which it owns to private hands as reported in Chancellor George Osborne’s Mansion House speech. RBS may be split into a good and a bad bank before anyone considers an IPO for it.

3) Strong words as Fitch raises concerns about a credit bubble in China, unprecedented in world history. A mere £2 trillion dollars worth of loans may be hidden off balance sheet in banks. Ambrose Evans-Pritchard assess the issues in the Telegraph. He quotes Charlene Chu, the agency’s senior director in Beijing. “There is no transparency in the shadow banking system, and systemic risk is rising. We have no idea who the borrowers are, who the lenders are, and what the quality of assets is, and this undermines signalling”. The BBC’s Robert Peston says history suggests that not even China’s can avoid the consequences – over-capacity, deflations, firm failures and all.

4) The language is a little technical but we think the boffins from Allianz, who pride themselves on their detailed understanding of risk as well as their investment credentials put it very well this week – “James Dilworth, CEO Allianz GI Europe says: “Investors need returns and traditional holdings will not provide it. The low interest rates of traditional fixed income investments will barely deliver positive real returns and the risk they bear with regard to rising rates seems to be widely underestimated.”

5) Well if that’s all bit too much and you don’t fancy banks but do like, edgy, trendy, punkish brewers, BrewDog is seeking funds. In its Equity for Punks online crowdfunding scheme, it is making 42,000 shares available at £95 each as it seeks to fund expansion. Founder James Watts has the following harsh words for the tradional City establishment. “It proves that there is a viable alternative to the financial establishment, and as the self-interested banks continue to stunt economic growth, people are looking for better places to put their money.”

26 thoughts on “Five things investors learned in the last week”

  1. Edward Harkins says:

    Austerity IMO always was a con (as well as a deeply flawed and now failed concept). It was used as a cover and rationale for an attack on the state and publci services and to pay for the socialisation of the bank and financial services private indebtedness (i.e. we suckers the taxpayers pay for the corruption, inpetness and near-collapse of the private sector financial system)

    1. therrawbuzzin says:

      A point I’ve made here a number of times.
      How real austerity is depends entirely on your circumstances.
      Ask a disabled person who has lost his/her entitlement to disabled benefits, and then lost their home because they store essential equipment in a “spare bedroom”; he/she will tell you about austerity.
      The UK is becoming an unpleasant place, and that’s why a number of Scots want out.

    2. DaveS says:

      The problem with the line “we the taxpayers” is that based on our perpetual deficits then its clear that we the taxpayers aren’t paying enough.

      Its quite possible that Chinese peasants (who have no welfare) are paying a large chunk of our welfare state by depositing their savings in Chinese banks who then recycle into Gilts to fund our deficits.

      The reality is that its a long time since we the taxpayer have paid for our government – we ran big deficits before the 2008 crash.

      The welfare state was in fact never funded properly. They stole NI contributions from day one – it should have been invested as insurance for when those workers got old. Instead they rely on taxation from current workers in another example of a ponzi scheme doomed to fail due to demographics.

      Likewise a lot of the bailout costs were funded not by the taxpayer but by the BoE printing money into existence. There was a VAT increase and some tiny income tax increases – I would suggest most of that was spent on the increased dole claims.

      I realise this make me sound like a bank hugging, Tory voter but honestly I am not – anything but.

      This country (and many in the West) doesn’t produce enough – we aren’t wealthy except in the fantasy world of GDP tables – its a lie. We live on borrowed money, both the government and the people – we have no right to expect a welfare state and one day sadly we won’t have one.

      1. Sorry, and with all due respect Dave, you have completely miss-understood and conflated the issues I raised. Nothing to do with whether ‘we the taxpayer have paid for our government’, Nor anything to do with paying for welfare. It’s everything to do with taxpayers’ money being requisitioned (without consultation, still less mandate) and given over to private sector financial interest; moreover those interests have subsequently ignored the intentions of government in handing over that money and have continued to use it to service their own wellbeing to the continued cost of the rest of society.
        Iceland found itself in a (comparatively) worse position 2007/08 and it’s elites had similarely elected to bail out their financial sector associates. However, Iceland being a smaller and m ore democratic country than the UK the good common folk were able to, literally, surrounded their President’s house one night and made it plain that they would not acquiese in this looting of their public purse. Part of the story since then has been that Iceland has, of course, recovered far better than the UK. At least Icelnad now seems into a sustainable recovery (rather than the UK’s re-run of a loose credit and house-price inflation driven candy floss recovery)

        1. DaveS says:

          My point was that taxpayers didn’t bail out the banks – the BoE did through all sorts of dodgy mechanisms. Taxes didn’t increase to cover the bail out costs – in fact they didn’t increase enough to cover increased welfare costs- hence the continuing deficits.

          The bail outs were criminal but they didn’t cost taxpayers money but rather their children’s future . Except their future was destroyed a couple of decades ago -they were just too high on debt (supplied by the banks) and cheap consumer crap to bother.

          1. therrawbuzzin says:

            Who pays the interest on the loans?

      2. Anonymous says:

        ‘Instead they rely on taxation from current workers in another example of a ponzi scheme doomed to fail due to demographics.’

        I agree, but at least we have the lowest state pension in Europe! Imagine our situation if we had (eg) an average state pension per month of €1000 and a maximum of €2500, as they do in Spain? Their minimum is around twice our maximum. And their ESA equivalent for those out of work is around twice ours. And that’s ‘poverty-stricken’ Spain!

  2. Anonymous says:

    Have been re-reading my old book (printed 1990) about pricing bonds, options & futures complete with a guilder note bookmark on the IRS calculations page.

    The example bond yield calculations use a 10% coupon – That would make the UK interest bill £166bn. The increase would be than education spending. Ouch.

    1. Anonymous says:

      Hi ExpatInBG

      Yes I do remember those days of double-digit yields for UK Gilts. To younger readers they must seem very alien when we discuss countries like Japan,Switzerland and more recently Germany with yields of less than 1%!

      However if we went to 10% yields tonight it would be a slow burner before it really impacted. This is because it only applies to new Gilts being issued although of course we do have to issue a fair few of them these days…..

  3. DaveS says:

    My question is – who is buying all these extra Gilts – any ideas Shaun ?

    We are issuing way more per year then we were prior to 2008, and the yields look a lot more unattractive now – so who wants to hold them ?

    Its easier to explain who was buying when QE was active – but since then issuance is still way above pre-2008 levels – someone must have been buying them or the yields would be climbing.

    I really can’t see why foreigners would be wanting to buy more – with negative real yields and government debt headed to 100% – shouldn’t that quell their appetite somewhat ?

    I can’t see why UK pension companies are suddenly buying more – number of retirees is growing slowly but not fast enough to create this level of demand.

    So I can only think its UK banks – is there some sort of devils pact where they are stuffing their balance sheets full of dodgy UK debt in return for an endless supply of near-zero funding from BoE – and maybe a quiet nod to not make too much fuss on bonuses ?

    It its the latter then if the bond bubble were to burst then our banks are going to be in trouble – more bailouts – more deficits – rising yields – a death embrace for sure.

    But in truth the bond bubble can never burst – the UK and the West can simply not allow rates to return to anything like historic norms. There may be the odd reluctant half-percent rise to pretend we still follow economic rules but any serious rise will trigger a QE response and massive central bank buying to push yields back down. If not the West will spiral into bankruptcy. The time will come when central banks lose this power – but then we will be in a very different world.

    Thats why the bond vigilantes are absent – who would bet against an opponent that has infinitely deep pockets ?

    1. Drf says:

      “Its easier to explain who was buying when QE was active…” No doubt you mean when overt QE was active?

      1. DaveS says:

        Yes do we have covert QE via UK banks ?

        I can add one other factor which I know from my line of work. Since 2008 many derivatives have been regulated into central clearing and large amounts of collateral have to be posted. Even non-cleared derivs generally need more collateral posted against them then before 2008 – the crash taught players that nobody is safe.

        The collateral of choice is often govt bonds so rather ironically, the crash has caused increased demand for collateral and hence increased demand for govt debt. Treasuries are a defacto currency in the markets (gilts to a lesser extent). and the markets need a lot of collateral currency,

        So as the world gets more uncertain, some lucky governments get increased demand for their debt – the more volatility, the bigger the demand – conversely if the US ran a surplus and didn’t issue debt then I suspect there would be major problems in financial markets.

        There is no escape !

        1. Drf says:

          Exactly

        2. Anonymous says:

          Hi DaveS

          Some of the possibilities you and Drf have discussed. I can add some factual information about overseas holdings which have increased considerably. Before the credit crunch (Q1 2007) they held some £132 billion of UK Gilts or 29.8% of them. At the end of the first quarter of 2014 they held £410 billion or 29.2% of them.

          I am always dubious about the accuracy of such data but those are the official numbers.

          As of Q1 2014 The insurance ans pension sector held some £370 billion. The category for banks has been renamed but has £133 billion although there are also £100 billion with other monetary institutions.

  4. dutch says:

    I find it fascinating that these bureacrats are so keen to peg the national Debt to GDP,when,as you allude,it would make a lot more sense to peg it to something finite like tax revenue.

    Dave S asks the very sensible question as to who’s buying these Gilts.Could it be pension funds desperately looking to satsify yield and solvency ratio considerations? It certainly isn’t penioners/savers looking to defend themselves against rampant food and fuel inflation.

    And let’s consider whether it’s really sustainable for us to offer free education,healthcare and housing to all and sundry, now that wages need to be topped up by the govt for people to lead a basic lifestyle on low wages…..can’t have the banking sector facing reality can we?

    1. Anonymous says:

      Hi Dutch

      I have replied to DaveS giving some official numbers for who holds what in the UK Gilt market. You are right about individual holdings being low as households held some £15.4 billion at the end of the first quarter of 2014. However it had risen by £2.3 billion on the previous quarter so somebody was buying.

    2. Noo 2 Economics says:

      “…..offer free education,healthcare and housing”. Free housing?

  5. dutch says:

    Also,retail sales took a bit of a hit a yesterday,again as with other discussions on here,I wonder whether the ONS do any retail sales data on a per capita basis,as it would likely make interesting reading.

  6. Anonymous says:

    Shaun,
    Telegraph reporting fall in income & corp.tax revenues
    ref:
    http://www.telegraph.co.uk/finance/economics/11047916/UK-borrowing-target-still-in-doubt-despite-stronger-tax-receipts.html
    viz:
    “Corporation tax payments also declined 4.8pc to £6.6bn, and are down 4.3pc at £14.7bn this financial year.”

    “The Treasury’s borrowing forecasts for this year are heavily backloaded due to its expectation for a flurry of receipts from self-employed workers in
    January 2015. The number of self-empoyed workers has increased by 400,000 in the past year alone.”

    Last item will be good test if self employed relying on tax credits etc or not?

    1. Anonymous says:

      Indeedy. Interesting, thx.

    2. Anonymous says:

      Hi Chris

      i just wanted to point out that the Daily Telegraph confused up with down regarding the Corporation Tax figures for the fiscal year so far.

      “while corporation tax increased by £0.6 billion (or 4.3%) to £14.7 billion.”

  7. Jimbob says:

    Hi Shaun

    The cost of topping up low wages by the govt is just going up and up. It seemed like a good idea at first, encouraging people to work, and subsidising their wages. But the un?intended consequence is that now every low paid job is paid at the minimum wage, as that maximises the benefits. The system is so badly designed it penalises those who do overtime, and so no one does here. And the govt aren’t subsidising the workers wages, they are subsidising the companies wage bill. Hence wage stagnation and increased govt borrowing. Tesco used to pay 50% more than the minimum wage 8 years ago locally. Now they don’t have to, the govt tops up the wages.

    We need a drastic movement in the minimum wage, but don’t expect the low pay commission to listen, as they are no doubt very cosy with big business lobbyists.

    1. Anonymous says:

      Hi Jimbob

      The law of unintended consequences has been applied with full force here hasn’t it? The initial impulse to help the lower paid was good but now some employers are gaming the numbers are you say in order to offer lower wages. Oh what a tangled web it has become…..

    2. Anonymous says:

      One tiny correction. As ever, it’s not the government, it’s the taxpayers who finance the top-ups, plus those strange people who buy government bonds. It’s a simple wealth shift, for in the end it will be the middle class who pay the interest on loans, currently running at around £45bn per year and rising even under zirp, not to mention what will happen when rates start to rise. The direct taxpayers are essentially a slab of the middle class as the lower echelons are net recipients and the higher ones (though definitely large tax payers) don’t pay what you might expect of them because some avoid a lot of tax. The middle class is suffering among the highest direct tax rates in Europe and only the rather crazy notion that our houses are worth much more than they were last year is staving off a rebellion on that front. The 40% band (why is there no 30% band?) is dragging more and more into its maw and though there have been alleviative mutterings from No 11, I fear that the sums won’t add up without it.

      You are quite right that tax credits are potentially disastrous. I would say they are actually disastrous. Once you start handing out money to those in work, the whole scene becomes distorted. Employers are not stupid! That was correctly anticipated, but so was the captive nature of the PAYE system that the middle class ‘enjoys’. There’s no escape…

  8. Damocle says:

    Hi all, the actual interest paid on the 375 billions debt in the BOE balance sheet is zero: https://www.gov.uk/government/news/changes-to-cash-management-operations
    If the budget will remain out of control the easiest way to fund it is another QE. Bond vigilantes are very complacent with UK budget deep hole…

  9. dutch says:

    You’ll never get a job at the ONS Anteos.First rule of life there
    ‘Don’t talk about imputed rents’.

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