Monthly Archives: September 2012

30th September 2012 – Catching up on missed topics

Life has been so busy in the last few months, that there have been several topics I wanted to blog about, but just didn’t have the time. I saved the links to various articles I read and am posting these now, in case I ever want to come back to them

Loss of retail investor participation in stock markets

A favourite leitmotif of Zerohedge’s is the collapse of participation by retail investors in American stock markets as measured by the Domestic Equity Mutual Fund Flows. Two articles of theirs caught my attention. The first charted “The Lost Generation of Investors”, the second shows how retail investors have avoided the stock market like the plague for the last few years.

Where does money come from?

An interesting piece I picked up somewhere (not sure where). Continue reading

19th September 2012 – The frantic race to the bottom

Japan have announced an extension of the size and duration of their QE programme.

It wasn’t that long ago that an extra $126bn of bond purchases would have seemed shocking. Now it almost seems like small change.

These are crazy times we live in.

There can be little doubt central bankers in the developed world are determined to destroy their currencies and are falling over each other not to be the last one standing. A collective madness has gripped and this is not going to end well. At all.

Surely it can’t be long before the Bank of England announces more QE?

More worryingly though I wonder how much longer the developing world is going to stand by and suffer the consequences of these disastrous policies. Given the recent paradigmatic shift in manufacturing output (to China especially) the currency debasement of the €, $, ¥ and £ causes two major problems. First it makes their good less competitive, which is obvious. However the second problem is a little less apparent, namely these moves to weaken the major currencies also significantly reduce the spending power of those that make our goods.

The overwhelming majority of trade is conducted using €, $, ¥ and £ meaning the countries that have been selling their output have also been accumulating huge foreign currency reserves. A recent estimate holds that China owns roughly $1.2trillion of US Federal Debt (I know this isn’t the best source, but I am pushed for time and have seen these figures elsewhere). The decline in the value of these reserves naturally leads to a decline in the wealth of the holding nations.

But this isn’t all.

All of the major commodities around the world are priced in $ and £. As these currencies decline in value, this pushes up the price of the commodities (in simple terms because it takes more units of currency to purchase the same number of units of the commodity). So faced with declining sales (thanks to the weaker currencies) the manufacturing nations are also faced with higher input costs. This two pronged assault on profit margins is bound to have the most disconcerting of effects.

13th September 2012 – If at first you don’t succeed, then print, print again

So, like the ECB now the Fed has announced open ended Quantitative Easing.

We can now look forward to the purchase of $40billion a month of mortgage backed securities, an extension to Operation Twist and 0% interest rates until 2015. If the economy worsens they may even buy more MBSs.

Unsurprisingly markets have shot up.

Part of me is quite happy about this. I’ve been adding to my gold mining stocks so think I am well positioned to take advantage of this lunacy.

However this all masks quite how near to the end of the road we are.

Given that neither QE1 nor QE2 solved the fundamental economic problems of the Credit Crisis, this latest move by the Fed feels very much like a desperate last charge. After all what else can they now do?

To do adopt a different course would be to admit the failure of the previous plan (which no-one will do) and short of handing out wads of Dollar bills on street corners they can’t really do much more to flood the system with liquidity.

I feel very sad tonight.

12th September 2012 – “No thank you very much…”

“…I don’t want this hot potato”

It was no real surprise today to see Germany’s Constitutional Court throw the responsibility for the European Stability Mechanism back to the Bundestag

Commenting on the legality of the ESM is extremely difficult. After all what is legal?

In these highly fraught, politicised times we live in everyone seems to be making the rules up as they go along, while absolving themselves of as much responsibility as possible.

The absence of genuine leadership has been a hallmark in the efforts to resolve the Credit Crisis. No-one is prepared to admit the scale or nature of the problems the system faces, so the slow motion disaster will continue unabated for who knows how long.

At least we probably have a stock market rally to look forward to now, assuming Bernanke and the Fed do start easing tomorrow.

I did like how today’s ruling imposed conditions on Germany’s participation in the ESM, including a cap on their overall commitment. Apparently this can only be overruled by the German parliament.

On the face of it this seems like a sensible precaution.

However I am more cynical than that.

Everyone knows that the €500billion for the ESM will not be enough. Knowing this, I think the judges have made quite an elegant move. By imposing the cap and explicitly saying this can only be removed by parliament they have ensured that they are not on the hook, when this eventually (inevitably?) goes wrong.