“Britain is back in recession!” screamed the newspapers last week.
“Tell us something we don’t know”, shrugged the markets.
Neither the FTSE 100 nor even the pound seemed particularly perturbed by the news that Britain’s economy had shrunk for a second quarter in a row.
Even if the figures are correct (they’re preliminary estimates after all), the reaction of some sections of the press and politicians was over the top.
You want to know why Britain is in recession?” We had a boom. Now we have a bust. That’s the way it works. It’s as simple as that. In 2008, we were in a serious mess. You can’t then expect, less than four years on from that cliff-edge, for everything to be booming again.
In the US, things seemed to have picked up much more quickly. But there is a reason for that. If the US is indeed recovering now, it’s because – despite the best efforts of the Federal Reserve – they had something closer to a proper crash.
The crucial difference was that, unlike the Bank of England, the Federal Reserve was unable to lower the cost of mortgages rapidly. As a result, house prices collapsed – and remain about a third lower than they were at the peak. Unemployment rocketed – and remains extremely high. About a sixth of the population is on food stamps.
Don’t be under any illusions – the Americans have gone through a much more painful crash than us. But it means that their banks have been forced to write off debt.
We chose the stagnation route out of the slump instead. Debts that should have been written off – from mortgages to business loans - have instead been allowed to stagger on, by lowering the cost of servicing them. Given this misuse of resources, it’s little wonder that we are still in a recession.
The real reason no-one is buying houses
The struggling economy is also having an impact on the housing market, says MoneyWeek editor-in-chief Merryn Somerset Webb on her blog. “There is much talk about the low level of volumes in the UK market – and about how that is the thing that is keeping prices up.
“People, convinced their house is still worth a bubble number, won’t sell at the new market price. So supply is crunched and prices have stayed higher than they should have. Soon, or so the story goes, sellers will blink and cut their prices properly, allowing volumes to rise and markets to clear.”
But Merryn has a different theory. She draws attention to the fact that mortgage providers are raising their rates or making “sneaky” changes to contracts. Perhaps the problem isn’t that people are greedily holding out for an unrealistic price for their home, after all.
Instead, perhaps it’s “all about the price they have to pay for a new mortgage on the next house they buy. The Financial Services Authority has pointed out that the UK is home to hundreds of thousands of mortgage prisoners – people who can’t move because they can’t get a new mortgage at all. They have too little equity or too low an income for our newly prudent mortgage lenders to touch with a bargepole”.
Even those people who aren’t officially ‘mortgage prisoners’ might still be stuck, says Merryn. Falling house prices will have pushed up borrowers’ (they owe more as a percentage of their house’s value than they used to).
Combined with stricter terms from lenders, this means that even people who think they have ‘portable mortgages’ – the type you can take with you when you move house – will have to apply for a new loan. And that, in the current climate, means they will end up paying more.
So “the lack of volume in the market might not be about sellers not being able to cope with the price of houses, but something that lies behind that – sellers not being able to cope with the price of new credit”.
The blog led to a debate in the comments section below. Regular commenter Boris Macdonut felt that the increases by mortgage providers are not significant enough to affect the housing market. “The real reason is not a modest cost increase but fear and distrust.”
But as Dr Ray pointed out, while the numbers may seem small, in percentage terms they are quite big. For example “an increase from 4.27 to 4.6 isn't a 0.33% increase. It is a 7.73% increase”.
Meanwhile, Agabus25 put it down to various factors. “It's not one single thing but the combination: higher rates, fees that you can no longer capitalise, withdrawal of interest-only, no extended maturities (ie no longer than 25 year loans), no excessive salary multiples, no sky-high loan-to-value, plus the squeeze on middle class earnings. Combine just a couple of these and the total effect is substantial enough to become a deal breaker.”
The game is completely rigged
Money printing by the Federal Reserve and other central banks, means that the idea of a ‘risk-free’ rate – essential to calculating the value of anything in modern finance - is now obsolete.
Indeed, says Tim Price: “There’s one thing I know about investing today - the game is completely rigged”.
Tim, who writes The Price Report newsletter, isn’t one to pull his punches. As far as he’s concerned: “The world’s governments and their central bank cronies are conspiring to distort almost every investment you can put your money in right now. But they can’t do it forever”.
He has a pretty bleak view of where things are heading. “The plain fact is that we are in the midst of a devastating sovereign crisis.” Yet Tim thinks that investors – if they’re prepared – can protect their money from the coming storm. And that’ll leave them in a good position to take advantage of the opportunities that will arise from that.
Is the gold bull market over?
In the past few months the gold price has wobbled. Some have even said that the bull market for gold is over. Is it?
In the current bull market, gold has regularly had sharp run-ups, just as happened last year. And each time it’s happened, “a lengthy period of consolidation and digestion has followed before we have seen new highs. Often these periods last for more than a year. In some cases – if the preceding move has been large – the consolidation has lasted for over 18 months”.
So don’t worry. Gold is just having a breather. “I maintain we will eventually see new highs, just not any time soon.”
In fact, now could be a good time to stock up if you haven’t already. “If the patterns of previous moves continue to be our guide, we can expect gold to start creeping up from here – perhaps to about $1,800 before a pullback. I would like to see gold get above its 252-day moving average and stay above it.
“If it doesn’t and gold starts to creep down, I will be nervous. But continue to hold your gold. The fundamentals have not changed. And if you don’t own any, I would say the odds favour now as a decent opportunity to accumulate.”
James McKeigue
Monday, 30 April 2012
Wednesday, 4 April 2012
Is now a good time to buy gold?
‘If you are going to panic’, I’ve heard it said, ‘Panic first. You can investigate later.’
Gold had another one if its bad days yesterday. It fell some $30 or $40 an ounce, depending on when your day began. It fell another $13 overnight.
But now really is not the time to be panicking. If you start now, you’ll be very late to the panic party.
In fact, if you have been looking for an opportunity to increase your exposure to gold, now could be the chance you’ve been waiting for.
Gold is consolidating after its 2011 excesses
My longer-term prognosis for gold remains unchanged.
When gold has one of its big run ups, as it did in the periods to May 2006 and February 2008, afterwards, it goes though a lengthy period of consolidation. It’s trying , it’s frustrating, but that’s what it does.
Eventually it gathers impetus again, challenges the old high and, after several attempts, breaks out. The old high then becomes support. But it is many months – sometimes more than 12 – before we challenge that old high.
Gold is now in consolidation mode after its 2011 excesses. It will be many months yet before we break out to new highs. But we will. And two or three years after we do, gold will have another big run-up and sell-off and that $1,920 figure will be the line of support – just as both the $700 and $1,000 have been.
We still have colossal monetary stress, unpayable national debts, negative real interest rates and central banks that – despite yesterday’s jawboning by Federal Reserve chief Ben Bernanke – have gone beyond the point of no return on the money-printing path.
He is not printing at the moment because he doesn’t have to. US stock markets have been the stellar markets. They won’t be forever.
In the meantime, I’d like to introduce you to another moving average, one that’s worked particularly well for gold over the years. You may remember how well my 144-day moving average worked in the period from 2009 to late 2011. Well, now I’d like to tell you about the 252-day moving average.
When gold hits this line, it’s usually a good time to buy
I use the 252-day moving average because there are usually 252 trading days in year, so, in effect, it shows the average price over the last year.
Here we see gold from 2001, when the bull market began, to 2008. The red line underneath is the 252-day moving average.
You can see that throughout that seven-year period, gold repeatedly came back to it and found support there. In other words, it consistently marked an excellent entry point.
These things don’t work forever, however, and in 2008, as the world panicked (did you panic first?), gold got too far above the moving average, and then for a few sorry months in the latter part of the year, the price plunged through it.
From 2009 it hardly worked at all. Why? Because it didn’t have to.
From spring 2009 to late 2011 gold, such was its strength, never went back to its one-year average. Instead it consistently found support at the 144-day moving average – the green line on the chart below. The ‘irrelevant’ 252-day moving average is in red.
But in September last year, as we all know, gold went too far too fast.
One casualty of the subsequent wash-out has been the 144-day moving average (we are currently sitting below it). It is, for the time being, no longer an effective tool.
But, joy of joys, our friend the 252-day moving average has risen from the ashes. It now seems to be offering gold the support it so badly needs. Here’s a one-year chart of gold with the 252-day moving average underneath. We’ve just slipped through it overnight.
The 252-day moving average, I’ve found, is more of a ‘rough guide’. It doesn’t nail the exact lows in the way that the 144 did. You can see we slipped through for a few days in late December. But, over a longer time frame, it’s acted as a good point to be dripping money back in.
Will it continue to work? My bet is that it will.
I said a few weeks back that gold looks like it wants to go back to $1,600. I thought we had seen the low last week and that we were on our way back to $1,800. It looks like I got that wrong and that $1,600 has to be visited first.
I’m not sure, as some suggest, that Bernanke is out to deliberately suppress the price of gold. But he has said before that he has the gold price on his screen and watches it every day.
Does he want the gold price to soar? Of course not. But read his work, look at the measures of inflation he uses, look at what he actually does – he is a keen proponent of monetary stimulus. As Marc Faber would say: ‘he’s a money printer’.
Gold has gone back to its one-year moving average. Every time it’s done this bar a few months in late 2008, it’s not been a reason to panic. It’s been an opportunity.
So my message to you today, in case you haven’t already got it, is sit tight, stay long, stay strong, and be patient. The bull market isn’t over.
Dominic Frisby
Gold had another one if its bad days yesterday. It fell some $30 or $40 an ounce, depending on when your day began. It fell another $13 overnight.
But now really is not the time to be panicking. If you start now, you’ll be very late to the panic party.
In fact, if you have been looking for an opportunity to increase your exposure to gold, now could be the chance you’ve been waiting for.
Gold is consolidating after its 2011 excesses
My longer-term prognosis for gold remains unchanged.
When gold has one of its big run ups, as it did in the periods to May 2006 and February 2008, afterwards, it goes though a lengthy period of consolidation. It’s trying , it’s frustrating, but that’s what it does.
Eventually it gathers impetus again, challenges the old high and, after several attempts, breaks out. The old high then becomes support. But it is many months – sometimes more than 12 – before we challenge that old high.
Gold is now in consolidation mode after its 2011 excesses. It will be many months yet before we break out to new highs. But we will. And two or three years after we do, gold will have another big run-up and sell-off and that $1,920 figure will be the line of support – just as both the $700 and $1,000 have been.
We still have colossal monetary stress, unpayable national debts, negative real interest rates and central banks that – despite yesterday’s jawboning by Federal Reserve chief Ben Bernanke – have gone beyond the point of no return on the money-printing path.
He is not printing at the moment because he doesn’t have to. US stock markets have been the stellar markets. They won’t be forever.
In the meantime, I’d like to introduce you to another moving average, one that’s worked particularly well for gold over the years. You may remember how well my 144-day moving average worked in the period from 2009 to late 2011. Well, now I’d like to tell you about the 252-day moving average.
When gold hits this line, it’s usually a good time to buy
I use the 252-day moving average because there are usually 252 trading days in year, so, in effect, it shows the average price over the last year.
Here we see gold from 2001, when the bull market began, to 2008. The red line underneath is the 252-day moving average.
You can see that throughout that seven-year period, gold repeatedly came back to it and found support there. In other words, it consistently marked an excellent entry point.
These things don’t work forever, however, and in 2008, as the world panicked (did you panic first?), gold got too far above the moving average, and then for a few sorry months in the latter part of the year, the price plunged through it.
From 2009 it hardly worked at all. Why? Because it didn’t have to.
From spring 2009 to late 2011 gold, such was its strength, never went back to its one-year average. Instead it consistently found support at the 144-day moving average – the green line on the chart below. The ‘irrelevant’ 252-day moving average is in red.
But in September last year, as we all know, gold went too far too fast.
One casualty of the subsequent wash-out has been the 144-day moving average (we are currently sitting below it). It is, for the time being, no longer an effective tool.
But, joy of joys, our friend the 252-day moving average has risen from the ashes. It now seems to be offering gold the support it so badly needs. Here’s a one-year chart of gold with the 252-day moving average underneath. We’ve just slipped through it overnight.
The 252-day moving average, I’ve found, is more of a ‘rough guide’. It doesn’t nail the exact lows in the way that the 144 did. You can see we slipped through for a few days in late December. But, over a longer time frame, it’s acted as a good point to be dripping money back in.
Will it continue to work? My bet is that it will.
I said a few weeks back that gold looks like it wants to go back to $1,600. I thought we had seen the low last week and that we were on our way back to $1,800. It looks like I got that wrong and that $1,600 has to be visited first.
I’m not sure, as some suggest, that Bernanke is out to deliberately suppress the price of gold. But he has said before that he has the gold price on his screen and watches it every day.
Does he want the gold price to soar? Of course not. But read his work, look at the measures of inflation he uses, look at what he actually does – he is a keen proponent of monetary stimulus. As Marc Faber would say: ‘he’s a money printer’.
Gold has gone back to its one-year moving average. Every time it’s done this bar a few months in late 2008, it’s not been a reason to panic. It’s been an opportunity.
So my message to you today, in case you haven’t already got it, is sit tight, stay long, stay strong, and be patient. The bull market isn’t over.
Dominic Frisby
South Carolina Acknowledges the Silver & Gold Manipulation
Silver price manipulation and gold manipulation has been alleged through out this bull market. This premise has been one of many reasons why gold and silver advocates have urged the public to accumulate precious metals.
The story begins on September 29, 2008 when the Wall St Journal reported that the CFTC would begin investigating allegations that 2 big banks had been controlling a large part of silver’s short positions-or bets that prices will decline-on the COMEX.
Since then the CFTC has issued press releases every now and then confirming that the investigation is ongoing. The CFTC has been reluctant to give a final ruling. This has only added fuel to the fire of speculation of some sort of conspiracy.
The silver manipulation story gets weirder. A London based precious metals trader by the name of Andrew Maguire became a whistle blower who revealed via an interview with GATA in April 2010 that silver manipulation does exist, confirmed JP Morgan Chase and HSBC as the main culprits and went so far as providing the SEC the algorithm used to suppress the price of silver based on the movement of gold. For three straight days his algorithm correctly and precisely tracked the price. The SEC should have had all they needed. That was the “smoking gun”. No charges were nor have been brought forth.
Andrew Maguire is quoted as saying, "JPMorgan acts as an agent for the Federal Reserve; they act to halt the rise of gold and silver against the US dollar. JPMorgan is insulated from potential losses (on their short positions) by the Fed and/or the U.S. taxpayer."
Maguire was even involved in a freak hit and run accident the day after his name was revealed at a CFTC hearing. Maguire of course believed it was an attempt on his life. It’s hard to argue especially when the authorities have refused to name the assailant and file charges against the assailant after having apprehended him and helicopter cameras watching the whole scene unfold from above!
But all this doesn’t matter anymore. Or at least it shouldn’t. While investigating the specifics on the bill advancing gold and silver as legal tender in the State of South Carolina’s website, we came across a study that was conducted by South Carolina’s State treasurer. The study was intended to provide state officials with advise on whether or not the State should invest State Pension funds in gold and silver. But what the document revealed was much more than that.
The state document acknowledged collusion between the Federal Reserve, the London Bullion Market Association, JP Morgan Chase and HSBC have engaged in artificial price suppression of gold and silver prices through massive naked short positions.
Friday, 30 March 2012
Why buy Silver?
- Currently there is less silver available for investors to buy than there is gold.
- Only enough silver on Earth for every person to have one fourth of an ounce.
- Considered a ‘miracle metal’. It is the world’s most used industrial metal and cannot be replaced by anything else.
- Silver is the most electrically conductive, thermally resistant, and reflective metal on the planet that has no known substitutes.
- Past 30 years the world has used up more silver than has been mined, and today silver inventories are near all time record low levels.
- Experts are retiring leaving a void in the mining of silver because college graduates are not getting degrees in mining and geology.
Thursday, 29 March 2012
A warning to all Gold investors
If we were to idealise the anatomy of a bull market, it would have three phases.
There’s the first (or ‘stealth’ phase) when the canny few get on board, but most are uninterested.
Then there’s the middle phase. This is when institutions and other sophisticated players wake up to it, but many continue to ignore it, because ‘prices have already gone up so much’. This is when you’re climbing your proverbial wall of worry.
Finally, there’s the euphoric mania, when the world and his wife simply can’t get enough.
So when it comes to gold, where are we now?
One feature of the second phase of a bull market, is that the mainstream media, albeit guardedly, start mentioning said bull market.
There have been phases in this current gold bull market where radio and newspapers – I’d say less so television – have got interested in gold. This interest usually seems to come when gold has broken to new highs and is going on one of its mini-exponential runs. I’m thinking in particular about last August-September, but also about April to May 2006 and February 2008.
When those in the mainstream – who, ironically, are often on the outside – do get interested, one of the questions they keep coming back to is: ‘Is gold in a bubble?’ In other words, there is doubt. Prices have already gone up so much, that they’re sceptical and so stay out of the market.
This would suggest that – when it comes to gold – we are somewhere in phase two of our idealised bull market model. There is no guarantee of course that phase three will ever happen – I wonder if too many people are waiting for it – but wouldn’t it be nice if it did?
Don’t fall in love with gold
The fact is, gold is in a historic bull market. It has risen by an average of just under 20% per annum over the last 11 years, outperforming every other asset class. But there is much more to this bull market than meets the eye.
It’s not just about an asset class rising in price. It’s about the on-going breakdown of our financial and monetary systems. It’s about incompetence and perhaps even corruption in our bloated governments and central banks. It's about, believe it or not, freedom, and integrity.
Gold – to many – is so much more than just an asset that is rising in price. Look at the fervour it generates. Look how passionately people feel about it – myself included. Look, for example, at how angry and aggressive those who are long gold can become when someone dismisses it. I’m thinking, in particular, about the slagging off Nouriel Roubini receives on Twitter when he baits gold bugs. (I knocked him myself in one article). Certain pro-gold websites have become almost cultish.
I happen to think the world would be a better place if the free market were to choose which money we use – whether that be gold, pounds, dollars, or Bitcoins - rather than have a government money forced on it. Hayek outlines this idea of competing currencies in his essay The Denationalisation Of Money.
Competition would force better practice onto money issuers – and likely, though by no means certainly, most market participants would prefer to use gold or silver as money, at least until other forms of money pay sufficiently high interest to lure them away from the hard stuff.
Gold, as you can’t print it, is a great regulator. It forces discipline onto governments and banks. They have to rein in their spending. They can’t simply expand the supply of money and inflate their debts away.
But this is just an economic ideal. Gold may well prove to be the route to it, but it is still just an ideal. And it’s one that many have fallen in love with. Falling in love is fun. Falling in love with an investment, however, or confusing an investment with an ideal, can be very dangerous. Your judgement is bound to get clouded.
So this is a kind of note to self, a warning. I have come to, I suppose, love gold – or at least the idea of it, and the glorious, free society it offers at the end of the rainbow.
But I shouldn’t. It’s just an investment. So be warned and take note. Should we ever see that exponential final euphoric bull market phase, then come back and read this, sober up and sell.
Having thrown a wet blanket over you all, I should say that my big picture view for gold is that the end of this bull market is still not within sight. All the main drivers – monetary stress, deficit spending, debt, currency debasement, ballooning money supply, negative real rates and so on – are still in place.
In the shorter term, I feel we are still in consolidation mode after the run up to $1,920 last August-September and remain of the mind that we won’t see new highs before next autumn at the earliest, though I’ll be glad to be wrong on that. And in the very short term, I think we put in a low last week around $1,625 and that we should see a nice run up to the $1,800 mark over the next few weeks.
Dominic Frisby
There’s the first (or ‘stealth’ phase) when the canny few get on board, but most are uninterested.
Then there’s the middle phase. This is when institutions and other sophisticated players wake up to it, but many continue to ignore it, because ‘prices have already gone up so much’. This is when you’re climbing your proverbial wall of worry.
Finally, there’s the euphoric mania, when the world and his wife simply can’t get enough.
So when it comes to gold, where are we now?
One feature of the second phase of a bull market, is that the mainstream media, albeit guardedly, start mentioning said bull market.
There have been phases in this current gold bull market where radio and newspapers – I’d say less so television – have got interested in gold. This interest usually seems to come when gold has broken to new highs and is going on one of its mini-exponential runs. I’m thinking in particular about last August-September, but also about April to May 2006 and February 2008.
When those in the mainstream – who, ironically, are often on the outside – do get interested, one of the questions they keep coming back to is: ‘Is gold in a bubble?’ In other words, there is doubt. Prices have already gone up so much, that they’re sceptical and so stay out of the market.
This would suggest that – when it comes to gold – we are somewhere in phase two of our idealised bull market model. There is no guarantee of course that phase three will ever happen – I wonder if too many people are waiting for it – but wouldn’t it be nice if it did?
Don’t fall in love with gold
The fact is, gold is in a historic bull market. It has risen by an average of just under 20% per annum over the last 11 years, outperforming every other asset class. But there is much more to this bull market than meets the eye.
It’s not just about an asset class rising in price. It’s about the on-going breakdown of our financial and monetary systems. It’s about incompetence and perhaps even corruption in our bloated governments and central banks. It's about, believe it or not, freedom, and integrity.
Gold – to many – is so much more than just an asset that is rising in price. Look at the fervour it generates. Look how passionately people feel about it – myself included. Look, for example, at how angry and aggressive those who are long gold can become when someone dismisses it. I’m thinking, in particular, about the slagging off Nouriel Roubini receives on Twitter when he baits gold bugs. (I knocked him myself in one article). Certain pro-gold websites have become almost cultish.
I happen to think the world would be a better place if the free market were to choose which money we use – whether that be gold, pounds, dollars, or Bitcoins - rather than have a government money forced on it. Hayek outlines this idea of competing currencies in his essay The Denationalisation Of Money.
Competition would force better practice onto money issuers – and likely, though by no means certainly, most market participants would prefer to use gold or silver as money, at least until other forms of money pay sufficiently high interest to lure them away from the hard stuff.
Gold, as you can’t print it, is a great regulator. It forces discipline onto governments and banks. They have to rein in their spending. They can’t simply expand the supply of money and inflate their debts away.
But this is just an economic ideal. Gold may well prove to be the route to it, but it is still just an ideal. And it’s one that many have fallen in love with. Falling in love is fun. Falling in love with an investment, however, or confusing an investment with an ideal, can be very dangerous. Your judgement is bound to get clouded.
So this is a kind of note to self, a warning. I have come to, I suppose, love gold – or at least the idea of it, and the glorious, free society it offers at the end of the rainbow.
But I shouldn’t. It’s just an investment. So be warned and take note. Should we ever see that exponential final euphoric bull market phase, then come back and read this, sober up and sell.
Having thrown a wet blanket over you all, I should say that my big picture view for gold is that the end of this bull market is still not within sight. All the main drivers – monetary stress, deficit spending, debt, currency debasement, ballooning money supply, negative real rates and so on – are still in place.
In the shorter term, I feel we are still in consolidation mode after the run up to $1,920 last August-September and remain of the mind that we won’t see new highs before next autumn at the earliest, though I’ll be glad to be wrong on that. And in the very short term, I think we put in a low last week around $1,625 and that we should see a nice run up to the $1,800 mark over the next few weeks.
Dominic Frisby
Monday, 19 March 2012
Keep a close eye on the fear gauge
The headline says it all. “Fear has vanished from the stock market”, says Steven Russolillo in the Wall Street Journal. “Don’t wake the sleeping giant: the stock market’s so-called ‘fear’ gauge is fast asleep”.
He’s talking about the VIX, or the CBOE Volatility index. It is quoted in percentage points and measures the expected movement in the S&P 500 index over the next 30-day period, which is then annualised.
The S&P 500 is the world’s most watched stock market index. A climbing VIX means that American, and also global, investors are becoming more fretful. Their selling drives the stock market down. The higher the VIX rises, the bigger the crescendo of concern.
The flipside is that the lower the VIX drops, the more the S&P 500 climbs. That’s when investors start to become complacent and the risk of a big sell-off rises as the supply of buyers runs out.
What the VIX is telling us now
Right now investors are becoming dangerously complacent. Analysts have been growing very bullish about official stats. Optimism has spread about the global economy. And all that despite Chinese growth slowing and the eurozone, which is still coping with major debt problems, facing a return to recession.
In fact, fund managers have been ploughing clients’ cash into shares faster than at any time since early-2011. And ‘short interest’ – where traders sell in the hope of buying back lower down – is at its lowest point for four years. All these are signs of fast-falling fear levels in stock markets.
But before we all buy into this bullish bonhomie, let's pause a moment. It's worth looking at what happens when the price of volatility becomes so cheap. And not just in the US. The overall performance of London–listed shares is closely linked to Wall Street. In other words, the VIX is a handy guide to the FTSE 100 too, as this chart shows.
Source: Bloomberg, FSL
You can see how the VIX (the red line) has plunged over the last six months. The FTSE 100 has been a near-mirror image of this. But since the financial crisis began in 2007, such low points in the fear gauge have always been followed by a sharp downswing in the equity market.
OK, this hasn’t always happened straightaway. And current investor complacency might yet take a few more weeks to shatter. There has to be a catalyst, and right now it’s unclear what that will be. But in summary, today’s overall market levels are looking increasingly dangerous.
David Stephenson
He’s talking about the VIX, or the CBOE Volatility index. It is quoted in percentage points and measures the expected movement in the S&P 500 index over the next 30-day period, which is then annualised.
The S&P 500 is the world’s most watched stock market index. A climbing VIX means that American, and also global, investors are becoming more fretful. Their selling drives the stock market down. The higher the VIX rises, the bigger the crescendo of concern.
The flipside is that the lower the VIX drops, the more the S&P 500 climbs. That’s when investors start to become complacent and the risk of a big sell-off rises as the supply of buyers runs out.
What the VIX is telling us now
Right now investors are becoming dangerously complacent. Analysts have been growing very bullish about official stats. Optimism has spread about the global economy. And all that despite Chinese growth slowing and the eurozone, which is still coping with major debt problems, facing a return to recession.
In fact, fund managers have been ploughing clients’ cash into shares faster than at any time since early-2011. And ‘short interest’ – where traders sell in the hope of buying back lower down – is at its lowest point for four years. All these are signs of fast-falling fear levels in stock markets.
But before we all buy into this bullish bonhomie, let's pause a moment. It's worth looking at what happens when the price of volatility becomes so cheap. And not just in the US. The overall performance of London–listed shares is closely linked to Wall Street. In other words, the VIX is a handy guide to the FTSE 100 too, as this chart shows.
Source: Bloomberg, FSL
You can see how the VIX (the red line) has plunged over the last six months. The FTSE 100 has been a near-mirror image of this. But since the financial crisis began in 2007, such low points in the fear gauge have always been followed by a sharp downswing in the equity market.
OK, this hasn’t always happened straightaway. And current investor complacency might yet take a few more weeks to shatter. There has to be a catalyst, and right now it’s unclear what that will be. But in summary, today’s overall market levels are looking increasingly dangerous.
David Stephenson
Thursday, 15 March 2012
100 year Government bonds? You must be kidding!
Less than a week ahead of the Budget, chancellor George Osborne has been given a very clear warning by credit rating agency Fitch. “Keep up the cuts – or else”.
Fitch has put Britain on ‘negative outlook’. The group warned that the UK could lose its AAA-credit rating if the government fails to stick to its plan and debt ends up “peaking later and higher than currently forecast.”
Trouble is, if growth is weaker than hoped, or there’s a eurozone crisis, then we could lose the AAA too.
That leaves Osborne in a bit of a bind. How can he pull any vote-winning rabbits out of the hat if he hasn’t got any spare cash?
It’s small wonder he’s pondering desperate measures – such as issuing 100-year gilts.
A 100-year fixed-rate loan is a great deal – for the borrower
What rate would you charge to lend your money to the British government for the next 100 years?
George Osborne plans to find out. He’s looking at issuing a ‘century’ gilt, or maybe even a ‘perpetual’ (which has no maturity date at all). The benefits for the government are clear.
Britain would get to take advantage of current low lending rates. It would get to extend its average debt maturity even further. This stands at an already healthy 14 years, which is twice the figure of Italy and France. What this means is that we are less vulnerable to short-term spasms of panic in the debt markets, because we don’t need to roll over our debt as regularly.
It would also be a nice publicity stunt. “Look”, the chancellor could say. “Britain is so safe, so credit-worthy, so well-managed, that investors are throwing money at us.”
And at the back of his mind, he’s probably thinking, “Maybe the ratings agencies would cut us some slack if we had a longer debt maturity. That means I could spend a bit more money on winning the next election.”
So you can see why Osborne is tempted to explore this. What’s less clear is the upside for anyone who is confused enough to give the government this money.
Why would anyone lend to the government for 100 years?
The initial reaction certainly hasn’t been good. Investors might be dim enough to lend to the government over ten years for a sub-inflation return, but they’re not keen to do it for the next century.
Even those seen as the most natural customers for the product – pension funds, who have to match liabilities to life expectancies – aren’t keen.
The National Association of Pension Funds (NAPF) said “few of its members would find such gilts attractive,” says The Times. Joanne Segars of the NAPF told the paper: “Pension funds are looking for 30, 40 and 50-year index-linked debt, and would much rather the Government issue more of those.”
Well, of course they would. An asset that guarantees to beat inflation with very little risk over the course of 50 years is exactly what a pension fund needs.
But the point of issuing a 100-year bond at minuscule interest rates is to effectively write off the debt via inflation. Index-linking it would render the whole thing pointless.
The War Loan, issued in 1915 to pay for the First World War, was similar to what Osborne seems to be planning now. And it turned out to be a disastrous investment. In 1932, it was ‘restructured’. Indeed, some argue that Britain effectively defaulted. In practical terms, that was the impact on anyone holding the debt. £100 invested in the loan back then is worth less than £2 today, notes Ian King in The Times.
Keep avoiding gilts
What does all this mean for you? The fact that Osborne is seriously considering this, does make you wonder how much longer the gilt bubble has to last. If it wasn’t for the massively sceptical reaction from potential buyers, I’d say this was almost like ringing a bell for the top of the gilts market.
And it’ll be interesting to see the reception they receive if they actually get to market. Pension funds might be slagging them off now, but that’s the equivalent of kicking the tyres and tutting when you walk around a car showroom. They might lap up the 100-year debt when it’s issued.
Make no mistake, you’d have to be mad to buy it. Britain’s status as a ‘safe haven’ relies on two key things.
First, the crisis in Europe. As long as that continues, sterling and the UK are two nice, convenient destinations for wealthy Europeans seeking refuge for their cash. But that can only continue for so long.
Second, the Bank of England. Osborne doesn’t like to mention this, but gilt yields are low because our central bank keeps buying the things with freshly minted money. There’s a guaranteed, price-insensitive buyer in the market. Even the most useless contestant on that Alan Sugar programme,The Apprentice, could make a successful sale under those conditions.
If quantitative easing ends, gilt yields will have to rise. Indeed, that may be one good reason why the government is trying to make hay right now.
Incidentally, if you’re worried about inflation, I’d be comfortable holding on to index-linked gilts. Actively defaulting on these would be a huge step, and so I don’t see it happening, although they might fiddle with the official inflation figures. With headline inflation declining, you may get a better chance to buy later this year, but then again, the stubbornly high oil price may mean Mervyn King is disappointed sooner rather than later. That said, I’d keep hold of gold too as an all-round insurance.
John Stepek
Fitch has put Britain on ‘negative outlook’. The group warned that the UK could lose its AAA-credit rating if the government fails to stick to its plan and debt ends up “peaking later and higher than currently forecast.”
Trouble is, if growth is weaker than hoped, or there’s a eurozone crisis, then we could lose the AAA too.
That leaves Osborne in a bit of a bind. How can he pull any vote-winning rabbits out of the hat if he hasn’t got any spare cash?
It’s small wonder he’s pondering desperate measures – such as issuing 100-year gilts.
A 100-year fixed-rate loan is a great deal – for the borrower
What rate would you charge to lend your money to the British government for the next 100 years?
George Osborne plans to find out. He’s looking at issuing a ‘century’ gilt, or maybe even a ‘perpetual’ (which has no maturity date at all). The benefits for the government are clear.
Britain would get to take advantage of current low lending rates. It would get to extend its average debt maturity even further. This stands at an already healthy 14 years, which is twice the figure of Italy and France. What this means is that we are less vulnerable to short-term spasms of panic in the debt markets, because we don’t need to roll over our debt as regularly.
It would also be a nice publicity stunt. “Look”, the chancellor could say. “Britain is so safe, so credit-worthy, so well-managed, that investors are throwing money at us.”
And at the back of his mind, he’s probably thinking, “Maybe the ratings agencies would cut us some slack if we had a longer debt maturity. That means I could spend a bit more money on winning the next election.”
So you can see why Osborne is tempted to explore this. What’s less clear is the upside for anyone who is confused enough to give the government this money.
Why would anyone lend to the government for 100 years?
The initial reaction certainly hasn’t been good. Investors might be dim enough to lend to the government over ten years for a sub-inflation return, but they’re not keen to do it for the next century.
Even those seen as the most natural customers for the product – pension funds, who have to match liabilities to life expectancies – aren’t keen.
The National Association of Pension Funds (NAPF) said “few of its members would find such gilts attractive,” says The Times. Joanne Segars of the NAPF told the paper: “Pension funds are looking for 30, 40 and 50-year index-linked debt, and would much rather the Government issue more of those.”
Well, of course they would. An asset that guarantees to beat inflation with very little risk over the course of 50 years is exactly what a pension fund needs.
But the point of issuing a 100-year bond at minuscule interest rates is to effectively write off the debt via inflation. Index-linking it would render the whole thing pointless.
The War Loan, issued in 1915 to pay for the First World War, was similar to what Osborne seems to be planning now. And it turned out to be a disastrous investment. In 1932, it was ‘restructured’. Indeed, some argue that Britain effectively defaulted. In practical terms, that was the impact on anyone holding the debt. £100 invested in the loan back then is worth less than £2 today, notes Ian King in The Times.
Keep avoiding gilts
What does all this mean for you? The fact that Osborne is seriously considering this, does make you wonder how much longer the gilt bubble has to last. If it wasn’t for the massively sceptical reaction from potential buyers, I’d say this was almost like ringing a bell for the top of the gilts market.
And it’ll be interesting to see the reception they receive if they actually get to market. Pension funds might be slagging them off now, but that’s the equivalent of kicking the tyres and tutting when you walk around a car showroom. They might lap up the 100-year debt when it’s issued.
Make no mistake, you’d have to be mad to buy it. Britain’s status as a ‘safe haven’ relies on two key things.
First, the crisis in Europe. As long as that continues, sterling and the UK are two nice, convenient destinations for wealthy Europeans seeking refuge for their cash. But that can only continue for so long.
Second, the Bank of England. Osborne doesn’t like to mention this, but gilt yields are low because our central bank keeps buying the things with freshly minted money. There’s a guaranteed, price-insensitive buyer in the market. Even the most useless contestant on that Alan Sugar programme,The Apprentice, could make a successful sale under those conditions.
If quantitative easing ends, gilt yields will have to rise. Indeed, that may be one good reason why the government is trying to make hay right now.
Incidentally, if you’re worried about inflation, I’d be comfortable holding on to index-linked gilts. Actively defaulting on these would be a huge step, and so I don’t see it happening, although they might fiddle with the official inflation figures. With headline inflation declining, you may get a better chance to buy later this year, but then again, the stubbornly high oil price may mean Mervyn King is disappointed sooner rather than later. That said, I’d keep hold of gold too as an all-round insurance.
John Stepek
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