The US has finally raised interest rates from a measly 0.5% to a paltry 0.75%.
As ever though with these things is it the direction of travel that matters. When Japan tried this after wrecking its economy of with excessive quantitative easing it realised that it could not longer raise rates fare before inhibiting any real growth. The Country has remained moribund ever since.
With the USA, there is more hope than Japan, the economy has several inflation generating activities (like shale oil and gas) which also boost growth at a low cost. If the Fed makes this rise stick then European Bonds and UK gilts are in for a sharp price drop.
In Europe there is no sign of a recovery similar to that of the US, bar the UK and Germany. The EU central bank is still pumping the QE poison merrily into the system in the hope that it will soothe all the ills. Like gambling addict, the result is the constant doubling down of all bets.
If you have a long-term pension it is possible to see this turn (which is immense after nearly 10 years of one way bets) as a positive in that lower bond prices beget higher yields. But if you bought those bonds at high prices your actual investment hit will be as bad or worse than any income accumulation.
Bizarrely, this will juice the stock market instead, which is already quite fully priced.
Reality needs to return to economic to try and save the Western world, that does not mean the road will not be bumpy, mind.
5 comments:
I am willing to be persuaded that there will actual return to the old "reality" but currently remain unconvinced.
Out of interst will this latest oil uptick really stick - just like all the others that have been heralded by the algo's after Opec meetings in the last two years or so?
If you have a long-term pension...
As opposed to a short-term pension? I think most people hope their pension will be 'long term'.
Bizarrely, this will juice the stock market instead, which is already quite fully priced.
I'm still finding companies that look cheap for the long term. I've come to the conclusion that 'the market' is dominated by a few dozen largely deluded fund managers.
Exhibit 1: Metrobank plc is a loss making bank with a measly125m turnover. 'The market' values it at about 6.5 times book and 20x turnover. Virgin Money is in profit, yields 10% gross and trades at around book and 2x turnover. But London fund managers walk past 'Metro Bank' to work and not 'Virgin Money'. Actual people who swipe their credit cards in Tenerife bank with Virgin. 'the market' values Metobank at nearly double Virgin.
Exhibit 2: Capita plc. Supposedly good fund managers were buying this highly leveraged trading company with hocus pocus 'adjusted p/e' accounts for well over a tenner just a few months ago. But then Capita does the back office stuff for most of their funds.
Sl - not everyone has a pension...depending on your age, even then it may not be that long term...:o(
"In Europe there is no sign of a recovery similar to that of the US, bar the UK and Germany. " Yeah, well, they are the two countries that run their own currencies to suit themselves. :)
SL - the Telegraph had a piece on Capita a year or so back. Pretty good call.
http://www.telegraph.co.uk/finance/markets/questor/11387935/Questor-share-tip-Capita-still-a-sell-as-latest-deal-doesnt-convince.html
"Crucially, we noted in the earlier update that the firm’s return on capital had slumped from a peak of 23.6pc in 2007 to 7.2pc at the end of 2013. A similar fall had proved in retrospect an early warning sign of trouble at Tesco."
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