Tonight: the Ascent of Money – Monday 24th November, 8pm Channel 4

This second episode of historian Niall Ferguson’s series on the story of money and finance, The Ascent of Money, is probably worth a look.  It’s apparently going to cover the development and importance of bond markets, and although it includes an interview with a minor US bond fund manager rather than one of your friends at M&G, it will be interesting. 

Meanwhile it’s time for a quick competit…

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Driven to Bankruptcy?

I’m sure it won’t have escaped most people’s attention that the big American car makers are suffering at the moment – sales by the big three, GM, Ford and Chrysler were down 23% last month. Both GM and Ford announced last week that they have been spending their cash reserves at a hefty pace, and GM has said that it could run out of operating cash as soon as the end of the year.

This has lead so…

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Turning Japanese I think we're turning Japanese I really think so

Yesterday it was announced that UK CPI inflation for the month of October was minus 0.2%.  The annualised rate of inflation dropped from +5.2% to +4.5%, the biggest year on year drop in UK CPI since April 1992. Inflation expectations have plummeted.  The 5 year breakeven inflation rate, i.e. the rate of inflation priced in by the UK index-linked bond market, is now -0.1%.  In other words, the U…

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Explaining the current unprecedented credit spreads: "It’s the economy, stupid"

Is it? Well kind of. Credit spreads (ie the excess yields on corporate bonds over government bonds) are very closely correlated to the strength of the underlying economy – when times are good, investors demand a small risk premium, and when things turn nasty, investors demand a much bigger risk premium. Right now, credit spreads are at almost unprecedented levels – see the chart in Richard’s re…

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Rates – how low can they go?

We talked about the possibility of Japanese-style zero interest rate policy (ZIRP) heading to the western economies in a recent blog. Today we had an unexpectedly large rate cut from the Bank of England, with the policy rate hitting 3%, its lowest level since 1955, when Winston Churchill was Prime Minister. In this link to a 3 minute video I recorded this afternoon you can look into my wild, st…

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The Great Credit Crash

Since May 2007, we’ve seen the Great Credit Crash, with the fastest and sharpest sell off in credit that the modern world has ever seen.   In the US, in May 2007, the average BBB corporate bond yielded just 120bps (ie 1.2%) over a government bond.  The figure was 699bps as at the end of yesterday.  BBB rated bonds now yield 10% on average in the US and UK, and almost 9% in Europe. This chart is…

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When rates get to zero, what happens next? Quantitative easing

Later today the Fed will probably cut US rates by 0.5%, down to 1%. After this we’re only a couple of cuts away from a zero percent Fed Funds rate. When rates are at 0%, what can a central bank do to stimulate the economy? Well some possible answers are found in Japan, although with its economy still struggling to print positive growth numbers a full 18 years after its bubble burst, it may not …

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What's the risk of governments defaulting?

The vast sums of money being thrown by governments at banks right now have clear implications for developed countries’ credit worthiness.  Meanwhile, emerging market governments are facing a crisis of their own.   I thought it would be useful to have a look at which countries the bond markets say are at greatest risk of default, both developed and developing.

The attached chart from Bloomberg …

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Deflation might be coming, but will it really stay until 2018?

Inflation-linked bonds around the world have seen heavy losses in the past couple of months. 30 year UK index linked gilts are down by nearly 20 points (15%) since August, with similar selloffs seen in the US and European markets. After the inflation scare of the first half of 2008, with oil hitting $140 per barrel and food prices rocketing, the markets are suddenly realising how quickly global…

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The 2008 Great Crash – an historical perspective

It’s always very hard trying to get a sense of historical perspective, particularly when you’re living through something that will be discussed and debated long after we’re all gone. I think this chart helps. It shows the S&P going back to January 1928, and I’ve used a logarithmic scale so that you can get an idea of how this crash compares to those that occurred in previous eras.

The 30% fall…

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