Category Archives: Inflation

27th September 2013 — What is real inflation

The threat of inflation is a regular theme here at Spreadbet Magazine.

We are deeply concerned about the long term implications of the excessive easy money policies of the major central banks, since 2008. In the absence of clearly defined exit strategies, the likelihood is that once this money starts seeping out into the real economy, prices will head much higher. Financial markets have already experienced the super-charged effects off this.

A crucial point, which has been missed in the current debate about tapering, is that the taper is not an exit strategy. It will simply be a reduction of the Fed’s extraordinary bond purchasing programme. They will continue to purchase billions of dollars of financial assets each month, to add to the $3.73trillion in “assets” it already holds. The explosion in the sheer size of the Fed’s balance sheet is already troubling in itself, but the greater it grows the greater the hazard posed by future inflation.

 

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31st July 2013 — Are US equities psychologically adjusting to the taper?

We’ve just heard that US GDP in the last quarter grew by 1.7% against a projected figure of 1.1%. Even though the unexpected gain was negated by Q1’s downward revision of 0.7% to 1.1%, this number is still fairly decent. Of course when I say “decent” I don’t mean by historical standards, but rather in comparison to the lacklustre growth witnessed in most of the other OECD nations.

In spite of this reasonably positive news, the benchmark US indices have barely budged. It appears that the market is back to believing good news is bad. With the Federal Open Markets Committee due to release its policy statement in a few hours, the skittishness is understandable. Speculation is rife that the Fed is going to announce plans to start tapering its bond purchasing programme. There is now a two month hiatus in FOMC meetings and the next one is scheduled for September. A consensus has formed that the Committee will take the opportunity with this month’s policy statement to lay out plans to start scaling back its operations by the time of the next meeting.

 

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27th July 2013 — Frontrunning the Fed (again)

Last month’s meeting of the Federal Open Markets Committee (FOMC) provided an excellent opportunity to go short US stocks. Comments in the FOMC’s policy statement concerning the withdrawal of the bond purchasing programme prompted panic. For many this was a shock, but really the only surprise in the market’s reaction should have been the surprise itself. The Fed has been making hawkish noises for quite a few months now. The economic data set they use have been slowly improving, albeit at a fairly anaemic rate, and “official” inflation remains comfortably in check (as for real world inflation – that’s a different story!).  All in all, the right conditions appear to be in place for the commencement of “policy normalisation”.

The question now is will the FOMC follow through next Wednesday and announce its plans to start tapering QE, possibly as soon as September?

 

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8th April 2013 – Is the market rally a sure sign of “broken economics”?

Over the weekend I read this excellent piece by Anatole Kaletsky.

It sums up very succinctly the economic challenges facing us all today and is a must read.

Friday’s rally in markets, in response to the immediate sell-off after a very disappointing US jobs’ report, further reveals the growing disconnect between stock market performance and real economic performance.

Wherever I look there are signs that economies are treading water at the moment.  Some immediate examples which spring to mind include;

-        Ongoing turbulence in Europe

-        The Baltic Dry Index continues to struggle

-        Copper looks like it is heading to the bottom of its recent range

-        This interesting analysis from Zerohedge has adjusted the principle of monitoring power usage as an economic indicator (first used to assess the strength/weakness of China) to monitoring fuel usage in the US

All the while, corporate earnings apparently remain robust and the “fundamentals are sound”.  Continue reading

4th April 2013 – Japan opens the floodgates

Well what can I say?

I certainly can’t say I’m surprised.

Concerned, worried, sad…..?

I woke up this morning to headlines that Japan has launched another massive QE barrage on the financial system.  Although not as big as the Americans’ this QE blitz is a lot more flexible, affording the Bank of Japan the opportunity to buy REITS and ETFs.  It’s no wonder the Nikkei has gone bonkers and I expect to surge even higher.  The Yen will likely fall sharply.

After the recent analysis by Kyle Bass, this move looks risky.  Inflation and currency depreciation erode wealth and usually lead to higher interest rates.  Given the enormous weight of Japanese government debt and the vast holdings of said debt by Japanese institutions is the Bank of Japan looking wistfully across the Pacific at the market response to the Fed’s QE.

Defying many expectations, the yield on US Treasuries continues to fall, demand for them is strengthening strong and inflation remains benign.

What is risky about this is that Japan is not America (and who says I don’t have market insight!!!).  Continue reading