How QE plays out – and other guesses

How QE plays out – and other guesses

15 Sep 2016

This is a follow up to my last post about how QE is a wrecking ball that distorts financial markets and economic decision making. I have no opinion – despite a sceptical mindset – about whether QE is being applied correctly or about whether it will work. I doubt if even hindsight will allow people to agree about whether it succeeded. As an investor I need to weigh the probable outcomes of the distortion itself. Even this is not the same as making a definitive call on what will happen. That is gambling. As always, investing is about probability. THE WEALTH GAP – ONLY SHARES ARE CHEAP As long as QE carries on and the pool of safe assets shrinks further, savers in search of yield will keep chasing other assets. The stock market has been climbing the wall of fear this year. Before the referendum vote, George Soros and others forecast a decline of up to 20% in UK shares. Chancellor Osborne did not rule out suspending stock exchange trading in the face of the expected panic. With the atmosphere so full of “markets hate uncertainty”, that notorious cliché so readily embraced by third rate market commentators, many people will have assumed that the stock market would have performed its patriotic duty and dived after Brexit. But shares are cheap and quick to buy and sell, five days a week. I have just been offered a two year fixed rate bond by a building society that yields 0.95%. That’s a decision that ties up my money for two years. Were I to choose to buy Marks & Spencer shares instead I could get a dividend yield of more than 5% – and if I change my mind and decide that M&S is too racy, I can sell it in two minutes. Back in verdant Blackheath and vibrant Lewisham near to my house, yields on buy-to-let properties are between 3.6% and 4.5% (source portico.com). That seems like a lot of cost, time and risk compared to being a passive and better-rewarded owner of M&S. There is no hint that QE will be curtailed or reversed. On the contrary, the central banks of the UK...

QE : a wrecking ball to crack a nut

QE : a wrecking ball to crack a nut

3 Sep 2016

On 4 August 2016, the Bank of England expanded the QE (quantitative easing) programme that it had begun in 2009. This expansion, which now includes corporate bonds as well as gilts, is ostensibly in response to the Brexit referendum result on 24 June. The Treasury and the Bank had warned that Brexit could lead to a bad recession. You might need reminding that the official purpose of QE, since 2011, has been to stimulate the UK economy. You might think that, if this policy has been a success, it is rather a slow burner. But Andy Haldane (Bank of England Chief Economist) is in no doubt that it is the right thing to do and that this is no time to be faint hearted. “I would rather run the risk of taking a sledgehammer to crack a nut than taking a miniature rock hammer to tunnel my way out of prison.”   Mr Haldane may be an economist but he knows how employ a ridiculous metaphor to make a point. And although he – incredibly – affects populist ignorance of financial matters (giving interviews in which he says that pensions are too complicated to understand), he does not lack respect for his own ability. He explained that the decision to cut interest rates by 0.25% was in order to save hundreds of thousands of jobs, though whether this included his own was not clear. QE actually commenced in 2009 as an emergency measure to prop up asset prices in a (so far) successful attempt to save the banking system. The banks held vast amounts of tradable assets that could become vulnerable to crises of confidence – so the central bank stepped in as a very public buyer and calm was largely restored. Phew. The official line that this was a form of monetary policy that could stimulate economic growth snuck in later and is much more challenging to justify. It seems to me to be a rather strained argument. Here is the latest official serving. BoE report 4 August 2016 The expansion of the Bank of England’s asset purchase programme for UK government bonds will impart monetary stimulus by lowering the yields on securities that...

Gifts in the mail

Gifts in the mail

15 Jun 2015

The privatisation of Royal Mail in October 2013 was a lesson in how the City can run rings around politicians who fancy themselves as financial sophisticates. In this case the sap-in-chief was Vince Cable, a man whose CV includes many “economics advisor” titles. Despite this supposed in-house expertise, his department for Business, Innovation & Skills hired a vast syndicate of City banks, perhaps believing in the wisdom of crowds. It is well known that the shares were priced at 330p, that the institutional offering was oversubscribed by 24x and the retail portion by 7x. Most applicants for shares got none at all but 16 priority investors shared 38% of the entire offer (representing 22% of the company). On the first day of trading the shares closed at 455p. Within a few weeks, seven of the sixteen priority shareholders had cashed out completely. The grounds on which the priority investors had been selected were said to include their willingness to be long-term shareholders. It is hard to escape the conclusion that the government behaved with a mixture of ignorance and fear. For many years, financial institutions have gorged themselves on the naivety of their customers but, as a citizen, I find it very disappointing that my elected representatives are quite so useless. The underpricing and mishandling of the IPO was something of a public humiliation that may have contributed to the ejection of Vince Cable in the recent general election. It took only until March 2014 for the National Audit Office to publish a report that criticised the government for being cautious and pointed out in restrained language that “the taxpayer interest was not clearly prioritised within the structure of the independent adviser’s role”.  Royal Mail was something of a dinosaur company in stock market terms. It was a state-owned business that retained a highly unionised workforce and huge defined benefit pension liabilities. Moreover, it was obliged to maintain a national postal delivery service while the potentially more lucrative parcel delivery service was open to new competitors who could to some extent cherry-pick the services that they fancied. Letter volumes are in clear decline as most of us prefer e-mail while parcel volumes are rising...