First published on The Broad Oak Blog (Nov. 15, 2010):
___________________________________________
On October 7, CMA DataVision released their third-quarter report on the credit ratings of sovereign countries. CMA's ratings are worked out by looking at what the credit market charges for insuring against default. This market-based marking is different from the assessments of Standard and Poor's, Moody's, Fitch etc, who are paid by the organisations they rate and whose reputation has been brought into question after the events of 2008.
On page 4, CMA says that four of the 10 most risky nations are in the EU (Greece, Ireland, Portugal, Romania). It's worth remembering that a fifth on that list, Ukraine, is eager to join the EU. (For those who want to know about all the "PIGS", Spain is 21st most risky.) How is the currency and banking of the European Union meant to contain these problems?
The UK is rated 59th most risky (or 13th safest), with an implied credit rating of aa+ (as opposed to the official AAA rating that has helped to keep down the cost of our credit).
Four Nordic countries lead the list of securest debt: Norway, Finland, Sweden and Denmark. Only four other countries share their "implied AAA" rating: Germany, Switzerland, the Netherlands and Australia.
The United States has been downgraded this quarter, from "aaa" to "aa+" - the same as for the United Kingdom.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
Thursday, November 18, 2010
Gold is merely the thermometer of inflation?
First published on The Broad Oak Blog (Oct. 9, 2010):
________________________________
The vitally important inflation / deflation debate continues. In my last post, I relayed one view, which is that the very rich and powerful will not permit runaway inflation, because it erodes the value of money and the rich have most of the money.
As a corrective, I give below the latest video from the National Inflation Association (NIA), a US group that has warned about credit growth and inflation for a long time. Their motivation appears to be patriotic - a return to sound money as part of what makes individual prosperity and freedom possible.
The NIA argues that the rise in the price of gold is not because of mass speculation, for although a lot of gold has been bought recently, a lot has also been sold. What may be happening now is a transfer of privately-held gold from relatively poor people who need to raise money, to investors who are looking ahead to a time when cash will rapidly depreciate. Think of all those gold-buying outlets (or inlets) you now see on your High Street. As someone said a while ago, the mania will be when those shops start selling you gold instead of buying it from you.
As many have now said, trading nations around the world are devaluing their currencies to keep pace with one another, for fear that their exports will be hit if they don't. So the soaring value of precious metals can be seen as a better indication of inflation than currency exchange rates.
You may think that if currencies are depreciating, then surely prices of goods and services in general must also increase rapidly, and we don't see this yet. But we are in a recession and the threat of unemployment is keeping down wage demands; the self-employed are willing to lower their rates, perhaps especially if paid in cash; and traders in items such as cars and computers are offering discounts to clear stock and keep paying their overheads.
However, the NIA and others say there will come a time when the system begins to crack. Governments are buying their own debt, or lending money to banks to do it for them, to maintain the appearance of normality and control; this can't go on forever. The prediction is that we will get either default or hyperinflation. So the gold bugs say buy gold, silver, maybe oil and agricultural commodities etc - anything tangible that can't be multiplied at will.
I don't think (feel) that the turning point is imminent, because of recession and the attempts by some governments (such as the UK) to retrench. But I fear that these last-ditch attempts are untimately doomed to partial or complete failure. In that case, the gold bugs will probably be vindicated.
The other thing I'd say, as I've said before, is that if the system really does come under severe strain, the price of gold may not be the most important of your concerns. If you accept the inflationists' thesis, you will be quietly making preparations to cope with emergencies of different kinds.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
________________________________
The vitally important inflation / deflation debate continues. In my last post, I relayed one view, which is that the very rich and powerful will not permit runaway inflation, because it erodes the value of money and the rich have most of the money.
As a corrective, I give below the latest video from the National Inflation Association (NIA), a US group that has warned about credit growth and inflation for a long time. Their motivation appears to be patriotic - a return to sound money as part of what makes individual prosperity and freedom possible.
The NIA argues that the rise in the price of gold is not because of mass speculation, for although a lot of gold has been bought recently, a lot has also been sold. What may be happening now is a transfer of privately-held gold from relatively poor people who need to raise money, to investors who are looking ahead to a time when cash will rapidly depreciate. Think of all those gold-buying outlets (or inlets) you now see on your High Street. As someone said a while ago, the mania will be when those shops start selling you gold instead of buying it from you.
As many have now said, trading nations around the world are devaluing their currencies to keep pace with one another, for fear that their exports will be hit if they don't. So the soaring value of precious metals can be seen as a better indication of inflation than currency exchange rates.
You may think that if currencies are depreciating, then surely prices of goods and services in general must also increase rapidly, and we don't see this yet. But we are in a recession and the threat of unemployment is keeping down wage demands; the self-employed are willing to lower their rates, perhaps especially if paid in cash; and traders in items such as cars and computers are offering discounts to clear stock and keep paying their overheads.
However, the NIA and others say there will come a time when the system begins to crack. Governments are buying their own debt, or lending money to banks to do it for them, to maintain the appearance of normality and control; this can't go on forever. The prediction is that we will get either default or hyperinflation. So the gold bugs say buy gold, silver, maybe oil and agricultural commodities etc - anything tangible that can't be multiplied at will.
I don't think (feel) that the turning point is imminent, because of recession and the attempts by some governments (such as the UK) to retrench. But I fear that these last-ditch attempts are untimately doomed to partial or complete failure. In that case, the gold bugs will probably be vindicated.
The other thing I'd say, as I've said before, is that if the system really does come under severe strain, the price of gold may not be the most important of your concerns. If you accept the inflationists' thesis, you will be quietly making preparations to cope with emergencies of different kinds.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
Should retirees look to the stockmarket for income?
First published on The Broad Oak Blog (Sept. 7, 2010):
______________________________________
Adapted from my advice to a client this weekend:
Price inflation is not uniform or universal. Food and fuel have risen in cost recently, but State Pension benefits are linked to a cost of living index and should therefore approximately keep pace with increases in the price of basic needs.
In other areas (e.g. cars, cruises) prices have remained stable or even fallen. During what I suspect will turn out to be a long, Japan-style recession, it may be that the price of luxury goods and services will not inflate greatly, except perhaps for the luxuries of the very wealthiest.
Other than cash, what other ways could you invest?
First, one could look at deposits that link to inflation indices. Unfortunately, NS&I recently withdrew their index-linked savings certificates, the first time they have done so in 35 years. National Counties Building Society has an RPI-linked cash ISA (available until 30 September) but this is for a fixed amount (£5,100), runs for a fixed 5 year term and does not permit earlier withdrawals, so it may not fit in with your requirements.
If the government issues new index-linked gilts, these provide income and capital growth in line with RPI. The initial income may be low, however. For further details, please see the website of the Debt Management Office or a stockbroker. Generally, I would not now strongly recommend government bonds on the second-hand market, because the demand for them has become so high in these troubled times that the yield (ratio of income to traded price) is very low. If public finances unravel and interest rates rise, the effect on the capital value of bonds would be very depressing. As it is, the UK is struggling to maintain its official AAA rating and the implied credit rating on the credit default insurance market is actually rather lower already.**
Residential property appears still to be overpriced in historical terms. I think the only reason prices haven’t fallen much further is that interest rates are very low, which allows homeowners to maintain their mortgage payments on large loans. As the budget cuts begin to take effect, I think we will also see a depression in commercial real estate.
The stock market is also in a bubble, I believe. The ratio of price to earnings is still very high and the earnings may not truly reflect the forward position*. Companies are reportedly maintaining some degree of profitability by running down stocks, closing sites and laying off staff, but there is only so far they can go down this road. Many leading companies derive a significant part of their earnings overseas, but world trade is so interconnected these days that a slowdown in Western consumption will also impact on Eastern production.
The general picture appears to be deflationary, and although governments would like to stimulate further inflation in the way they have done over the past 30 years, there are respected economic and investment commentators who say we are now saturated with debt and unless we see outright defaults by sovereign nations (which could still happen), we will have to go through a long and painful process of retrenchment and paying-off debt.
Others look beyond deflation and think that it will ultimately force governments to find some way to increase the monetary base and devalue their currency. It may be significant that both Russia and China have made substantial purchases of gold in the last few months, and China has announced its intention of increasing her holding from c. 1,000 tonnes to six or ten times that amount in the next decade. But here we are in the realms of financial speculation, and the inflation speculators are already buying into agricultural commodities, precious metals, oil etc.
However, extreme or unconventional government strategies to deal with deflation don’t seem imminent and so I think that over the next couple of years, cash savings are likely to be a good way to build up funds for your envisaged discretionary expenditure***. Should there appear to be a major policy change, then we may have to look at investments that could protect against high inflation.
* Albert Edwards at SocGen expects a major reversal, the FT reports today.
** Though CMA DataVision have raised the UK from aa to aa+ in their Q2 report.
*** "There are no longer any “defensive” securities on the planet. The old asset allocation models and the diversification models don’t and won’t work any more and they haven’t for over a decade. I can’t believe that prominent asset managers are still using this approach." - Steven Bauer
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
______________________________________
Adapted from my advice to a client this weekend:
Price inflation is not uniform or universal. Food and fuel have risen in cost recently, but State Pension benefits are linked to a cost of living index and should therefore approximately keep pace with increases in the price of basic needs.
In other areas (e.g. cars, cruises) prices have remained stable or even fallen. During what I suspect will turn out to be a long, Japan-style recession, it may be that the price of luxury goods and services will not inflate greatly, except perhaps for the luxuries of the very wealthiest.
Other than cash, what other ways could you invest?
First, one could look at deposits that link to inflation indices. Unfortunately, NS&I recently withdrew their index-linked savings certificates, the first time they have done so in 35 years. National Counties Building Society has an RPI-linked cash ISA (available until 30 September) but this is for a fixed amount (£5,100), runs for a fixed 5 year term and does not permit earlier withdrawals, so it may not fit in with your requirements.
If the government issues new index-linked gilts, these provide income and capital growth in line with RPI. The initial income may be low, however. For further details, please see the website of the Debt Management Office or a stockbroker. Generally, I would not now strongly recommend government bonds on the second-hand market, because the demand for them has become so high in these troubled times that the yield (ratio of income to traded price) is very low. If public finances unravel and interest rates rise, the effect on the capital value of bonds would be very depressing. As it is, the UK is struggling to maintain its official AAA rating and the implied credit rating on the credit default insurance market is actually rather lower already.**
Residential property appears still to be overpriced in historical terms. I think the only reason prices haven’t fallen much further is that interest rates are very low, which allows homeowners to maintain their mortgage payments on large loans. As the budget cuts begin to take effect, I think we will also see a depression in commercial real estate.
The stock market is also in a bubble, I believe. The ratio of price to earnings is still very high and the earnings may not truly reflect the forward position*. Companies are reportedly maintaining some degree of profitability by running down stocks, closing sites and laying off staff, but there is only so far they can go down this road. Many leading companies derive a significant part of their earnings overseas, but world trade is so interconnected these days that a slowdown in Western consumption will also impact on Eastern production.
The general picture appears to be deflationary, and although governments would like to stimulate further inflation in the way they have done over the past 30 years, there are respected economic and investment commentators who say we are now saturated with debt and unless we see outright defaults by sovereign nations (which could still happen), we will have to go through a long and painful process of retrenchment and paying-off debt.
Others look beyond deflation and think that it will ultimately force governments to find some way to increase the monetary base and devalue their currency. It may be significant that both Russia and China have made substantial purchases of gold in the last few months, and China has announced its intention of increasing her holding from c. 1,000 tonnes to six or ten times that amount in the next decade. But here we are in the realms of financial speculation, and the inflation speculators are already buying into agricultural commodities, precious metals, oil etc.
However, extreme or unconventional government strategies to deal with deflation don’t seem imminent and so I think that over the next couple of years, cash savings are likely to be a good way to build up funds for your envisaged discretionary expenditure***. Should there appear to be a major policy change, then we may have to look at investments that could protect against high inflation.
* Albert Edwards at SocGen expects a major reversal, the FT reports today.
** Though CMA DataVision have raised the UK from aa to aa+ in their Q2 report.
*** "There are no longer any “defensive” securities on the planet. The old asset allocation models and the diversification models don’t and won’t work any more and they haven’t for over a decade. I can’t believe that prominent asset managers are still using this approach." - Steven Bauer
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
Monday, November 15, 2010
The State of the Union, in credit terms
CMA DataVision's third-quarter report gives the latest assessments of sovereign debt default risk, as measured by the price of credit default insurance. This edition also includes ratings for selected individual States of the USA. I have combined the latter with the former in a ranking below, so that you can see the ratings of States in some sort of context. Please click on the picture to enlarge.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
Sovereign debt default risk
On October 7, CMA DataVision released their third-quarter report on the credit ratings of sovereign countries. CMA's ratings are worked out by looking at what the credit market charges for insuring against default. This market-based marking is different from the assessments of Standard and Poor's, Moody's, Fitch etc, who are paid by the organisations they rate and whose reputation has been brought into question after the events of 2008.
On page 4, CMA says that four of the 10 most risky nations are in the EU (Greece, Ireland, Portugal, Romania). It's worth remembering that a fifth on that list, Ukraine, is eager to join the EU. (For those who want to know about all the "PIGS", Spain is 21st most risky.) How is the currency and banking of the European Union meant to contain these problems?
The UK is rated 59th most risky (or 13th safest), with an implied credit rating of aa+ (as opposed to the official AAA rating that has helped to keep down the cost of our credit).
Four Nordic countries lead the list of securest debt: Norway, Finland, Sweden and Denmark. Only four other countries share their "implied AAA" rating: Germany, Switzerland, the Netherlands and Australia.
The United States has been downgraded this quarter, from "aaa" to "aa+" - the same as for the United Kingdom.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
On page 4, CMA says that four of the 10 most risky nations are in the EU (Greece, Ireland, Portugal, Romania). It's worth remembering that a fifth on that list, Ukraine, is eager to join the EU. (For those who want to know about all the "PIGS", Spain is 21st most risky.) How is the currency and banking of the European Union meant to contain these problems?
The UK is rated 59th most risky (or 13th safest), with an implied credit rating of aa+ (as opposed to the official AAA rating that has helped to keep down the cost of our credit).
Four Nordic countries lead the list of securest debt: Norway, Finland, Sweden and Denmark. Only four other countries share their "implied AAA" rating: Germany, Switzerland, the Netherlands and Australia.
The United States has been downgraded this quarter, from "aaa" to "aa+" - the same as for the United Kingdom.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
Sunday, November 14, 2010
Shares as a safeguard against inflation
Previously published on the Broad Oak Blog (Nov. 14, 2010):
_________________________________________________
It is well-known that German money became worthless in 1923, thanks to hyperinflation. The value of cash savings was wiped out; fixed rents also became worthless, which benefitted the ordinary person; but practically all one's income was spent on food, instead (see Table 6 at the bottom of this page).
What is less well known is how investors who didn't have to sell their shares actually gained, after a market pullback.
_________________________________________________
It is well-known that German money became worthless in 1923, thanks to hyperinflation. The value of cash savings was wiped out; fixed rents also became worthless, which benefitted the ordinary person; but practically all one's income was spent on food, instead (see Table 6 at the bottom of this page).
What is less well known is how investors who didn't have to sell their shares actually gained, after a market pullback.
UPDATE: As Michael Panzer points out, what I called a "pullback" should more properly be termed a horrendous crash! Unless you have the titanium nerve to hold on through such an event, there is a grave danger that you could buy in now and sell in a panic later and lose most of your wealth.
CLARIFICATION / CORRECTION:(I should have made it clearer that the graph above is not mine - it comes from the site I linked to in the text, i.e. Now and Futures. Apologies for any misunderstanding, which I didn't intend.)
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
Could shares protect against inflation?
It is well-known that German money became worthless in 1923, thanks to hyperinflation. The value of cash savings was wiped out; fixed rents also became worthless, which benefitted the ordinary person; but practically all one's income was spent on food, instead (see Table 6 at the bottom of this page).
What is less well known is how investors who didn't have to sell their shares actually gained, after a market pullback.
What is less well known is how investors who didn't have to sell their shares actually gained, after a market pullback.
UPDATE: As Michael Panzer points out, what I called a "pullback" should more properly be termed a horrendous crash! Unless you have the titanium nerve to hold on through such an event, there is a grave danger that you could buy in now and sell in a panic later and lose most of your wealth.
CLARIFICATION / CORRECTION:(I should have made it clearer that the graph above is not mine - it comes from the site I linked to in the text, i.e. Now and Futures. Apologies for any misunderstanding, which I didn't intend.)
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
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