We're all going to have face it, we're addicted to......?

11 October 2011

We're all going to have face it, we're addicted to.......?

Indefinite stimulus can't work - because it gets less and less effective each time, ultimately becoming counter productive. Who says so? Well none other than yours truly - speaking to Money Channel's Banphot Thanapermsuk on News at 10 last Friday I noticed just how quickly the announcement of a further GBP 75 Billion of QE to go with the 200 billion already done had already been turned on its head by almost the entire UK banking sector and some of the commercial property sector being downgraded, meaning that the markets will now know that there can't be any more quantitative easing to come - what are they going to do - keep printing money again and again and again until they bankrupt their own banking system creating easy money,,. It's a clear sign to the UK. Ratings agencies are saying "This is madness - you have to stop this!" This will totally nullify the effect of the QE because people know that there isn't any more of this coming down the line. A similar situation applies to Europe although there is the difference that QE in Europe is seen as a transfer mechanism of liquidity and security from the core nations to The Club Med, but if anyone does their sums they'll see that the EFSF is, at its core level really only able to fully support Greece and to assist Ireland and Portugal as well but it's certainly not big enough to deal with Span and Italy as well. I absolutely agree with the ratings agencies - we agreed with S&UP downgrading the US credit, even if it did prompt Timothy Geithner to go on TV behaving like a spoilt child who'd just seen someone run away with his sweets, complaining, almost crying. Yet S&UP were right then and the agencies are right today and have been right with the downgrades to Greece, Spain, Italy and other European sovereigns and banks. If only they'd done this a few years earlier when all the crazy credit was being given AAA ratings then a lot of the worst excesses would have been reined in before but better than never and it will be a good thing longer term if the ratings agencies rein in the palliative effect of QE by making sure that no more can come down the line to follow it. GBP 75 Billion in its own right is so insignificant in relation to the size of the debt that it won't make any kind of a dent. Markets rallied on the rumour but now that we know that there can't be any more to come, it'll just disappear like a very shallow puddle of water on a hot Bangkok sidewalk evaporating into thin air, there one minute and gone the next. It's not going to have a lasting impact, it's not enough to spur a meaningful rally. If people believed in indefinite QE and support and stimulus then maybe there'd be a rally until the folly and futility of this becomes evident but as it is, everyone know that this is an isolated meaningless gesture. The ratings agencies have just pulled the rug from under the central bankers and policy makers. If only they'd done it sooner............................" You can find this at http://www.dcs-digital.com/moneychannel/program.php?listid=9 Click on October 7th on the calendar and advance the slider to around 51 minutes.I'm sure that we'll pick up on this theme on Wednesday's Squawk Box Asia from 05.00-08.00 Bangkok time when I'll be rejoining the award-winning Squawk Box team at the SGX. More importantly, this was a theme that the manager who's jointly responsible for overseeing the majority of MBMG client portfolios picked up on yesterday, when talking to Trustnet''s Joshua Arden.Martin Gray echoed the idea that the UK’s second bout of quantitative easing (QE) will have a negligible effect on the performance of equities in the coming months.

"There could well be an asset rally maybe in the short-term, but I don’t think we’re going to see a sustained bull run or anything like that......Short-term surges don’t interest me; I’m not a trader, so I’m not going to try and time the market perfectly......I just can’t see how markets can rally, given the poor GDP figures we’re expecting towards the end of the year.......Everyone is banging on about how cheap equities are, given that their price-to-earnings ratios are historically cheap. However, I’m not convinced US corporate earnings are going to be any good in the third quarter." It's worth setting these remarks in the context of Martin's performance relative to that of his peer group:

Cumulative performance (%)	1m	3m	6m	1y	3ys	5 ys
Miton Special Situations Portfolio (B Cls)	+1.0	+2.0	+5.6	+5.1	+33.1	+47.3
Balanced Managed Sector	-1.6	-10	-8.7	-3.6	+20.8	+6.4

While the CF Miton Special Situations Portfolio remains defensively positioned relative to its sector, Gray still sees potential for upside if the markets recover more quickly than he expects - "I’ve added around 10 per cent in risk assets this year. I have 15 to 20 per cent of the portfolio invested in Asia, which I’m very happy with......In August and September I added to my Asia and Japan weightings. I also wanted to increase my property exposure, but that hasn’t worked out for me yet....I won’t be adding to risk assets unless the markets drop away substantially."

Miton Special Situations Portfolio has 28 per cent of its assets invested in equities – an underweight position of more than 40 per cent relative to its sector.

Like me, Martin doubts whether QE will have a positive impact on the economic recovery -

"I really hoped they would come up with something a bit more inspired than buying up more gilts....By doing this, they’re essentially saying banks are in worse shape than they thought. It’s not going to help households with spending, and I don’t think its going to encourage lending or employment either.......It’s a bit like giving a patient morphine; the more you give them, the more they are going to need in the long-term.....This is potentially very dangerous. As we’ve seen in the Greek bailout, there comes a point when you run out of money.......The UK government already owned a big portion of the gilts, but now it must be close to a third of the entire market, including index-linkers. It will be interesting to see if they plan on unwinding their share." Whatever they plan, maestro, they're now at the mercy of the markets. The ratings agencies have made sure of that when they suddenly discovered that they do have a spine after all."

Paul Gambles