Monthly Archives:

November 2006

Interesting innovations in fixed income – “CPDOs”

One of the latest fixed income innovations are CPDOs, which stands for “Constant Proportion Debt Obligation” – a bit of a mouthful I know. These new products are causing a stir because credit rating agencies such as Moody’s and Fitch have assigned CPDOs with AAA ratings, which is remarkable considering that they offer a yield of 1.5% to 2% above interest rates. So is there really such thing as … Read the article

Top dollar no more?

Today, the pound strengthened for the 10th day in a row, climbing to 1.96 against the dollar, the highest level since September 1992 (when the UK currency was ejected from the ERM). When I started in the City in 1985, the exchange rate stood at 1.05$/£, and if it breaks 2 $/£ it’ll be at the strongest level since 1981. What’s going on?


In one word, “globalisation”. American consumers make UK …

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Letter from Chicago

I was in Chicago on business on Friday. Up at 5am with jetlag I was able to take my time reading the Chicago Sun-Times. Two articles in there caught my eye. First was news of the death of Chicago’s own Milton Friedman. Friedman was the ultimate free market economist, arguing for an individual’s freedom to buy heroin, and against the necessity of having licensed doctors (the market would determi… Read the article

Private equity continues to dominate the investment headlines

Private equity continues to be in the news with ever bigger deals. Freescale, a semiconductor business, yesterday priced almost $6bn of High Yield bonds (the largest deal ever) to help finance the $19bn acquisition. The group of private equity firms wrote an equity cheque for $7bn which demonstrates just how much money they have been raising if they can invest that amount on one deal. Will it c…

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What sort of shape is the banking sector in?

A new report by rating agency Fitch (“UK Banks – Managing the Consumer Debt Burden”) suggests that although results for the banking sector in the second half of 2006 and into 2007 will be good, things will become increasingly difficult thereafter.

Further increases in personal bankruptcies and IVAs, together with a higher unemployment rate and interest rates will lead to those banks who have be…

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Bad news for students, but not so bad news for inflation

The Bank of England’s Inflation Report was less hawkish on the future path of inflation than we’d expected. The Bank’s targeted measure of inflation is forecast to return to its 2% target level by the middle of 2007, rather than 2008 as predicted in August’s Inflation Report. Given these projections are based on the market’s interest rate forecast (currently around 5.1% for 2007/08), this could…

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Putting Americans First, or Putting Growth First?

So nearly a week since the US midterm elections, and neither bond nor equity markets have seen significant moves. Is that right? After all, while we had all expected the Democrats to make gains, winning both houses of Congress was a bit of a surprise. The departure of Rumsfeld, and Bush’s acknowledgment that he could use suggestions as to what to do about Iraq were also not expected. So we have…

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Monetarism revisited

Goodhart’s law states that once you start targeting a certain statistic in the course of economic policy, the relationship between that statistic and the economy breaks down. Charles Goodhart was a Bank of England advisor, and the law gained publicity during the 1980s attempts by the Conservative government to target the monetary aggregates (broad money (M4 – money in bank accounts and circulat…

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Longevity starts to worry the actuaries

One of the biggest drivers of corporate bond returns over recent years has been demand for long dated assets by company pension schemes in order to match retirement liabilities. We think this trend will continue, not least because the length of time we are expected to live after we retire is increasing rapidly.

John Ralfe, the pensions consultant who famously switched the Boots pension fund ent…

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The Death of Disinflation?

Roger Bootle famously “called” the decade long fall in global inflation in his 1996 book “The Death of Inflation”. He predicted that globalisation would mean that an individual country could have low levels of unemployment without that generating inflation, as companies would outsource manufacturing (and increasingly services too) to cheaper labour countries.

Previously the academic model (The …

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