Thursday, 20 August 2009

The Global QE mess

China's Shanghai exchange, a weird place open only to domestic money, had gone up 89% this year, only to fall by 20% in recent days. A real rollercoaster, the UK is more sedate but still the market has gone u p over 33% in recent months. I am glad I had a lot of long positions.
I still do and if you want to know why, the answer is Quantitative Easing and the global mess of bail outs. Money has been pushed into the system by many countries around the world through a variety of means. This money has had not practical use in producing goods and services due to low demand.

Instead it has pushed up asset prices, virtually all of them. Everything is up, Gold should be down as the threat of collapse recedes and demand for gold collapses, but it is not. Oil is up again to what only very recently was considered a very high price indeed. Shares across the world market have made spectacular gains.

This is where all the new debt has gone, so if you were not invested you have missed it. All this has contributed to a better zeitgeist in August than many would have thought back in March.

However the real economy of the world is still in recession, albeit not the depressionary conditions of a few months ago. There is huge potential for a price unwind across all asset classes. The only thing to be in at that time are US Dollars as it will fly as a safe haven asset along with Yen.

Even if the unwind turns out to be mild, the effect of Government curbing their lending and re-selling their QE books to the market will depress growth for sometime. The UK is particularly badly placed here. it is going to be a boring and hard-working decade to 2020.


Old BE said...

I doubt the UK economy will return to "boom" conditions until public and private consumers have reduced their debt burdens. It seems to me that the UK government is trying desperately to reduce both sets of debt by inflation and is likely to kill off a recovery by raising interest rate expectations.

I think this has happened before in many countries...

What we need is a concerted effort a la Canada to reduce the national public debt and return British financial culture to one of saving rather than borrowing.

Budgie said...

Very interesting. But if money reduces in value due to QE (and a restart of the credit markets) then surely assets, especially in land or tradeable goods are preferable? We seem to be in a highly unstable economy, which looks deceptively calm at the moment.

Budgie said...

Blue Eyes - we will not get a savings culture 'back' until everyone is completely convinced that money will retain its value. The politicians cannot be trusted to do this - the temptation to spend to buy votes is too strong.

A period of consistent very mild deflation might change attitudes. But it would have to be mild enough not to trigger an outright depression a la 1930s. QE bolsters the debt culture, so don't hold your breath.

CityUnslicker said...

Budgie - Yes assets increase in the short term, as they have now, however, when these assets are sold back onto the market then instead of excess money we have excess assets.

That is one of the ways it could work out. We only get excess money if the QE is re-lent at leverage; but this does not seem to be happening...yet.

CityUnslicker said...

BE you are becoming rather sound on all things economic

Old BE said...

Only "becoming"? I clicked on your FT link recently and read an article about German savings culture and was in awe. I think we probably had the same until we came off the gold standard and then it all slowly but surely went to pot. Perhaps the destruction of our currency a la Weimar is what the electorate needs to shake it out of its stupor.

Anonymous said...

Since China re-pegged to the $ a few months ago, they have been printing madly to keep up with the US and maintain the peg.

There will be precious little bubble in China, - all the infrastructure, etc, will tend to bring the population into the cities at a faster rate. The turn around to a "consumer" society has been amazing in such a short time, aided no doubt by a subsidy on oil, which has created both a false demand for oil, and cars.

The "technology" upgrade, if you can call it that, needs to be in agriculture, and given it's cultural/family base, that may be difficult.

Given recent free-ups on the release of US high technology exports from the US to China, "in order to correct trade imbalances" we will shortly see a decimation of western high-tech, much as the Japanese decimated UK mfg in the '60s, 70s. And we can't fight back because nulab has presided over a deliberate, progressive dumbing down of the population.

ON the release of QE, I have doubts. I worry that the interest payments on the debt alone, should they return to normal market demands of an insolvent country, would be beyond the ability of the economy to pay.

The stream of UK listed companies leaving for Ireland, the Channel Isles, the Isle of Man, BVI, etc, for listing purposes will become an avalanche if corporate/personal taxes are increased beyond current levels, and will be accompanied by talented, motivated individuals. The tax base will collapse.

I can only figure a devaluation, either gradually "managed", or sudden, in the future. The middle class will shrink, and the gap between rich and poor, the highest it has been for many years, will approach "Sheriff of Nottingham" proportions.

Strange that we seem to want to expand the various wars at such a time. Perhaps our link with the military/industrial/financial complex of the US will be severed. However, I note that UK holding of US debt was vastly increased for the latest reported month, while Chinese holdings contracted heavily.

I reckon they have figured out, in common with many other South East Asian, and South American nations that they are financing their own military encirclement. Past a certain tipping point, the exit from the $ will be both rapid and painful. Alternative structures are being set up everywhere, some even involving EU countries with S E Asia.

I see nothing in the pipeline to separate normal banking activities from irrational casino gambling by the banks, and I also don't see the listing of widely disparate OTC derivatives on exchanges as progressing, at all, since the majority cannot be valued in any sort of "grouping", for exchange "accounting purposes". They are still being written. They are toxic, and given the upcoming commercial real estate problems, and the fact that in bankruptcy they will revert to face value, well,nothing material has changed. Thus the tax payer will be shafted again, shortly. After a point, if a lender on an underwater loan has written the correct CDS, he will profit more by the bankruptcy of the borrower, than he would by continuing to provide finance, thus the collapse of the borrower is hastened, and the counter party to the CDS is placed in jeopardy.

Quite why these OTC derivatives have not been legally, globally, declared illegal and unenforceable,and of no value, I can't understand. They are not banking, for the most part they cannot be exchange regulated, and for the most part they are fraudulent, since price discovery is not fairly possible by both parties.

Perhaps I stray from the subject. Oh well.

As you say, we face a grim future in the UK.

Many heads should role, publicly.

James Higham said...

It is this volatility which shows that things are far from good.

CityUnslicker said...

Anon - that is a fine post, thanks for your thoughts.

OTC derivatives are a nightmare. I am nto so worried about commercial real estate, at least in the UK where things have bottomed out after at 50% fall. Yes we have the cmbs resets to deal with, but hopefully there is lending for this.

Peregrine Merceron Amplethorpe said...

So I guess this explains why my shorts had gone wrong by mid-week.

Demetrius said...

Scary, very scary, it really does look as though the UK authorities have lost the picture, and are just playing guessing games. Or doubling the bets.

Anonymous said...

CU, if you come back to this post....

Certain technical points were passed by the Dow and the S&P500 indices yesterday, and seemingly, that would be a reason for the friday bounce.

(Significantly they were skated over in the futures thursday/friday overnight...!)

Technically, if the Dow can now get past 11,000, without any retest, and hold.... it could signify that high inflation is the plan..... Dow to 20,000, commodities and gold to the moon, in $ terms, trash the $.....

But then..... technical analysis....?

But sitting where we are, what about sterling, does it follow the $ down, and how much $ premium is removed by lack of global currency status??

I would appreciate your thoughts, if you come back to this post....