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View To 2020 Or Thereabouts, Probably


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In an effort to post less but say more I am writing the following as an encapsulation of my thoughts and in the hope some find it interesting. Others have covered similar grounds in posts but I thought it might be worth bringing it all together

Interest Rates to Stay Low until Economic Recovery Takes Hold

It is clear that the PTB in countries which are sovereign in their currencies (not the Eurozone) are in complete control of the yield curve of government bonds. As they control the yield of the risk free, this naturally lowers the cost of borrowing across the board. Due to this control of the yield curve and the fact that the pound is free floating means that the government can keep interest rates down. Banks and building societies can and have raised rates, but they will do only slowly to squeeze out the weakest positions for their own benefit. They will not shoot themselves in the foot by raising rates dramatically.

Recovery to Remain Tepid

Economic performance is generally measured by using the Gross Domestic Product (GDP) measure. GDP measures economic activity of a given economy over a given timeframe. It does not measure the quality of output, neither does it consider whether the distribution mechanism within the economy is fair. It is calculated thus:

GDP = Private Consumption + Gross Investment + Government Spending + (Exports - Imports)

Looking at these 4 factors, we can see that the UK has a problem. I think it is fair to assume that private consumption will not increase anytime soon due to massive household debt and the trade imbalance is likely to remain. This leaves government spending and gross investment as means of increasing growth. No major party advocates increasing government spending, though the UK public appears to be moving in this direction. Moves towards investment appear sluggish - if the UK is unable to agree on a new airport or a train line from Birmingham to London it is unlikely the amount of investment will be sufficient to create growth. It is therefore reasonable to assume the UK will continue as it has during the current government until such time private consumption increases due to delveraging or the government substantially assists increases in investment and government spending. Deleveraging the amount of private debt in the economy appears to be a multi-decade effort

Propping Up the Rent Seekers

The government will continue to prop up the rent seekers. Changes to housing benefits appear not to have caused the firesale of BTL hoped for, and pensioners will no longer need to sell their houses to fund their care. Given that people are being bailed out by low interest rates, it is very difficult to see where the selling pressure required for rapid and substantial falls will come from. Moreover, no major party is advocating a substantial shift in the taxation policies of the UK from that of rewarding rent seeking and punishing wealth creation. High income tax combined with low or non-existent taxes on assets or unearned income will remain.

A Run on the Pound Unlikely and Ineffectual

The only risk to the government’s control of the yield curve is that the currency maybe abandoned by international markets, leading to a run. Given the problems in all developed countries I think it is unlikely that the pound should be singled out, but even if it does occur, there maybe a short lived spike up in inflation such as we saw when the pound dropped in the second half of 2008. The government resisted pressure to put up interest rates, and they will resist that pressure again.

Inflation to Stay Low due to the Coming Commodity Crash

China, with 11% of global GDP, currently represents monumental portions of global commodity demand (50% of cement demand, 30% of rubber demand etc). This, on its own, is unsustainable and assuming that supply remained the same, it is unlikely that China can maintain these levels of demand and thus the current high commodity prices are unlikely to last. However there is another factor worth bearing in mind. To meet the large demand from China, a great deal of supply is currently being brought online in Australia, Canada and other resource countries. This means that the world is about to be awash with commodity supply for which there is simply insufficient demand. Commodity prices won’t drop, they will leap screaming off a cliff, following closely by epic busts in Australia and Canada and the other dutch disease countries.

They Cannot “Inflate It Away”

So, given the above situation, the talk of “inflating debts away” is erroneous. In the first place there will be little to no inflation and in the second, for said debts to be inflated away there needs to be a general increase in real terms in household income. So there will be no inflating away of debts. There will simply be a long, slow trudge towards deleveraging over a multi-decade period.

The Way Out

The way out for the UK and the US is through investment in large public works programmes. The deficit ultimately reflects the desire in the aggregate of the private sector to save. If the private sector saves less then the deficit will automatically reduce and economic growth would take care of the public debt issue. The private sector needs to be encouraged to invest through subsidy or alterations in the tax system if necessary and if they do not, the government needs to step in. This may prove problematic as the UK and US governments seem to be as allergic to investment spending as the average Oriental is to consuming. The opportunity is there, if the governments are willing to take it.

I think much of the above is known to posters here, but I thought it might be of interest. I’d just like to point out that I am living in Japan and anyone who makes a life changing decision on the basis of some random bloke on the internet is an utter div. I am in cash, 50% yen, 50% sterling. I believe the yen has very probably topped and there will be an opportunity to convert my sterling to yen over the next few years.

Edited by FaFa!
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What recovery? There is no recovery.

I agree that rates are going to stay low unless there is a major shock Israel/Iran could be a trigger, although it's likely that base rate will stay low whilst rates to the proles remain high and detached from the base rate. Those who are tied to the BoE base rate with their mortgage could have the deals of their lives.

Are you expecting a trudge like there has been in Japan over the past 20 years and the certain banks to remain zombies on govt support?

As for govt investment in infrastructure are you hoping the West learns from the Japanese error of simply building roads/bridges etc to nowhere, and invest in productive infrastructure? The US is lucky in this respect as most of it's road bridges need replacing which clearly could be a massive stimulus and your replacing road bridges already in heavy use.

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The way out for the UK and the US is through investment in large public works programmes . The deficit ultimately reflects the desire in the aggregate of the private sector to save. If the private sector saves less then the deficit will automatically reduce and economic growth would take care of the public debt issue. The private sector needs to be encouraged to invest through subsidy or alterations in the tax system if necessary and if they do not, the government needs to step in. This may prove problematic as the UK and US governments seem to be as allergic to investment spending as the average Oriental is to consuming. The opportunity is there, if the governments are willing to take it.

I think much of the above is known to posters here, but I thought it might be of interest. I’d just like to point out that I am living in Japan and anyone who makes a life changing decision on the basis of some random bloke on the internet is an utter div. I am in cash, 50% yen, 50% sterling. I believe the yen has very probably topped and there will be an opportunity to convert my sterling to yen over the next few years.

More or less agree with your prognosis, but your solution...if they know where to invest correctly then it is fine, but with this lots... and borrow to do that investment...you got to be kidding.

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Have you considered the probability and risks of the fact that market rates across the yield curve could decouple from administered rates?

Some sort of funding crisis in non-administered rates, possibly starting in bank funding markets, could be the catalyst that causes the PTB to lose control.

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What recovery? There is no recovery.

I agree that rates are going to stay low unless there is a major shock Israel/Iran could be a trigger, although it's likely that base rate will stay low whilst rates to the proles remain high and detached from the base rate. Those who are tied to the BoE base rate with their mortgage could have the deals of their lives.

Are you expecting a trudge like there has been in Japan over the past 20 years and the certain banks to remain zombies on govt support?

As for govt investment in infrastructure are you hoping the West learns from the Japanese error of simply building roads/bridges etc to nowhere, and invest in productive infrastructure? The US is lucky in this respect as most of it's road bridges need replacing which clearly could be a massive stimulus and your replacing road bridges already in heavy use.

Yes, I expect a 20 year trudge unless the government gets serious about public and private investment spending

My understanding is the bulk of the investment in Japan occurred during their bubble (it was an investment bubble) and the efforts to prop it up via pork barrel largely petered out in the late 1990s (though of course some prok barrel remains). Their need is to boost consumption. Ours was a consumption bubble, we need to rebalance through investment. Certainly the possibility of mal-investment is ever-present but the basic point remains.

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More or less agree with your prognosis, but your solution...if they know where to invest correctly then it is fine, but with this lots... and borrow to do that investment...you got to be kidding.

The best area to spend money is probably transportation infrastructure which is either good for business or improves users' quality of life. I would suggest the following rather than HS2 :

- Increase airport capacity

- Renovate train stations

- Improve rolling stock

- Restructure our roads so that the average speed during rush hour gets to a target of at least 75% of the speed limit. This is a very green initiative which would see vehicles operating under a steady state for longer and reduce stop / start driving which is very inefficient and increases pollution.

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Really? Do you mean that?

Yes

I believe the Japanese will start to monetise their debt in a large scale, placing downward pressure on the yen. I have no intention of converting my sterling at this point and I cannot imagine a scenario where I would convert due to on-going yen strength. If I am wrong then I would think about using my sterling to purchase dividend yielding FTSE stocks. I haven't thought it through though. I probably should.

But if I am wrong, I am not responsible for any losses you incur

:)

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You mean like 2008?

Yes. Could the effects become more noticeable than they are now and get even worse if it becomes obvious that QE / ZIRP etc have done nothing to solve the underlying problem? Spreads have narrowed massively since their 2008 / 2009 peak. Could they blow out again?

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What recovery? There is no recovery.

This. There will be no recovery until the present system has either collapsed or the Governments stop printing money and allow banks (and everything else that needs to) to fail.

The way it looks at the moment, it seems that they have opted to print to infinity until the final and devastating collapse.

At which point a new system will be put in place.

The dollar will not be a reserve currency for long.

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@CD - are you still trading yen from your council house ?

Well yes, not trading just sitting on Yen I made in Japan several years ago. Seems that in a few months time the wife and I will cash in and buy our council house. This money will then be used to pay off the councils historic debt (around 35k on this house) with the remainder going to build a new dwelling (flat?)...........supposedly.

Edited by council dweller
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Yes. Could the effects become more noticeable than they are now and get even worse if it becomes obvious that QE / ZIRP etc have done nothing to solve the underlying problem? Spreads have narrowed massively since their 2008 / 2009 peak. Could they blow out again?

To my mind the purpose of QE was to keep the banks afloat long enough to deal with the bad debts. It appears to be succeeding. They managed it in Japan, don't see why it cannot be managed here.

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Well yes, not trading just sitting on Yen I made in Japan several years ago. Seems that in a few months time the wife and I will cash in and buy our council house. This money will then be used to pay off the councils historic debt (around 35k on this house) with the remainder going to build a new dwelling (flat?)...........supposedly.

Sounds like a good plan to me.

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I'd be highly surprised if the yen suddenly plummets over the next few months/year. I see it as a long, slow move back to the mean.

It might end up a bit like the CHF in that every time they try to devalue it, someone else does it bigger and better and it lifts back up again. Like the US and China...until it's finally allowed by the markets to drop.

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I am however willing to buy you a beer if you are ever in the Land of the Rising Sun, by way of compensation. I'd be highly surprised if the yen suddenly plummets over the next few months/year. I see it as a long, slow move back to the mean.

Happoshu?

Thanks for the info....I'm still waiting for less than 100 Yen to the Pound though!

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If I am wrong then I would think about using my sterling to purchase dividend yielding FTSE stocks. I haven't thought it through though. I probably should.

But if I am wrong, I am not responsible for any losses you incur

:)

Can't provide a reference off-hand, but I have read that 86% of stock market trades are made automatically by computers using algorithms defined by traders, which causes a gradual increase on a daily basis. Only 13% are made by actual decision makers, causing a sharp rise or fall in a particular stock. 1% are done privately.

There is an army of cruisers out there pushing the FTSE (and other markets) up. At some point the actual value of these stocks will be realised, and the whole pack of cards will come tumbling down.

I'm not a financial guru either, no advice given here, just my perspective.

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It might end up a bit like the CHF in that every time they try to devalue it, someone else does it bigger and better and it lifts back up again. Like the US and China...until it's finally allowed by the markets to drop.

+1

This is indeed the most likely outcome. In a race to the bottom why would the rest of the world let the Japanese get there first?

As I see it the yen has only one place to go in the immediate future and that's up, choking the Japanese econ still further, forcing Japanese manufacturers overseas or out of business.

Domestic demand is unlikely to keep them afloat. Maybe Apple will buy up Sony for cash and get them to knock out Apple branded tv's?

:lol:

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Interesting FaFa.

Perhaps things can be drawn out for some time but it is highly unlikely the central banks can continue to maintain the delicate line between deleveraging/deflation and money printing and asset purchases for decades. If history is any precedent then you will be disappointed and inflation is coming.

Cash is generating poor returns at present. I would be interested to know how you intend to maintain your wealth during this 30 year depression?

GB

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I’d just like to point out that I am living in Japan

Then you should know that 'investment in large public works programmes' just increases government debt with no impact on the real economy. It's true that if there are programs the government intended to fund for good, rational reasons then now may be a good time if construction companies are lacking work and eager to take any contract for a low price, but throwing money at them just to spend it will not fix economic problems caused by too much government.

Edited by MarkG
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Propping up rent seekers

The change to LHA has not come into full force as of yet

No fire sale of BTL due the the reform of HB ? I think if you take a look at the one bed flat market you will be surprised, it`s in free fall around my way but on a whole it has not had that much of a affect as of yet but it will start to bite IMO interest rates are the key to the BTL time bomb ,but as it stands now TPTB prefer to see a death by a thousand cuts

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