Friday, Mar 06, 2009
More nasty surprises for stock markets are coming
MoneyWeek: More nasty surprises for stock markets are coming
So here we go. Into the great unknown. The Bank of England has switched the printing presses on. This is supposed to help the economy. So that'll be why stock markets around the world continued to plunge yesterday...
Posted by damien @ 11:16 AM (1442 views) Add Comment
11 Comments
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1. crunchy said...
"The market is always right." Fight it at your peril.
2. 51ck-6-51x said...
Good post, I always enjoy reading John Stepek's commentary, it's always well thought out and logical.
crunchy - or even, the market is never right, fight it at your peril ;p (I think it was John Maynard Keynes that said "The market can stay irrational longer than you can stay solvent")
3. stillthinking said...
QE is not to help the housing market, or even the stock market, rather the purpose is to lower the price/rate of corporate debt, which as becomes due and needs to be rolled over, will be unaffordable and possibly take down even "heatlhy" companies, because companies are the economy. The approach is 2-pronged, purchase gilts to close that escape route for funds, and buy company debt thereby driving up the price and lowering the yield.
In this, the government take the view that company collapse is a consequence of unaffordable borrowing costs, and unaffordable borrowing costs are a consequence of a perception of company collapse. In other words it is all so terribly pointless and just a matter of confidence. I think probably there is a lot to this argument.
However, I can remember working at a nearly empty company in June/July last year, taken over by a venture capital company and loaded up with debt. Causing mass redundancies to save costs in order to service such debt, the axe was wielded too much, hence my arrival. Anyway, as one of the senior staff said to me,
"I think they paid too much for it actually".
In other words, even then, the debts of the company were too much for their revenue. Without the debts the company was profitable, in this case the company didn't borrow to expand or open new markets, the debt was purely to pay the immediate shareholders all the profits of the future at once.
From that, I see qe as mitigating company closure and the recession, not as part of a recovery plan at all. Further, almost certainly people will prefer to hold debt rather than stocks in any particular company as the government will buy debt, but won't buy stocks. What is worse, is that probably these efforts are insufficient given the amount of debt taken on.
What is worse is that government/BoE cannot possibly take upon themselves the choice of corporate debt to buy, because that breaks the market pricing level. Suppose for example, they buy up corporate debt in large employers but ignore small employers with a more robust future market? How on earth can they know what to buy !?
So, a good idea would be to introduce something similar to USA Chapter 11 bankruptcy. As in debt gets written off but the company carries on functioning and employing etc, as opposed to the UKs administration bankruptcy where the company is run down. Which is also kind of full circle because back to defaults again :)
4. crunchy said...
2. 51ck-6-51x
Or the market is only rational for insider trading, meaning it is only right when one is on the right side of it.
Oh to be privileged and not greedy.
5. uncle tom said...
I really don't think this policy will work, and also fear that once the BOE heads in this direction, it will be very hard to stop.
It is a de-valuation, in all but name, and the nett result will be to scare away foreign owners of Gilts.
Not very clever, IMO
6. mark wadsworth said...
@ ST, "Further, almost certainly people will prefer to hold debt rather than stocks in any particular company as the government will buy debt, but won't buy stocks."
The normal rational response to the overleveraging of the past decade is deleveraging, or replacing debt with share capital whether by raising new share capital or debt for equity swaps or any other method. If your above statement is correct (and it probably is) then this will discourage deleveraging, which is the best way out of this mess - i.e. it will drag out the agony for that much longer.
7. stillthinking said...
mark,
How about this. You know in the article it mentions that "Aviva has paid a dividend it didn't have to, raising fresh questions about its solvency."
You could think about this company in terms of three entities, shareholders, chairman, debt holders. And the key influence is;
Shareholders appoint and control money paid to the chairman.
So, if I was the Chairman, and I had come to the conclusion that the situation was untenable, I have a choice, keep cash in order to pay down debt (logical if the company has a future), or pay the shareholders (who pay me) and leave the debt holders with nothing.
Maybe lots of shareholders around the world are thinking, sheesh, our debt servicing costs are so large we will never see a dividend again. Then lo and behold, they see a champion of shareholders, a man who in the face of a collapsing company pays what is left to the shareholders, and lets the debt holders hang out to dry.
So the Chairman of Aviva has made a very good personal choice, if I was a shareholder I would say, we need this guy!
My conclusion is that, if there are any notable dividend payments from companies in debt then they might be kaput companies. The existing shareholders want to maximise their return, and possibly the choice of replacing debt with share capital doesn't do that.
There isn't much wrong in this, I think, because for corporate debt holders, instead of getting the money back, they get the company instead. Perhaps next time they will think twice before enabling venture capitalists to collapse imaginary optimistic future profits into a big single payment !
8. stillthinking said...
Looking back, I seem to have contradicted myself. But I mean, that perversely, duff companies might be getting big dividends (bond holder rip off), while healthy companies will go for the long term and their debt (with government funding) seems relatively more attractive. Horses for courses probably.
9. techieman said...
Careful ST - http://en.wikipedia.org/wiki/Trading_while_insolvent_(UK)
10. stillthinking said...
If you became insolvent because you had "assumed" that you could roll over your debt at 5%, but when it came to it, you were faced with with 30%, you could argue that away as bad market conditions. On your books you would make assumptions that would maintain the appearance of solvency. The government itself has announced lower borrowing costs, after all.
11. troy said...
background
"In order to clearly establish that this is not a conspiracy theory, but is actually how things are controlled, we further quote Charles Lindbergh. From the house of representatives, Lindbergh was well placed to see exactly what was happening back then and continues to happen today.
"To cause high prices all the federal reserve board will do will be to lower the re-discount rate..., producing an expansion of credit and a rising stock market; then when... business men are adjusted to these conditions, it can check... prosperity in mid-career by arbitrarily raising the rate of interest.
It can cause the pendulum of a rising and falling market to swing gently back and forth by slight changes in the discount rate, or cause violent fluctuations by greater rate variation, and in either case it will possess inside information as to financial conditions and advance knowledge of the coming change, either up or down. " XAT
and faulty/toy steering wheels?
"Extreme revolutionary groups were controlled by being financed when they complied and cut off, with money sometimes being given to their opposition, when they didn't.
If you find this hard to believe, listen to what the so called dictator of the new Soviet Union had to say.
"The state does not function as we desired. The car does not obey. A man is at the wheel and seems to lead it, but the car does not drive in the desired direction. It moves as another force wishes."
Vladimir Lenin 1 " ~~~~ The Federal bank in this way has overall control of the US money supply, as each country's central bank does in the same way. The bankers, through the magic of fractional reserve banking have been delegated the right to create 90% of the money supply. This control makes a mockery of any elected government. It places so called leaders behind a toy steering wheel, like the plastic ones, set up to amuse small children.
Or as Rep.Charles Lindbergh father of famous aviator Lucky Lindy puts it when commenting on the Federal Reserve Act:
"This act establishes the most gigantic trust on earth. When the President signs this bill, the invisible government by the Monetary Power will be legalised.
The people may not know it immediately, but the day of reckoning is only a few years removed... The worst legislative crime of the ages is perpetrated by this banking bill."
Rep. Charles Lindbergh (R-MN)