Monthly Archives: November 2012

28th November 2012 – Sentiment getting crushed

Picking up from Monday’s theme, I saw another heavy set of news items about the OECD’s cutting of its global GDP forecast.

Apparently further policy support is needed. Yep, that’s more printing!

The more I observe markets the more I can see that there are three great forces at play. Two currently oppose (balance?) one another and the other seems fickle and hasn’t really made its presence felt yet.

The first of these forces is economic performance. Logically this should be the primary driver of the stock market. However over the last few years we’ve seen an increasing disconnect between real world economics (e.g. the jobless rate, earnings’ growth, GDP etc.) and stock market performance.

The reason for this break is widely attributed to the second force at play, monetary policy. We’ve now been on the receiving end of at least $13trillion in stimulus. The real figure is probably far higher, but I think we’ve now passed the stage where anyone is even bothering pretend to count the amount. Although much of this money hasn’t filtered through to the real world, its presence is undoubtedly sustaining asset prices.

Arguably the current market is just another bubble which has been created by financial excess. Unlike other bubbles though, this bubble hasn’t been sustained by the euphoric consumption that has fuelled previous ones. Continue reading

26th November 2012 – Why ever sell?

Today’s Technical Take has thrown up an interesting thought. Their indicators seem to be turning bullish, but there are still lurking dangers in this world of no consequences.

They make the point this week that a market which continually bails out the weak hands is one which is prone to failure. This makes logical sense. Failure is part of a healthy and functional market. It’s part of life. Denying this is foolish.

Even so monetary policy since 2008 has been designed explicitly to cushion investors from the losses they should have incurred from previous bad decisions. Whether bailing out the rotten banks or “saving” the bloated, inefficient car makers or persisting in grossly unsustainable public spending the policies of print and be damned are bound to have long lasting effects. In conditioning people to believe that no matter what they do, someone else will pick up the tab then this must create a false sense of security. Sadly it will also probably lead to even more ruinous behaviour.

I often seem to ask “is this not blindingly obvious”? Continue reading

19th November 2012 – If it looks like a bank…

An article in the FT this morning caught my eye. Apparently the Financial Stability Board has put forward proposals for regulating the shadow banking system.

I won’t pretend to understand what the shadow banking system is. But it scares me.

To start with it’s called “the shadow banking system”.

Without wishing to appear a simpleton, could it sound anymore sinister?

The losses incurred by the greed-driven malpractice of the regulated banking sector are bad enough. I dread to think what happens within the unregulated, non-reporting shadow banking sector.

While I have little to no faith in regulatory oversight, it strikes me as madness that this sector has been allowed to develop at all. I understand there are arguments about the complexity of international law, tax havens, advances in technology and the slowness of government to respond to change. However none of these are excuses for this apparent serious failing in policy.

But this isn’t what scares me most. It’s its reported size.

When an article in the FT casually quotes the size of the shadow banking sector as $67trillion, am I the only person who sees something totally amiss? Continue reading

12th November 2012 – Please just let Greece go

The prolonged agony being inflicted on Greece is unbearable to watch.

After five years of recession the debt burden is still increasing and what is worst of all is they haven’t even started the hard part yet (serious public sector reform, which will require pay cuts). Today the Greek Government has announced yet more austerity, as a precondition to receiving more aid.

Greece is bankrupt.

There can be no doubt about this.

Greece should be allowed to default and start again.

This will be extremely painful, but ultimately is surely going to be the only outcome. Better to get the hard part of the way as quickly as possible so the process of genuine recovery can begin. Pretending otherwise and hoping the problem will go away hasn’t worked nor has trying to solve a debt crisis with more debt. The organisations that lent to Greece should incur the losses from their poor lending practices. And this should include the ECB. Continue reading

5th November 2012 – The Chart that says it all

On the face of it this chart is extremely dull. It just goes up.

However consider for a moment what this chart actually represents. The simple answer is of course the expansion of US consumer debt since the 1950s. After a bit of more detailed reflection this chart should, in fact, terrify you. Note the large expansion in the 1980s as consumer debt double. This trend was broken for a short while during the recession of the early 1990s only for it to resume with a vengeance from 1992 onwards.

Parabolic charts rarely end well when applied to the real world.

This one could be one of the most disastrous endings we all now face.

Where banks get bailed out, sovereigns print more money and bond holders losses get underwritten, consumers are expected to repay all their debts or woe betide them.

Somebody of influence, somewhere, must surely look at this chart and recognise this is a disaster waiting to happen.

Sadly I fear not.

A basic question seems to have eluded the overwhelming majority of those in charge. How exactly will all this money be repaid. Continue reading