The real estate “bubble” is global

The real estate “bubble” is global

21 Mar 2019

In my round-up of Q4 2018 I mentioned three risks that I intended to keep an eye on. Here are three really bad things that could happen in 2019 or preferably later. 1) London house prices fall by 20% rapidly or 40% gradually (or both) 2) A major issuer of government debt suffers a catastrophic collapse in confidence or actually defaults (will the person who said “China” see me afterwards?) 3) A neo-Marxist garden gnome becomes Prime Minister of Great Britain. Numbers 2) and 3) remain of great interest but now I want to update myself on the developing story of property prices. Two observations are becoming quite well known: the apparent insanity of new high rise apartments shooting up all over Zone 2 London and the decline in turnover of the traditional property market. FLIPPERING HELL The FT had a good article on 20 February entitled “London’s property ‘flippers’ forced to sell at a loss”. Flippers are speculators who buy flats off-plan before construction has begun. It seems that they are often individuals either originating from or actually still living in Asia. They are probably rather ignorant about what they have agreed to buy. According to the FT, someone lost £770,000 buying and selling an uncompleted apartment in One Blackfriars, a monstrous glass eyesore (obviously that’s just my unsophisticated opinion) towering over the Thames (which has surely been punished enough). “In 2014, 21 per cent of resales in recently completed developments were sold at a discount, according to property research company LonRes. Last year that number had more than trebled, to 67 per cent. At the same time, the size of discounts has ballooned. From an average of 2.2 per cent in 2014, to 13.1 per cent last year.” To be brutally frank, most Londoners just find these stories of burnt speculative fingers quite satisfying. Some might say that it’s payback for despoiling our historic city with your greed and ignorance. Others might suggest that this attitude is somewhat hypocritical, given that mutual self congratulation about how much everyone had made on their houses was the backbone of London dinner parties for about three decades. PENSION PURGATORY Over those years many representatives of...

Report on Q4 2018 – full of sound and fury

Report on Q4 2018 – full of sound and fury

5 Jan 2019

Over the first nine months of 2018, the UK stock market was barely changed. In Q4 the world’s obsession with uncertainty overtook it. Trump took on China again, Trump took on the Fed, Congress took on Trump, the ECB took on Italy, the Conservative party took on Theresa May, everyone took on Saudi Arabia and the oil price took fright. While a falling oil price is sometimes considered broadly beneficial to the world economy, it is currently identified as a harbinger of global recession. The FTSE 100 fell by 10.7% in Q4, the 250 by 13.9% and the All Share by 13.1%. The rule that in nervous times investors favour large international shares (i.e. the FTSE 100) overall held good, though not on a scale to promote rejoicing or relief. For roughly the 17th time since the financial crisis the fear of impending inflation faded away. The underlying assumption that we are living in long-term deflationary times held good again. Government bond yields have duly subsided again. The US ten year yield has slipped from 3.0% to 2.6%, the UK 10 year gilt yield is now c.1.2% as opposed to 1.5% three months ago. It is times such as this (when the Japanese stock market’s daily change is one of the news headlines on the Today programme) that it is most important to remember our (or my) basic investment rules. Sharp and extensive falls in the price of classes of assets are caused only by the forced capitulation of unwilling and unhappy sellers. Great market collapses are invariably accompanied by the realisation that something that everyone took for granted is no longer true. Black Monday in 1987 was, with hindsight, a financial services event. Stockbrokers, fuelled by American money following Big Bang, were being paid more than bank directors had earned only a few years before. It was the time of Loadsamoney (Harry Enfield), Money (Martin Amis) and Serious Money (Caryl Churchill) and I am prepared to say without embarrassment that it was bloody marvellous to be part of when you were in your mid twenties. But when it was over you knew it was over. When the DotCom bubble burst in 2000 it...

Contagion

Contagion

16 Oct 2018

  “The least thing upset him on the links. He missed short putts because of the uproar of the butterflies in the adjoining meadows. ” PG Wodehouse Financial contagion is a phrase employed by those who try to explain a fall in an asset price that they didn’t see coming.  If it means anything, which is not certain, it describes the fallout from the volatility that results when any market falls because people are forced sellers. This is prone to cause panic which in turn means that the attraction of holding cash rises. Given that no one likes to sell a falling asset (a psychologically taxing experience) people prefer to raise money by selling things that haven’t fallen in price but look potentially vulnerable (especially if viewed with a newly sceptical eye). As the quote from PG Wodehouse shows, when things go wrong we tend to cast around for something to blame. Bad things happen to relatively overpriced assets and the nature of the event that triggers their decline is really of no consequence. The need to explain what happened is driven by a reluctance to take responsibility for a poor investment decision. Hence we are allegedly the victim of the devaluation of a currency, the collapse of an obscure foreign bank, the failure of a harvest or the uproar of beating butterflies’ wings. In reality, contagion is not a hidden threat but a constant reality that we should never forget. All assets are in competition all the time, subject to perceived risk and liquidity. All asset values are relative to each other. The most crass mistake that financial analysts make (and I certainly write from experience) is to compare the price of an asset with its own history and to declare that this proves it to be cheap or expensive. Here are ten assets in which you, if your assets and liabilities are UK based, might conceivably invest, ranging from cash (the most liquid) to commercial property arguably the least liquid). Note that all savings are investments, even cash.   Gross yield Cost of ownership Net yield Capital gain/loss? Building society 2.0% 0.00% 2.0% No Government Gilt 1.7% 0.25% 1.5% No Cash 0.0%...

Report on Q3 2018

Characterised by such slogans such as “sell in May and go away”, the third quarter of any financial year is often expected to be cautious. This year saw a mild confirmation of that view – the main UK indices in Q3 fell by +/- 2% compared to Q3; year on year there was an increase of around 2% leaving shares year-to-date down marginally (-0.25%). This is something of a relief in view of the political noise that irritates us on a daily basis but we should note that the US S&P is +8.5% year-to-date.  Whether it is the combination of tax cuts and trade deals or something else, the US is showing either where we could be going or what we are missing, depending on your view. US government bond yields are still inching rather than exploding upwards. US 10 year treasuries are now hovering just above 3% and 10 year gilts are just above 1.50%. These started the year at 2.4% and 1.2% respectively. Perhaps this is a trend. But we should not forget that although there are plenty of Britons who remember inflation, it is 25 years since it was last a problem. I think that wage inflation is worth keeping an eye on but there again it seems that so many of today’s new jobs are relatively unskilled – the more that technology leaps ahead the more we seem to need people who can drive a car or ride a bicycle. When pricing power reaches sellers of that kind of labour then inflation might be off to the races. At the end of the quarter there was another bout of panic about Italy being rebellious against the decrees of the EU/ECB. The premium of 10 year Italian yields over Bunds is climbing. If it continues it will politically disruptive in Europe and could conceivably affect the Brexit deal, though whether it would make the EU negotiators more conciliatory or more obstinate is anyone’s...

Prepare to turn left

Prepare to turn left

14 Nov 2017

I have been on the town recently. Two weeks ago I went to see Reasons to be Cheerful, a brilliant play based around the music of Ian Dury. It is performed by the Graeae theatre company that featured in the 2012 Paralympics opening ceremony. I saw it when it was produced the first time in 2010 and eagerly returned for more. Ian Dury was to say the least an anti-establishment figure and by today’s standards not politically correct. I’m not sure whether he would have appreciated the fact that a new song was tacked on to the end of the show. “If it can’t be right then it must be wrong” has rather puerile lyrics that I don’t think Ian himself would have written (“Keep the funding flowing from a loving cup”). As the song was played and sung, pictures of various politicians with devil horns sprouting from their heads were flashed onto a screen: Mrs Thatch, natch, David Cameron and, oh look, Tony Blair. But I will let someone else summarise: “This new anti austerity song from Graeae and the Blockheads captures the current mood of the country. Its lyrics bring people together in a moment of shared experience to challenge the status quo.” Jeremy Corbyn, Leader of the Labour Party. There I was watching a play set in 1979 and suddenly the “mood of the country” in 2017 was sprung on me. How did that happen, I wondered. Last week I revisited 1979 for the second time by paying a 2079 price to see Squeeze at the Royal Albert Hall. And it happened again. In between Cool for Cats, Up the Junction and Labelled with Love, the band naturally played songs from their new album. These included Rough Ride which laments the lack of affordable housing in London and A&E which really challenges the status quo by calling for more funding for the NHS. Perhaps I should get out more but I was struck by the way in which the anti austerity message was offered on both occasions with such confidence, as if it were not a politically contentious message but almost a fact. Perhaps I live in a London bubble but...

Report on Q2 2017

Report on Q2 2017

5 Jul 2017

The UK stock market was on a rollercoaster ride to nowhere in Q2. The FTSE 100 fell by -0.3% and the 250 managed a rise of +1.8%. Given that we had a shock election, a shock result, a hung parliament and that the shadow Chancellor thinks that democracy has failed, you could say that the stock market has been amazingly calm. Likewise the government bond market. The 10 year gilt yield was 1.23% at the end of Q1 and 1.26% at the end of Q2. This is the dog not barking in the night time. We are widely told that the pale imitation of austerity that has been attempted for the last eight years is to be abandoned but the bond market is not panicking yet. Here is a picture of gilt yields since 2007.    One of the lessons of the election was that voters under the age of fifty or so are not frightened of the things that made the 1970s rather messy. Inflation, double digit interest rates and labour unions challenging the government’s right to run the country to name but three. It remains the case that the return of inflation is what bears warn about most frequently. In the 1970s the best way to protect oneself against inflation was to buy property. House prices rose by 492% over the decade. I wouldn’t advise the same strategy now. In fact I would consider doing the opposite. The world still seems pretty deflationary to me. You can choose your own explanation and file it under “uncertainty” but it still seems to me that listed companies are still being very cautious about capex and expecting their shareholders to approve of this caution. Here are five domestically exposed UK companies that have reported March or April year-end results recently. Halfords cut capes by 11% and raised its dividend by 3%. Dairy Crest cut capex by 62% and raised its dividend by 2%. M&S cut capex by 25% and kept its dividend unchanged. Stage Coach cut capex by 18% and raised its dividend by 4%. Royal Mail cut capex by 16% and raised its dividend by 4%. All these are behaving in a risk averse...

The crumbling social contract

The crumbling social contract

15 Mar 2017

THE LAND OF THE FREE-FROM-RESPONSIBILTY The Occupy protesters (what was it they were protesting about again?) used to chant “We are the 99%”. The 1% were portrayed as the selfish and/or crooked people who had appropriated most of the wealth. It is demonstrably easy to be part of the 99% – in fact, it’s darned hard not to be. Rarely had so many ever been against so few. The trouble with being part of a 99% majority is that it is difficult to be focused. Even the French revolutionaries of 1789, who had pretty much the same numbers on their side, could not agree on their objectives and ten years later succumbed to dictatorship (by a chap named Napoleon). But the recent UK budget, delivered by the harassed Chancellor, Philip Hammond, highlighted one point on which close to 99% of politicians, lobbyists and commentators are agreed. They all have limitless opinions about how public money should be spent but next to no constructive suggestions about how that spending should be funded. There is no responsibility for funding that is commensurate with the responsibility for spending. This seems unfair because the latter offers all the joys of patronage and moral superiority and the former, as Mr Hammond might agree, is like having toothache in a land of no dentists (whose absence is widely attributed to your own austerity policy).      I believe that most citizens are supportive of the idea that they should pay their fair share of taxes. But what weakens their support is any suggestion that the government is misusing their money, either by waste and incompetence or by channelling it to family and friends or by funding causes with which they do not agree. (The 2016 EU referendum ticked all those boxes for many people). There was a great experiment in California in the 1970s that showed what happens when people revolt against their social obligation to pay taxes. PROPOSITION 13 Essentially, Proposition 13, passed overwhelming in a referendum in 1978, imposed severe restrictions on the ability of local Californian politicians to raise taxes. Its genesis was the Howard Jarvis Taxpayers Association. The US has a history of taxing real estate that...

Investing for our old age

Investing for our old age

16 Jan 2017

Here are two pieces of great news for the citizens of relatively rich, relatively developed, relatively Western economies. Women can increasingly combine career and motherhood rather than having to choose between them: and improved healthcare (if not exercise and diet) mean that people on average are living to greater ages. Fifty years ago, the UK average birthrate per woman was 2.9 (over her fertile life, not per pregnancy, obviously). Now it is 1.8. No doubt this is down to a combination of reasons which you can work out for yourself. Given that medical science has not yet worked out how to allow men to give birth you might imagine, if the UK’s experience is typical, that in the long term the global population will decline, on the rough basis that each woman should on average have two babies to replace those falling off the perch at the far end of life’s journey. Were it not for the fertility of some African countries, where birthrates of >5 per woman are quite common, mankind might become an endangered species.  According to the World Bank, the average fertility of women in the world was 2.5 in 2016 and the necessary “replacement rate” is 2.1. So the human race looks as if it will walk on for a while. Yet the story for developed nations is quite different. BIRTH RATE IN DEVELOPED NATIONS – FLACCID France (2.0), the US (1.9) and the UK (1.8) are doing their best (all, note, countries with histories of racially diverse immigration). The EU, which only promotes immigration from within itself, is overall at just 1.6 and Germany (1.4), Italy (1.4) and Spain (1.3) are below average. China, just unwinding its one child policy, is at 1.6 and Japan, perhaps the world’s most notorious ageing nation, is at 1.4. But the populations of established nations like the US, Germany and the UK are certainly not declining yet. Instead we have decades ahead in which the population will continue to grow but will age significantly. This is important for all kinds of financial reasons, none of them good. The last time that the fertility rate in the UK was at the “replacement rate” of...

FIVE FALSE TRUTHS

FIVE FALSE TRUTHS

13 Dec 2016

Imagine that your morning post contains an envelope that has your name and address written by hand in block capitals. Inside is a note, written by the same unknown hand that says, “YOU ARE SMELLY”. What do you make of that? For a moment you will regret having two helpings of chilli con carne last night and you will think back to last Thursday when you had a shower. But then you will start wondering about who could have sent such a note. What kind of strange person would bother to take the trouble to deliver such childish (and doubtless unjustified) abuse. What kind of sinister creep does that? Is this the start of something that could escalate? Will it end with a chalk line on your floor marking the position of your dead body when it was discovered?   Much of what passes for “social media” on the internet is effectively a worldwide digital version of an anonymous “YOU ARE SMELLY” note. And once you have asked yourself what sort of person spends time commenting, usually negatively, on anything that takes their fancy, with their ignorance protected with the cloak of anonymity, you must then come to a more awkward question: who in their right mind takes any notice of this stuff? It is certainly the case that corporations and politicians manage their Twitter and Facebook (and doubtless many other apps that I’ve never heard of) identities carefully. They employ people to try to ensure that their public face is shiny and smiley. Television channels read out texts and tweets to give the impression that someone sitting at home sending messages to the TV is not sad at all but is really a member of an upbeat community. Everyone is frightened of provoking a Twitterstorm, defined on Wikipedia as “a sudden spike in activity surrounding a certain topic on the Twitter social media site”. Sadly, Twitterstorms are frequently responses to someone questioning orthodox or just populist opinion. We pretend to revere people who challenge consensus but in practice they are fair game for mob anger. (I appreciate that Donald Trump is the exception to the above: he is far from anonymous, he does not...

Trade Agreements – the New Protectionism

Trade Agreements – the New Protectionism

2 May 2016

THE “UNREPEATABLE” MISTAKES OF THE 1930s According to the IMF (and pretty much everyone else, I believe) the Great Depression of the 1930s was made worse by protectionism. After the financial crisis that blew up in 2008, leaders of the Group of 20 (G-20) economies pledged to “refrain from raising new barriers to investment or to trade in goods and services, imposing new export restrictions, or implementing WTO inconsistent measures to stimulate exports.” They all agreed that a return to protectionism would be a disaster. The World Trade Organisation (WTO) is not a promotor of liberal free-for-all trade. It is an organisation of 162 countries based in Geneva (where else?) that employs 640 Secretariat staff. It particularly promotes the interests of developing nations and negotiates and monitors international trading rules. As we shall see in a moment, developed nations are showing an increasing wish to do their own thing. In its own words: “WTO agreements cover goods, services and intellectual property. They spell out the principles of liberalization, and the permitted exceptions.” Agreements are negotiated and then ratified by member countries one by one. Many of them ratify with qualifications that they individually require. The phrase “bureaucratic nightmare” comes to mind. The Doha development agenda has been under discussion since 2001. It is easy to suspect that these negotiations will occupy entire (probably highly agreeable) working lives. Consider this sinister undertaking: “Virtually every item of the negotiation is part of a whole and indivisible package and cannot be agreed separately. This is known as the “single undertaking”: “Nothing is agreed until everything is agreed”.” Nothing is agreed until everything is agreed. Wow. IS INTERNATIONAL TRADE REALLY CONDUCTED BETWEEN NATION STATES? The WTO was founded in 1995 on the premise that international trade is an activity that takes place between nations. As far as this applies to undemocratic nations it is at least partly true. North Korea, for example, exports a fair amount to China. I’m guessing that the nations involved monitor this pretty closely. Yet much of what passes for political debate seems to assume that we all function in this way. Don’t take my word for it. Listen to Donald J Trump on...

Monday 19th October

Monday 19th October

14 Oct 2015

Next Monday is an evocative date for those of us who worked in the City of London in 1987. The nineteenth of October became known as Black Monday (not the first or the last) as global stock markets went into meltdown. The Dow Jones Industrial Average fell by 22.6% in that single day. At one point during the trading day it was reported that the Chairman of the SEC (the U.S. Securities and Exchange Commission) had mentioned the possibility of suspending trading. Naturally this increased the level of panic. It felt all the more dramatic because the previous Friday, the 16th, had seen the Great Storm that felled trees all over Southern England. My wife and I drove into work that morning through streets that had been laid to waste a few hours before. The City was spookily quiet and the stock market felt abandoned but was also very weak. It turned out to be an eerie harbinger of the full scale panic that was to follow. If you search for explanations of Black Monday you will generally read that the stock market was overheated, partly inflamed by excited takeover activity. In September 1987, the ad agency Saatchi & Saatchi made an approach to buy Midland Bank. Nothing better exemplified the mood of the time – that anything was possible for the new money of the eighties. The Conservatives, led by Margaret Thatcher and Chancellor Nigel Lawson, had won the General Election on 11th June, seemingly confirming that the corpse of socialism had been buried and that capitalism could bring prosperity to anyone with the ambition to pursue it. It is certainly true that the developed world stock markets had risen substantially in 1987. By mid-July the FTSE 100 was up by 45%.  In that sense, prices were high though of course that is not the same as saying that they were expensive. All value is relative, as we know. As stock markets rose, bonds fell. This is a classic danger sign. Ten year gilt yields rose from 8.8% in May to 10.1% in September. High street savings accounts paid 9%. From today’s perspective, it seems incredible that equities were so popular. In relative...

Our fictitious “housing crisis”

Our fictitious “housing crisis”

6 May 2015

IT’S NOT ABOUT HOMES, IT’S ABOUT HOUSE PRICES Politicians, journalists and sundry do-gooders seem, against the odds, to have discovered one fact on which they all agree. It seems that Britain has a housing shortage and, to paraphrase the late Vivian Nicholson, we must build, build, build. Whenever an opinion, no matter how compellingly simple, is presented as a fact with which no one could disagree it is wise and even compulsory to question it. I bought a dead tree copy of the Times last week (28 April 2015) and there was an opinion piece about housing that contained this sentence: “It’s reckoned that we need about 250,000 new homes a year”. It didn’t add who reckons that or why. But once you start googling “250000 new homes” you quickly light upon a report written in 2003 by Kate Barker, a one-time stalwart of the Bank of England Monetary Policy Committee. It is reckoned, as they say, that this report demanded 250,000 new homes a year and eleven years on that has not been achieved once. It would appear that the nation has accumulated a bit of a backlog: to be more precise, a backlog of 845,000, that being the difference between the actual number of completions and 2.750,000 (11x 250,000). So what did the esteemed Kate (now Dame) Barker actually say in her report? Did she really demand that 250,000 new homes should be built every year? (Spoiler: no). The first line of the report is this: “The UK has experienced a long-term upward trend in real house prices.” And there’s a clue. I think it is fair to say that the primary motivation of this report is to make housing more affordable by increasing the supply in order to restrain prices. Here is the section that deals directly with the question of how many new houses are desirable: “Looked at purely from the perspective of the UK economy, more housing would be beneficial. Different approaches to measuring the shortfall, produce a range of estimates: • projections of population growth and changing patterns of household formation (a proxy for future demand), compared to current build rates implies there is a current shortfall of...

The ECB, QE and the waiting game

The ECB, QE and the waiting game

12 Feb 2015

Quantitative easing is a process by which a central bank buys relatively safe assets (mostly government bonds) and thereby puts cash into the hands of the newly-ex owners of those assets. In the early years of the financial crisis, this was effectively a life-support system for financial institutions which, post-Lehman Brothers, looked like they might fall domino-style. As the central bank bids up asset prices it creates a rising tide that floats many boats. One side effect of this is that the wealthy become wealthier. QE is quite tricky to justify from this point of view. If it is necessary to prevent the collapse of the banking system it is a jagged pill that needs to be swallowed. As I have written before, this is broadly how the Bank of England justified QE in 2009. “Purchases of assets by the Bank of England could help to improve liquidity in credit markets that are currently not functioning normally.” But gradually, while the music remained the same the lyrics changed. Expressing an idea that was essentially imported from the US, the justification from the Bank in 2011 was quite different. “The purpose of the purchases was and is to inject money directly into the economy in order to boost nominal demand.” You see what they did there? Once again, it was party time in financial markets. Bonds and equities were rising nicely. Bonds were rising because the Bank was buying them and other people were buying them because the Bank was buying them and equities were rising because they looked cheap compared to bonds. And property in the areas where financial people live began to go up again, despite the fact that prices appeared to require mortgages that quite high incomes could not plausibly service and that damaged banks could not reasonably be expected to offer. My friends and I have done splendidly from this once we had “got it”. And although I don’t know any influential people, some of my friends do. Call me a conspiracy theorist if you want but these influential people soon popped up all over the place saying how brave and wise central bankers were to extend QE. THE HIGH MORAL...

The paradoxical results of education for the masses

The paradoxical results of education for the masses

2 Dec 2014

The Churchill wartime government was kicked out by the electorate less than three months after the German surrender in May 1945. Labour won a huge majority and set about a radical socialist programme of nationalisation of key industries and the creation of the NHS and the welfare state. That story is quite well known. What will surprise many people now is that Churchill’s government managed to pass one dramatically progressive piece of parliamentary law in 1944: Rab Butler’s Education Act. There would be free education for all with selection at the age of 11. Children who passed the 11 Plus were eligible for places in grammar schools – it was intended that the top 25% should reach that standard. Places for the other children were to be offered at either secondary modern schools or technical schools which specialised in scientific and mechanical skills. Sadly technical schools were expensive and hard to staff and there were few set up. This gradually created the impression that the majority of children “failed” at the age of 11 and were sent to schools for underachievers. The 1944 act also allowed for the creation of comprehensive schools that could incorporate all standards. Perhaps grammar schools were burdened with having been promoted by a Conservative politician, but socialist politicians grew to dislike their perceived elitism and the Wilson governments of the 60s and 70s embarked on a determined programme of abolition. This culminated in an education act in 1976 which stated that state education “is to be provided only in schools where the arrangements for the admission of pupils are not based (wholly or partly) on selection by reference to ability or aptitude.” The class warrior secretary of state for education leading this was Shirley Williams (St Paul’s School for girls and Somerville College, Oxford). It is a matter of wonder that the most privileged members of the establishment tend to be dismissive of grammar schools and the upwards social mobility that they seem to offer. Our Old Etonian Prime Minister called arguments about grammar schools “splashing around in the shallow end of the educational debate” and “clinging on to outdated mantras that bear no relation to the reality of...

The eurozone is the frozenzone

The eurozone is the frozenzone

19 Jun 2014

The yields of bonds issued by government are broadly influenced by three factors: the performance of the underlying economy; the outlook for the currency in which the bonds are denominated; and the probability of default. Eurozone government bonds have demonstrated all three factors at work since the financial crisis hit in 2008. The story can be traced by the changing yields offered by (for example) Italian 10 year government bonds since 2008. In the first half of 2008, yields rose as the market worried that governments would have to issue more debt to bail out a few troubled financial institutions. This was widely expected to be inflationary (bad news for bonds). By mid-2008, worries began to be directed towards the probability that the crisis was going to cause recession and that interest rates were heading down. For two years, Italian bond yields fell. Then the story changed again. The possibility that Italy (and a number of other Eurozone countries) might default caused near panic. Finally, in late 2011, the ECB began to convince investors that a solution would somehow be found. The second blip in yields in the summer of 2012 coincided with much wild talk of the break-up of the euro causing some panicky types to worry that Italy et al would honour their debt in a new made-up currency that they could “print” themselves. This was an irrational fear, not least because much of the German and French banking system was a huge holder of such debt and would have been effectively destroyed. Through the rest of 2012 and 2013, Italian government bond yields normalised, offering a consensus view that the economy was poor, inflation low and the government unreliable but unlikely actually to default. In 2014, something quite different has happened. Yields on Eurozone bonds have started to deliver a single rather shocking message – low economic growth and low inflation are here to stay for years and years. Assuming that an investor is happy to disregard the risk that the Italian government will default, we must contemplate the fact that he apparently believes that a 2.6% return on Italian assets is enough to justify a ten year investment. As the...