Monthly Archives:

February 2008

Keep a very close eye on the money supply

The chain of events that led to the Great Depression were extremely similar to the ones that led to the ‘lost decade’ in Japan. Firstly loose monetary and fiscal policy led to real estate and stock market bubbles. Then the bubbles popped, which resulted in a sharp fall in demand for housing (and a fall in housing investment), bank failure (since the banks had become reliant on asset prices risi…

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US housing downturn worst since Great Depression – and getting worse

Investors are almost becoming blasé to dire US housing market data releases, but the reality is that things are getting worse and worse.

The monthly S&P/Case-Shiller figures that came out on Tuesday showed that the US housing market downturn is now more severe than the one that led to the US recession in 1991. As the chart shows, the S&P/Case-Shiller Index Composite-10 Index fell by 9.8% in th…

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Save the banks, save 5130 lives

Our banking analyst pointed out this academic paper to us. The joint work by the Universities of Cambridge and California shows that banking crises cause a significant increase in deaths from heart disease. In developed countries the increase is 6.4%, and for poor countries 26.0%. The authors estimate that a severe UK banking crisis would result in up to an additional 5130 deaths. It concludes … Read the article

Stag yes, flation no

Markets have rapidly moved towards our long held view that the global economy is slowing aggressively, and that recession is imminent (or already here) in the States. However it seems that the consensus is that this growth slowdown will be accompanied by strongly rising consumer prices – in other words stagflation. I don’t believe that’s likely. The consequence of a global banking crisis (and t… Read the article

Porsche outmanoeuvres the banks

Porsche is beating the banks at their own game. In the ‘go-go’ pre-credit crunch days, the banks gave Porsche an overdraft facility, whereby Porsche had the option to borrow €10bn at a cost of only 0.2% over LIBOR. The banks will now be regretting that they’d offered this credit facility.

Even though we are now in a full-blown credit crunch, Porsche is still able to borrow from the banks at 0.2…

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Full steam ahead for the gilt market

Gilts have been going at a rate of knots, thanks to the squall that has been the credit crunch. The benchmark 10 year gilt yield plunged from 5.46% at the end of June 2007 all the way down to 4.51% at the end of December, and UK government bonds returned 8.6% in the second half of 2007. It was the best half year since the shipwrecks of H2 1998 (a period that saw Russia default and the collapse … Read the article

Chart of the day – emerging market bonds vs high yield bonds

Emerging market sovereign bonds have had a fantastic run. Since the beginning of 2003, Russian government bonds have returned 78%, while Brazil has returned 172%. Ecuadorian government bonds have returned a massive 253%. But we’re not interested in historical returns, we’re bothered about future returns. Are emerging market bonds good value now?

This chart shows the spread (ie the excess yield…

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AIG woes highlight the curse of the football sponsors

First Man Utd drops points to Arsenal, and then Man U’s shirt sponsor AIG admits that losses on credit derivatives were $4.88bn in October and November, four times worse than the company had previously stated. AIG’s auditor, PricewaterhouseCoopers, found “material weakness” in AIG’s accounting treatment of credit derivatives. AIG’s shares fell by 12% on Monday, the biggest one day fall in the c…

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European recession will put a huge strain on European Monetary Union

After a few teething problems, it’s not contentious to say that the euro has been a success. Helped by the US dollar’s demise, the euro is gradually becoming a rival as the reserve currency of choice for central banks. European unemployment has plummeted, and the European economy probably grew at around 3% last year. Some countries have boomed – Spanish economic growth has averaged about 4% ove…

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US Treasuries : the last asset bubble?

I enjoyed this article, entitled “The Last Asset Bubble“.

US treasuries have enjoyed an incredible rally, returning 11.2% since the end of June. This has been driven by the sub-prime debacle and the Fed’s decision to cut rates from 5.25% to 3%.

Treasuries have also been supported by panicked investors fleeing from other AAA asset classes that are no longer AAA in any real sense of the word. The…

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