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...

6 Feb 2014

“The bond markets are suggesting that we are looking at a fairly gentle, low inflation recovery.” The dangerously alluring feeling of comfort that I wrote about in my Q4 report did not last long. Major stock markets have fallen this year: FTSE -4%, Dow Jones -6%, Nikkei -13%. Many financial commentators are saying that this is the result of weakness in emerging markets which are in danger of being starved of investment dollars as the Federal Reserve continues its tapering policy. Even writing that makes me feel slightly ridiculous. It is typical of the confusing non-explanations offered by the financial services industry, helping only to encourage ordinary punters in the belief that all this is far too hard for them to understand. “Emerging markets” is an inherently biased way of referring to exotic countries in need of investment.  The term seems to have been invented in the 1980s. According to Wikipedia, prior to that the label Less Developed Countries (LDCs) was used. In 2012, the IMF identified 25 emerging markets. For the record: Argentina;  Brazil; Bulgaria; Chile; China; Colombia; Estonia; Hungary; India; Indonesia; Latvia; Lithuania; Malaysia; Mexico; Pakistan; Peru; Philippines; Poland; Romania; Russia; South Africa; Thailand; Turkey; Ukraine; Venezuela Note, sadly, that that the only African country is RSA. Looking again at the list, if you are particularly attached to democracy, private ownership rights or tolerance of homosexuality, you might find the thought of investing in some of these countries hard to digest. You might also ask how many countries have succeeded in emerging since the 1980s. The answer to that would appear to be zero. Foreign investment in emerging markets tends to be tidal: it flows in and it flows out again (if it can). Why then should this concern the risk-averse investor? There are two reasons, one specific and one general. The specific reason is that businesses in which we might be invested could be hit by diving emerging market economies. Global companies that sell consumer products are especially prone to this. Last week, Diageo the drinks company reported weakness in China and Nigeria. The general reason is that nervousness is infectious (especially in the banking industry). Undoubtedly, we have both these...

16 Apr 2013

The falling gold price is making the headlines and has reportedly caused a well-known hedge fund manager, John Paulson, to lose $1billion of his clients’ money. Another very smart guy named David Einhorn has also suffered heavy losses on behalf of his investors, according to reports. These men made their names and presumably their fortunes by betting against sub-prime mortgages and the banks that owned them. It is disappointing to see heroic figures such as these getting tripped up like this. I wonder if investors who have a great success begin to believe that they can make something happen through the power of their own genius. Great investing is all about getting the big picture right – but this is very, very difficult and the correct pricing of probability must never be neglected. Gold bugs often display fanatical tendencies and a fondness for historical destiny (I’m not sure what that is but it looks quite profound so I shoved it in). They seem to incline to the belief that there is a morally correct price for gold (and today’s price always falls short of it) and that not owning gold is an omission that comes close to being a sin. I suppose that the notion of gold as an investment for the righteous derives from its former role as the ultimate reserve currency. A century ago, nations were supposed to limit their issuance of paper currency to the size of their gold reserves. Notes were theoretically certificates that could be exchanged for gold equal to their face value. This stopped governments from printing money as they wished, which was understandably regarded as irresponsible (sinful, even) but might also have prevented desirable monetary expansion in times of economic hardship.  Keynes wrote in 1924: “In truth, the gold standard is already a barbarous relic.” Yet the world returned to it, frightened by the inflation of the Weimar republic, with the USA running the dollar as the global reserve currency, backed by the contents of Fort Knox. You may remember that Goldfinger planned to render the contents of Fort Knox radioactive and untouchable for decades, assuming that the United States would be forced to purchase gold on...