Friday, 23 December 2011

The Crunch

Crisis on the continent persists. Bund's not sold. Greece yet again needs more time and money. The Iberian peninsula looks decidedly shaky. Portugal's borrowing costs rise and the public go on strike, just like many other nations throughout Europe. A change of leaders in both Spain and Italy won't solve the problems, just like it hasn't solved anything in the UK. Spain moved to the right, with  Rajoy looking similar in make-up to David Cameron. Sound-bites but little substance. 

The ECB have "loaned" out another ton of money to keep the system afloat for the short term. The French Politicians had a spat with the British Politicians to take peoples mind away from the declining living standards all Western nations are experiencing.  

General strikes not seen since the 1970's flared up in the UK. People are getting angry and after the Chancellor declared that recovery may take longer than initially expected, theres no sign of that feeling abating. There will still be a budget deficit at the end of parliament unlike when the Government claimed it would be gone. Cuts entails further budget shortfalls but politicians and members of the public forget such realities.

The Bank of England continues to be in the Government debt buying game. George Osborne points to the lowest bond rates in history, forgetting that we never bought our own bonds during any previous period, excusing radical policies during war time. It reminds me of what I wrote when all this QE started

The statement that they made sent a signal out to the market, "If there are no genuine buyers of government debt, then we will buy it". Hence the first market bond sale after this statement was made saw huge amounts of buyers with the auction being oversubscribed. The market is now playing the governments game, a game of the last one to hold the debt will get burned, and the market is thinking that will be the Government. In the future all Bonds will be bought by the Government, with all other sellers rushing to sell. It's a classic Ponzi scheme, where the whole pyramid exists on the premise of selling to the bigger fool.
Over the short run they can bring the price down, but over the long run the price will go higher than expected. The countries in the Euro don't have such a mechanism as they are on a Pseudo Gold Standard. Problem being the Gold Standard is nothing more than a fiat standard and like any paper standard is worthless in the long run. The Euro is no different.

The autumnal budget didn't contain much festive cheer. Pension ages raised. Public Sector pay capped to 1%, despite inflation running at 5%. Hundreds of thousands of job losses. The Government finally admitted they won't be able to control the budget by the end of parliament. Eighteen months into their term and they are still blaming the opposition, but there's only so long that lasts and peoples patience is running thin. Four years into the crisis and pay packets are  not keeping pace with living costs, the golden goose which was housing has flat lined and now when you retire your pension is continually been reduced. 

Its classic basket case economics. Stagflation. Socialism. Running faster to stand still. The only predictable thing is the Gold price. Solid as a rock during volatile times and it continues to be the investors ultimate safe haven making continual gains. Its still only the unconventional investors choice with the recent dip being part of the healthy bull run, another buying point for the few. People are waiting for their gilts, stocks or real estate to make a turn. Others have no idea of what to invest in as to many there appears no light at the end of the tunnel.

The FTSE like many other stock markets gyrates wildly on a daily basis. Stuck in a trading range, the fluctuations are from market instability and State interference. The bear market in bonds has only just begun. With rates in Italy hitting 7% people have pondered whether to buy, but they would be catching a falling knife. The rates will no doubt go back down like many European bonds in the short term as the ECB will in all probability ease its monetary policy (as they have already done with the loan process) with its new president, but don't be fooled, its a mugs asset class, best left for the pros. 

Looking at other bonds, the UK, Japan and the US look like a great sell currently. Private banks don't care. They always know the respective central banks will be the buyers of last resort when no one else is in the market for the  worthless paper promises. 

Chinas Central banks loosens bank reserve requirements while the Bank of England's Governor requests UK banks to check their capital. Recession defined by the states manipulated statistics looms once more, although most people feel like we are still stuck in a permanent one as living standards for the majority decline. Credit Crunch part two? We never solved the initial one, and the storm is going to get worse.

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