8 Apr 2016

Following a nervous rally in Q4, in Q1 the UK stock market was merely nervous. For the first time in seven quarters, the FTSE 100 (-1.2%) outperformed the FTSE 250 (-3.0%). This is a small indication that investors were becoming more worried about the outlook for earnings, I suppose. Since the Fed made the first tiny upward move in rates (0.25% in December), the economic smoke signals have deteriorated. Janet Yellen has publicly backtracked on the outlook for more rate rises this year. The ECB has signalled that more stimulus may be needed. Then there is China, Brexit and, most particularly, blah blah.      As usual, market commentators think that equity prices should reflect their view of the world. As usual, they miss the fact that equities are merely assets that compete with the value on offer elsewhere. The implicit secondary purpose of QE (the primary purpose was to bail out the banks) is to make the value of every other investment so unattractive that people begin to invest directly in riskier ventures that are more likely to help the economy. That’s the theory on which, despite its having the weight and robustness of a Twiglet, the world seems to be relying. How’s it going? Well, the price of “safe” investments has climbed to yet more prohibitively unattractive levels. The yield on German 10 year Bunds was 0.63% on the 30th December 2015 and 0.14% on 30th March 2016 and is thought by some to be heading negative. Well, why not? The Bank of England started its QE purchases of gilts in March 2009. At the time, the average UK dwelling cost £157,500 (its low point of the last ten years). In March 2016, the average dwelling cost £224,000 a nifty rise of 42% or 5.2% compound over seven years. No wonder that most Britons think that housing is the best possible investment and that we must have a housing shortage. Memo to everyone: house prices have been inflated by a deliberate and unprecedented policy of monetary easing, not by supply shortage. This is not going to end well. How about the next stage? Are people helping the economy by making riskier investments? Today’s...