The Great Experiment

The Great Experiment continues with “our” money being spent on any business model claiming to be too big to fail. I have to say, in my “humble” opinion, that Fred Goodwin’s pension is irrelevant given the trillions being thrown into the lame ducks’ pond. There will be a time for retribution but that is in the hands of a power far higher than those of our regulators and politicians, who have yet to come to terms with their part in this debacle and, in all probability, never will. When was the last time you heard the words “mea culpa” from that unhappy band?

The Bank of England has embarked on quantitative easing, which is the same as printing money, despite what you may read in the papers. (You don’t still believe them do you?!) Buying gilts increases the money supply. They don’t have to physically print money as so many transactions are made “electronically”. Think about the number of purchases you make by credit/debit card or bank transfer. It’s cash by another name. Even my tab at the local goes on a card.

They have said they don’t want to “pay up” for their gilt purchases but that rather defeats the object. If they can flatten the yield curve, ie the yield on longs gets closer to shorts, that will lower the cost of borrowing, (much of which is linked to the longer end of the curve) which is as much a hurdle to new borrowing as the apparent lack of liquidity. This week the yield on 10-year gilts dropped below 3% and on 30-years below 4% despite all the talk about gilts being expensive. Sub 2% and sub 3% yields on 10 and 30 year gilts could be coming your way sooner than you think.

There is no doubt that equity markets look cheaper on a relative basis but we have yet to see any real follow through after some impressive gains on Wall Street this week. Bullish news sees the shorts covering but the action is often in financials and the chances of that sector leading the charge into a new bull market are remote. Unemployment continues to rise and the Chinese are finding out that, like Gordon Brown, the title “saviour of the world” is hard one to sustain.

Until the “Great Experiment” has some more miles under its belt it is difficult to see where we are headed and the best guess is that we will see some impressive rallies followed by further sell offs; rather like the ‘60s and ‘70s in the US. Buy and hold hasn’t worked for the last ten years and another ten years of “famine” wouldn’t be a surprise. Of course Mrs Moneypenny always knew that you could rely on a “Bond”.