Monthly Archives:

January 2007

The Beautiful (expensive) Game

With all eyes on tomorrow’s inflation data (will Mervyn be forced to write a somewhat embarrassing letter explaining why inflation has breached its upper target ?) a report from the Virgin Money Group show football fans are suffering more than most. The Football Fans Price Index shows that the cost of attending games has risen 8.3% in the last three months and a whopping 17.1% in the last twelv…

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M&G Optimal Income – one month on

I thought it would be useful to explain the key positions in the new M&G Optimal Income Fund and how I am making use of the “wider powers”, so that readers can get a better understanding of my strategy for international bond (and indeed equity) markets.

A prevailing view over the past 18 months has been that the market’s expectations of interest rates have continually been too low, and my long-…

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UK rates up to 5.25% – “the risks to inflation now appear more to the upside”

The Bank of England has just hiked to 5.25%. Their statement is here. The Bank expects inflation to rise further in the near term, with limited spare capacity in the economy. However they do expect the impact of falling oil and the stronger pound to lead to inflation falling back in the medium term. The risks however are “more to the upside”. We think the Bank still has more to do.

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Default Rates – Where Do We Go From Here?

Moody’s this week published its December 2006 default report showing a fall from 1.8% to 1.7% marking its fifth consecutive annual decline and its lowest year-end level since 1996. Accommodative monetary policy, high levels of liquidity and a willingness to come to the aid of companies in financial difficulty has helped keep rates at historical lows. Worldwide in 2006, a total of 27 Moodys rate…

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The Wizard of Oz

I took Monday off to look after the nipper, and took him to see The Wizard of Oz at the wonderful Electric Cinema on the Portobello Road. You all know the film, but less well known is that L. Frank Baum wrote the book as a parable about US monetary policy. In the late 1890s presidential candidate William Jennings Bryan campaigned to have silver’s ratio to gold fixed at 16 ounces silver to 1oun…

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German VAT hike, and pay round begins – inflationary impact?

Germany hiked its rate of VAT on the 1st January, from 16% to 19%. Given the size of the German economy, the impact of this will be to raise Eurozone inflation by around 0.3-0.4%. Eurozone inflation is running at 1.9% year on year, only just below the ECB’s comfort zone (“below but close to 2%”), so during 2007 we’re likely to see price rises sufficient to provoke further rate hikes. There are …

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Technical backdrop for High Yield less favourable in 2007?

As many of you will be aware we have been concerned about the high yield market for a while now. Historically tight spreads do not, we believe, adequately reward investors for the risks that they are being asked to take although we have been well aware of the technical picture which has proved supportive of spreads. However, a piece put out by JP Morgan yesterday highlighted a few interesting p…

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Inflation – 2006 sector breakdown

Looking at the broad categories of the UK’s RPI numbers here’s a brief breakdown of where the inflationary – and indeed deflationary – pressures are occuring. The most recent inflation number we have is for November. The headline RPI was +3.9%, year on year.

 Components rising more quickly than average
– Fuel and Light: up 29.5% from a year earlier. Although crude oil prices were only up 11% ov…

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Information overload

Enron is still a case study for the rating agencies – they rated it investment grade 5 days before it went bust. Malcolm Gladwell has written an article (click here to read article) in the current New Yorker about the perils of having too much information to analyse and how everyone was missing what was going on at Enron even though the financial statements were revealing a lot of it.

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Pension fund black hole much bigger than previously thought

A recent report from the Pensions Regulator states that the UK’s pension fund liabilities exceed pension fund assets by £440bn. The calculation is now a little out of date as it was made on March 2006, so given that bond yields and equity markets have both risen since then, an up-to-date calculation would likely show that pension fund deficits are now marginally smaller. Nevertheless, the estim…

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