Wednesday 5 June 2013

Forever Blowing Bubbles

Who said Quantitative Easing would help to improve the real economy then?

A cursory glance at the main three assets markets for this year in the UK:

iShares FTSE UK All Stocks Gilt (GBP)
          IGLTGilts are still at all time highs, see below and ETF Gilt tracker which is a great procy for the combined market. Even this year things re steady at near all time highs. Not surprising with interest rates still at historic lows after 4 years.


Then we have the UK FTSE 100 - having a very strong year thus far (now actually I think this is more grounded in reality, its still below highs seen 14 years ago and is really hovering along its long term average)

And finally, House Prices, this chart from Zero Hedge helpfully pointing out a still historic 30% over-valuation...

So there we are 3 huge bubbles in the main asset classes and we have not even got into the Debt side yet. All the while the real economy slowly gathers pace for very modest recovery.

What could possibly go wrong with this picture? My main concern is that we tend to have recessions every 8-10 years. The last one started in 2008, so we are now on the climb to the top of the economic cycle. In 2015 we will likely reach the peak, juiced on stimulus - will this peak even be as high as 2007/8 in terms of overall GDP - probably not.

All the while, we are stealing from the future to pay for today's stimulus.


Blue Eyes said...

Probably. The gilts scare me, partly because I suspect my pension fund is so long into them. It also bodes badly for a collapse causing the taxpayer no end of grief.

Judging by the London skyline it might be about time to start unwinding QE. There is building work everywhere. I think London might be in danger of overheating already.

BUT if the real economy does begin to recover does that mean that house prices will look quite so over-valued? Will prices remain so sticky when some of this new housing comes on stream?

The government is not being as mad as Labour was during the last upturn and the banks can't be bust twice at the same time.

I am cautiously optimistic about some real economic development in the next few years.

Nick Drew said...

we are stealing from the future to pay for today's stimulus

That's our motto for Thursday's piss-up !

CityUnslicker said...

BE - the government assistance to people to buy over-priced houses is really, really, really bad and a betrayl to all the young people its going to screw.

Chelsea dn the prime london interenational zone. Not interested. Over-priced places south of the river and on the edges, much worse.

Jan said...

Hopefully there will be some loud popping noises soon to deflate the rich (banker) assets a bit so as to narrow the gap between the rich and the rest of us.

Blue Eyes said...

But CU they are significantly less over-priced South of the River etc.. What I'm saying is that if we get a better recovery they will be less unaffordable than they are now, as long as rates rise in response to any sustained growth. I agree about Osborne's wall of money - HMG should not be buying a share of the housing at taxpayer's risk.

Graeme said...

1. Yes we are in a bubble
2. It will get worse we are reaching a peak.
3. Central London has practically de-coupled from the rest of the country and what goes there doesnt suit everyone else.
4. The banks are still bust despite the published figures.
5. There will be no consumer lead recovery and it's not coming from anywhere else
6. Official inflation figures are a fiction as is muchof the rise in corporate balance sheets.

also look at:

Budgie said...

BE said: "I think London might be in danger of overheating already." I don't doubt it, but that is because London, being the seat of our crazily over-centralised government, sucks in most of the 40% of GDP which are taxes and 10% of GDP as borrowing (approx).

I think we are all aware that government is woefully inefficient in spending its ill-gotten gains. That inefficiency is a measure of the money that sticks in the ministries located in London (apart from a few call centre type sheds in the provinces).

It is easy to see the truth of this because a Pound in London buys less than a Pound in Workington. That is because there is too much money sloshing around London.

Oh well, when the Scots are independent there will be a lot less money sucked into London - some of it will go to Edinburgh instead.

Blue Eyes said...

I don't know about "most", there are a fair few state-sector staff outside London, but I agree it's disproportionate. London also has quite a few high-value world-leading industries, which helps the mood of success. Workington? Not so much.

Anonymous said...

.... 3 huge bubbles in the main asset classes...

If the asset inflation is there to support the bank balance sheets - underlying toxic loans and all that - I assume those with the hands on the levers are making sure that all this QE is not finding its way into more toxic loans.

Or am I just being hopeful?

On the other hand PE houses e.g. Electra, are picking up debt from the likes of RBS at a 50% haircut. Nice.

Graeme said...

You are just being hopeful Anon 9.42.