Report on Q3 2016

Report on Q3 2016

5 Oct 2016

The second quarter ended just after the Brexit vote and the stock markets were in a state of shock. The FTSE 100, which is where frightened investors go to hide, had one of its rare periods of outperformance over the FTSE 250 in Q2. (The FTSE 100 includes large multinational businesses, the FTSE 250 is a better reflection of the UK economy). In Q3, the FTSE 100 rose by 6.4% and the 250 by 10%, a strong indication that investors recovered their nerve during the summer.

Mark Carney would probably claim that this was the result of the Bank of England’s interest rate cut and expansion of QE on 4 August, though much of the stock market recovery had happened by then.

European government bond yields have remained low but have had a fairly quiet quarter as people begin to question how much further central banks can go.

The consequences of central banks’ actions were addressed by Crowknows in Q3. First in a post called “QE: a wrecking ball to crack a nut“, I suggested that, whatever its ultimate outcome, the predictable side effects of QE are quite disturbing. I looked at the widening of the wealth gap, the rising cost of pension liabilities (see the Tesco half year results on 5 October) and the piling up of the debt burden to be dealt with by future generations. The Bank of England does not print free money: it draws relentlessly on an excellent credit facility better known as the UK economy and its tax receipts of the future.

The second post was about how QE plays out. This suggested that shares and arguably only shares are cheap relative to other investable assets. (Never forget thatvalue is always relative and never absolute, unless you believe that there is an investment god). It then suggested that if your house is your pension, then cashing it in is going to become what investment wonks call a “very crowded trade” one day. I don’t know when that will be but included in the possible dates is tomorrow. The third conclusion was that national debt will continue to grow (confirmed by the new Chancellor this week) and that the government would be better off investing in practical, economically useful projects than in loss-making paper (take a rest, Mr Carney).    

One comment

  1. Cherith /

    That was a short one! Always a pleasure…no mention of the drop in sterling?

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