Debtor’s prison

The budget has pretty much killed off any chance of Labour getting another 5 years; not that the odds were very good anyway; or that the Tories would have done much better. Politicians are in denial as are many investors who think it’s all over. Well as much as I would like to believe that, the tea leaves (charts to those of you who think you can do without them) tell me we are still in a long term downtrend and that wont change until the Dow gets above 10,000 and the FTSE 100 above 5,000. A very profitable rally but experience suggests that most people will climb on board as we reach those targets rather than the 6,600 and 3,500 lows, when Armageddon seemed the only option

The big issue is still debt; government, corporate, personal; there is too much of it and its getting bigger. On Tuesday the Fed spent $10 billion buying 7-10 year Treasuries yet prices still fell on the day and both the US and the UK have huge funding programs to come; the UK will be issuing £175bn of gilts this year alone. Their only salvation is that deflation is still centre stage in the short term. In the 90’s Japanese bond yields fell from 8% to sub 1% (at the same time JGB issuance went through the roof and found willing buyers) and whilst 10 year bonds in government debt are circa 3% on both sides of the Atlantic they are still the safe haven for many. The Chinese have been adding to their holdings despite the world and its dog proclaiming how expensive they are. Compared with deposit rates, 3% from a triple AAA lender is really rather attractive isn’t it?

If the top US banks mark their derivative/loan positions to market 16 out of 19 would be insolvent. The optimists say that mark to market is irrational as in a “few years” liquidity will return and market values will re-establish themselves. If you will excuse the vulgarity “you can’t polish a turd”. Yes – much of this debt smells to high heaven. Western economics was founded on the Darwinian principle of survival of the fittest. If the business model is bust so is your business but bankruptcies and dole queues don’t buy votes.

The Austrian economist Schumpeter put forward the theory of “creative destruction”. A painful but effective course of action that has been shanghaied by the vote grabbers. An industry selling expensive and largely inefficient products that no one wants unless you give them away and which is run by the government is what my father would have labelled communism. In the US they call it General Motors…and “buy American” is the catch phrase.

We tried that (Buy British) back in the 70’s when we still made “things”, but not very well. It didn’t work then and it wont now. In June I am off around the world on a motor bike (more anon) and the only thing on the bike that’s British is me! And please don’t tell anyone I might know that I am actually one-eighth French!!