Monthly Archives: February 2013

28th February 2013 – The Sequester and short the Dow

There are some topics I ignore in this blog, largely because there is so much coverage of them elsewhere. I often figure what else is there to say?

The trend of events is clear and we keep receiving confirmation after confirmation of the trouble ahead. Excessive debt, stagnant economies and political deadlock

The Italian election is one issue I’ve ignored. Their bond yields have jumped and whichever parties eventually form a government, it probably won’t last more than 18 months if recent history is anything to go by.

The fact is the hard choices are just too hard to make now. Economies are so bitterly over-leveraged and populations have become used to such unsustainable lifestyles that there is no way the current ruling classes can possibly hope to implement desperately needed reform, without also ensuring their own downfall in popular uprisings. Continue reading

26th February 2013 – Some radical thinking from the BoE

I should write about the Sequester today, but I am short of time. I also just came across a fascinating piece in the FT.

Paul Tucker, of the Bank of England, has apparently suggested to MPs that banks could be charged negative interest rates for holding reserves at the central bank.

The “money on the sidelines” has been a big challenge in Britain, Europe and America. Quantitative Easing has not resulted in extra bank lending and is viewed by many as the single biggest failure of the policy. I’ll ignore for the moment the issues of too much debt and the obvious inflationary implications of freeing the liquidity which has been pumped into the financial system out into the real world. The idea itself is very revealing.

For a long time I’ve supported the view that the monetary rules as we know them no longer count. Certain fundamental laws of economics will still apply, but those are bridges to cross another day.

In the blog I wrote last week how the Fed can exit QE, I brought up the o the QE-created reserves will pose when interest rates start to go up. One solution is to encourage the banks to withdraw the reserves and start using them.

If they do this, this will surely have to have an inflationary effect.

After recent actions by the Fed and BoJ, this Great Global Monetary Experiment looks like it is going to get even more interesting this year.

I’m delighted to be long gold.

25th February 2013 – Long Gold

I don’t often write about positions I take, but last week I went long gold, buying June options. Possibly I bought a little high, but I’m happy with the position.

A few years ago I wrote a blog about the oil market. The point I made was that at the time at least one of the major investment banks had issued extremely bullish research, proclaiming oil was heading to $150. At the time it was trading at about $115 I think. I thought this might represent a top, but didn’t trade it.

Within a few weeks the price had collapsed.

I have accepted that deception is commonplace among market practitioners. I have adjusted accordingly.

Recently I saw many pieces announcing the official end of the gold bull market because George Soros had sold his holdings.

I got to work straight away.

My positions have 4 months to run. I am planning on adding to them if I can get a better entry price. The current spot price is $1590/oz. I’d like to see it fall $30 before buying anymore. If I get the opportunity, great, if not I am happy enough with my position.

There is a prevailing sense at the moment that we are on the road to recovery. I don’t agree. There may be a temporary reprieve, but the Credit Crisis is still with us, as much as many try to deny it. Just look at the debt statistics across America, the Eurozone, Japan and Great Britain. The talk is now of competitive currency depreciation and the Federal Reserve is still on course to unleashing $1trillion of QE over 2013. There is still plenty of trouble to come, not least the next instalment of the Deficit Ceiling debacle (but more of this tomorrow). Continue reading

23rd February 2013 – How little I know; Britain loses her triple-A status, the Keynesian Depression and shorting the bond market

When I first started writing this blog in January 2008 one of my first posts boldly declared Britain was going to lose her AAA rating.

I had no idea what I was talking about.

The more I have written this blog the less I realise I know. Perhaps this insight will help me remain open-minded in the future. Although Britain has now lost her AAA, I can hardly claim this as a victory of foresight. Worse still, and more pertinently for this blog, had I formed an investment strategy based on my 2008 opinion I would have no doubt failed disastrously.

So what went wrong with my view?

Britain has been on shaky ground for a long time. Back in 2008 I intuitively understood the desperate plight the economy was in. I understood Britain had borrowed too much and the business environment was listless. The public sector felt too large and the private sector was struggling. I couldn’t possibly see how Britain could be viewed as one of the most environments to invest in.

I underestimated several factors. Continue reading

19th February 2013 – Can the Fed exit QE?

I saw this piece in the FT a couple of days ago.

I have given a lot of thought to the Fed’s move just before Christmas, when it tied QE to unemployment. As the FT piece mentions the key word is “substantially”. Page 10 of the January minutes of the FOMC meeting confirm that “if the outlook for the labor market does not improve substantially, the Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until such improvement is achieved in the context of price stability”.

The obvious question to ask is what does “substantially” mean?

I have seen a lot of commentary suggesting this means the American unemployment falls to 6.5%, but this is not categorical. The language is no-doubt deliberately ambiguous to give the Fed flexibility when making future decisions and it’s the future decisions that interest me most.

Stopping the asset purchase programme will be an important step, but what comes after this? How is the Fed going to repair its balance sheet?

Remember this link?

To remind you the Fed has roughly $3trillion sitting on its balance sheet, which it is going to have to do something with. To pay for these purchases, the Fed has created bank reserves. Total bank reserves created to date equal $1.6trillion. This is likely to grow by $1trillion over 2013. Continue reading

18th February 2013 – How has this happened?

I’ve just finished writing an article about the prospect of the introduction of an oil-backed currency. It’s taken me a long time to research and write. It has also been a quite shocking experience.

I knew that the state of the Global Financial System was bad. I also knew that the debt burden was growing.

What I didn’t know was the scale of the problem.

The US debt clock is a famous site. It is inaccurate at the moment as it puts the Federal Debt at $16.5trillion so hasn’t been adjusted for the accounting sleight of hand performed at the start of the year, which gives Congress and the White House until the end of March to reach a deal.

I’ve seen this site several times before. I just haven’t look at it properly.

Excluding financial-sector debt and off-balance sheet (but real) liabilities, such as future pension commitments and Medicare-costs, the total US debt/GDP ratio is 370% and rising. American consumers and corporations, US State and Local Government organisations and the Federal Government owe $58.5trillion.

What is even more trouble is in terms of total debt/GDP ratios America’s is by no means the worst. During my research I came across this 2012 report from the McKinsey Global Institute. I have made some effort to cross-reference the figures with latest available data and this report seems to me to be the most accurate in assessing the global situation, even though it is a year old.

The headline figures have to be that Japan and Great Britain’s total debt/GDP ratios are both in excess of 500%.

This is staggering. Continue reading