4 Oct 2014

The stock market remained nervous, reportedly seeing below-average turnover in Q3. The trend that began in Q2, of the shares of smaller companies performing worse, continued. The FTSE 100 fell by 1.7% and the FTSE 250 by 2.9%. For the third quarter in a row, yields on European government bonds fell to previously unimaginable lows. German 10 year Bund yields have fallen below 1% (now 0.93%). To put this in some context, 10 year Japanese bond yields were around 1.9% before the financial crisis bit in 2008. Japan is considered to be the reference case of a country suffering from long-term deflation. Its 10 year yield is now 0.53%. Since June 2008, Japanese yields have declined by 72% and German by 80%. As I have noted before, the bond markets are shrieking the news that global growth has made a long-term shift to lower levels. Many will argue that this is bound eventually to be reflected in lower corporate profits. It is hard to argue with that but wrong to assume that share prices are consequently too high. When yields on all financial assets are falling, investors are paying higher prices for them. A dollar of corporate profit literally becomes more valuable than it used to be. Many stock market commentators, seemingly obsessed with short-term news and the aphrodisiac of growth, appear to be incapable of understanding this. Given that the cloud of deflation continues to hang over the world (see above), the traditionally nervous month of October will probably produce plenty of gloomy headlines. In my post about the supermarkets, I pointed out that, when operating leases are included as liabilities, Morrison was much cheaper that Tesco and Sainsbury. Well, the gap has reduced but not necessarily as anticipated. Morrison’s price has fallen but the others have fallen further. Tesco’s accounting practices have caught up with it and I must say that, as yet, there is no price at which I would buy it. At last I have noticed the beginning of a backlash in the press against Lidl and Aldi – our nostalgia for the 1970s must surely be limited. Sainsbury has promised a strategic review, a development that appears to have...