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sharpe

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Posts posted by sharpe

  1. So what happens when the BoE print money to buy the long end? Wont that keep prices up?

    that is a good question - to which I do not know the answer. i would have thought it should keep the price up if the BoE prints money and buys them. but should put pressure on the pound. perhaps this is what is happening, why the long yield is so low and pound is falling so much.

    i am shorting long gilts using igindex.co.uk. looking at that BBC link the long end is getting really caned. will probably go further short on Monday.

  2. [*]Becuase gold is near an all time nominal high, and a real terms high (adjusted for a realistic level of inflation and now deflation)

    ?????????????

    For an inflation adjusted all time high, you would have to inflate $850 (or the exact nominal high in 1980) by 29 years of inflation - lets say that is 5% inflation a year (which is probably a bit low); an inflation adjusted all time high is =850*(1.05)^29 = $3500

    so at $900 gold is no where near its all time high - a raging buy if you think the dollar crisis in 1980 might be repeated.

    the fact that in all human history all paper currencies have either gone back to the gold (or some other commodity) standard in a few decades or become worthless. we are now 38 years in paper. will either be back on the gold standard at a far higher rate than $900 or the dollar will be worthless - either way owning gold is a sensible thing to consider

  3. "investors' rewards for bearing interest rate or duration risk" (see this guy for why duration matters).

    And yep - I might change your words to "an element of conscious speculation", but I think we're now both at the point were comfortable with what each other is saying. I certainly am.

    And so it's off the pub!

    First round's on me. Been that kinda week.

    edit again: there we go, much happier with that one.

    so term risk might be the risk that your assets have a different duration to liabilities

  4. Sure. But this doesn't strengthen the argument for holding cash.

    In all seriousness cash needs to treated as what it is - the stuff of portfolio liquidity; so liquidity needs to be sufficient to meet drawdown arising from term risk and some margin above this excess cash is actually expressing a naked, long view on the currency concerned, intentionally or no.

    I'm a great believer in not using hammers to put in screws - a right tool, right job kinda guy.

    Not sure what term risk is, but fair enough

    I am not arguing for cash. I think there is an element of speculation in everything. Let's say you get gilts to match all your fixed liablilities exactly and inflation linked gilts to match inflation linked liabilities - there is still risk in RPI matching inflation experienced.

    An element of speculation is fine as long as liabilities are matched with a good enough buffer

  5. Because the price of cash is stark naked with respect to exchange rate risk (gilts, likewise, to inflation risk).

    But if the goal is to hedge inflationary risks, the inflation-linked instruments (TIPS, NS&I) are probably a better tool to use.

    what exchange rate risk is there for cash in meeting liabilities in the same currency?

    fair enough TIPS are ok if you believe RPI, but there is another risk that RPI understates or lags inflation experienced

  6. A recurrant if natural enough question.

    At this stage in the cycle you should have no naked exposure at all to day-to-day newsflow; it's just too volatile, you'll get burnt alive.

    Which makes every call a macro call.

    I'm going to be Uncle Rogi's bestest buddy for two seconds and tell you about a nice little AUD->XAU->AUD arb that's now totally possible...

    But apart from low hanging fruit like that (and this is the meat of the post so gimme a bit of credit and re-read it once or twice till it sinks in proper like)...

    *** The only currency you should be holding at present is the currency in which you need to fund your next asset purchase ***

    And you should be holding it as a risk-free income bearing security (so Gilts, Treasuries, and "I can't believe they're not Treasuries" - investment grade debt where a sovereign issuer bears first loss).

    Not cash.

    If you can't answer the implicit question "um what do I want to actually buy with this" then anything you do (including nothing) is naked speculation.

    The least costly kind of speculation is to sit in the currency of the country where you plan to live (because odds are your future asset purchases will also be in this currency).

    Gottit?

    Message ends.

    I did not get it. Why is holding cash in the currency you want "to fund your next asset purchase" (meet liabilities?) speculation, whereas holding gilts in that currency is not speculation?

  7. The national debt of the UK, before taking on bank liabilities: £637,400m

    The liabilities the UK state stood behind earlier:

    Northern Rock liabilities: £107,000m

    Bradford & Bingley liabilities: £50,000m

    The liabilities of the mega banks the government is either effectively standing behind or thought it soon will:

    Lloyds: £341,200m

    HBOS: £661,300m

    Barclays: £1,343,360m

    RBS: £1,887,108m

    Total liabilities for standing behind these 6 banks: £4,390,000m

    New liabilities of UK state: £5,027,000m (789% rise)

    Yes - that's £5trillion - before PFI, pensions etc etc. This is equivalent to what we spend on educating our kids in 167 (yes 167) years.

    Nothing to worry about there then

    the banks also have assets which partially offset those liabilities.

    ideally they would wind up RBS and Barclays - at least not pay any liabilities in foreign currencies

  8. What happened to our knowledge economy? Thought we were leading the world, not heard Gordon mention this lately!! :lol:

    This is true. People in the UK do have a deeper knowledge on many subjects than say the far east.

    My business is insurance and as a young actuarial student I remember we had an actuarial trainee from china work with us for about 2 weeks. Five years later this guy was chief actuary at china life. as an actuary working for a london consultancy we would get questions on subjects from people in china running enormous insurance companies - they did not have a clue. utterly basic stuff was totally unknown and there are about 100 qualified actuaries in china for 1 billion people. compared to the UK with about 6000 actuaries

    the same story in india - there is almost no one that knows what is going on.

    i have worked in the middle east, philippines, uk, belgium, france, germany, switzerland. also with people based in china, india, us, south africa, australia. the english speaking countries are all on a similar high standard; europe is a long way behind; the rest are not even off the starting blocks

    that is insurance - not sure what other industries are like?

  9. Gordon Brown's Peso up today against everything. Eur 1.13 Dollar 1.5, Aussie 1.22

    Can any of ypu bright sparks explain or is it a combo of what is happening to those currencies( another US bailout/ EU rate cut/ China dip) rather than any strength in ours?

    presumably ireland collapsing has something to do with weakening the euro

    nationalising banks, chatting to the IMF - how long before ireland is out the Euro - within 6 months?

    then the rest to follow

    i expect the euro will be a core of countries at some point, based around germany

    so - germany, belgium, austria, luxembourg, france, holland

  10. 25% is a crippling rate, for me it would only possible to have these rates in a very low wage, low cost economy. If you have a high cost economy with more drains on resources 25% is impossible.

    25% rates I think would also be highly inflationary as the cost of borrowing would get passed onto the consumer, I would also argue that it would be counter productive to investment.

    raising interest rates lowers inflation.

    i am not suggesting 25% as a level - i am suggesting letting the market decide the level. what rate would i need to make a secured loan on a house? it would probably need to be around 10-15% for me to lend someone a secured loan with a 60% deposit on a house - perhaps i am very prudent - other people would offer better, but let the market decide.

  11. but borrowers can't afford 10%, hell, they can't even afford 5%!

    some borrowers cannot, they are running failed business models - they need to go bust - and make way for new successful ideas. there are probably millions of businesses in the world running on 20%+ interest rates

    micro finance typically has rates of around 25% for small businesses in the third world - they can do it why cannot we?

  12. Again we need to be quite specific if we are to have a sensible conversation.

    The market does discover risk premia - I think we should trivially be able to agree this without proceeding.

    Reserves set the risk-free rate (the market cannot guarantee par value - only the taxpayer can do this).

    The difference between market and reserve opinion on growth outlook (opinion as to whether or not the Reserve's liquidity goals will be met) is expressed both in exchange rate futures as well as treasuries yield.

    In short - the market can only guess at over- or under-shoot and critically it is and does.

    The market cannot set the taxpayer's economic growth target (and even the reserves can only forecast this) - this seems a nonsensical concept to me, but I'm open to further input.

    the central banks sets short term interest rates - i am suggesting this be left to the markets

  13. The rates lever influences liquidity directly but only indirectly stokes demand for liquidity (we're beyond the point where setting the rates lever at any positive value will influence demand one iota).

    The Fed has entered the same twilight zone that the BOJ did (after first zombifying its own banking sector) - when we speak of "demand for borrowing" and "demand for lending" we need to appreciate that we're actually talking about "demand for further risk-taking endeavour" (the former are merely measures of this) and there is no appetite for this at present and no amount of monetary stimulus will alter this status quo.

    It's also necessary to distinguish as to precisely which lender (or borrower) is under consideration and exactly what kind of instrument is being discussed as each behaves differently. There is undoubtedly end-user (final consumer) demand for infinite amounts of borrowing and undoubtedly infinite amounts of institutional demand for infinite amounts of lending - and yet still the markets are seized and still institutional capital is being directly recycled into risk-free assets (hint, the nature of what kind of terms final consumers and institutional sources of capital desire could not be further apart).

    Negative stimulus (charging savers for holding cash) might break this recycling of reserve liquidity into risk-free (and short-term) instruments (this is EDM's NIRP concept).

    Fiscal stimulus (QE and cousins) might, also (the danger here of course is further displacement of demand).

    Bill Gross seems to think that the emerging markets will thaw first (I expect the winter freeze to stretch further around the globe and deeper into each nation's own yield curve first).

    I strongly suggest you each analyse his viewpoint before taking this much further.

    Thanks for this - i will check out the view of Mr Gross.

    What about letting the market decide interest rates by itself! This would raise rates to a level where lenders could get a fair return and borrowers would have to seriously consider their business plans before borrowing.

    we are in a liquidity trap because no one wants to lend at 0%. raising this to 10% say (through the market) would encourage saving and give banks something to lend with

  14. It is more a case of if you need to borrow you don't qualify, and if you do qualify, you don't need to borrow. Banks are only lending to good credit risks and lowering rates to try and get them to borrow. Pushing on a string, is the term Friedman used. This is the liquidity trap.

    or trying to fix the market price of borrowing at 0% when lender actually demand much higher levels to cover their risks

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