The price of everything

This, too, shall pass

“Gentlemen prefer bonds.”

 

-       Andrew Mellon.

 

 

All good things must come to an end. While many within the investment community have been wondering aloud whether stocks have entered a new bull market – unlikely, we feel, unless equities have now become inversely correlated to economic fundamentals – some of us have been increasingly wondering whether government bonds, most notably UK Gilts, but not ignoring the 1,000 lb gorilla that is US Treasuries, have entered a new bear market.

 

Even to suggest as much is to fly in the face of much economic theorizing – which is surely as good a reason for doing so as any. Conventional thinking has it that Gilts are the “go-to” asset in a supposedly deflationary recession, and a number of fund managers – most notably Eclectica’s Hugh Hendry – have gone on record with their fondness for owning government debt.

 

Put, just for one moment, the theorizing to one side, and simply look at the price action. Gilt yields, which move inversely to Gilt prices, have started rather ominously to rise..

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On optimism and chocolate teapots

“MP BECOMES FIRST EVER PERSON TO FORGET HE HAD PAID OFF HIS MORTGAGE

 

“..Martin Bishop, from Darlington, said:

 

“Complete strangers will remember where they were and what they were doing when I pay off my mortgage. I fully intend for it to be this generation’s Kennedy assassination.”

 

-       From ‘The Daily Mash’, motto “It’s news to us”.

 

 

Suppose they threw an Economic Recovery but nobody came ? The last few weeks have seen all kinds of motley rent-a-quotes pontificating about green shoots, or rather a slowing down in the rate of economic deterioration, but a slowdown in the rate of something worsening is hardly the same as a recovery, not least because all economic data are inevitably subject to subsequent revision. And if existing data are unreliable, how to describe the accuracy of economic forecasts ? The Bank of England, for example, in its quarterly inflation reports uses “fan charts” that reflect various probability distributions. The problem with their latest projections for UK GDP is that they are all over the place; forecast output growth for 2011-2012 is seen at anything from +6% to -2%. Well, thanks for that.

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A bull market that few are buying

“We refused to touch credit default swaps. It would be like buying insurance on the Titanic from someone on the Titanic.”

 

-       Nassim Taleb.

 

 

It’s not just what you know, it’s who you know. And it’s not just who you know, it’s who you pay off. As the Center for Public Integrity reports (as cited in last week’s Financial Times), the largest US originators of subprime mortgages spent roughly $370 million on lobbying and campaign donations in Washington during the past decade in attempts to stave off tighter regulation of their industry. The study

 

“shows that most of the top 25 originators, most of which are now bankrupt, were either owned or heavily financed by the nation’s largest banks, including Citigroup, Goldman Sachs, Wells Fargo, JP Morgan and Bank of America,”

 

who collectively originated $1 trillion in subprime mortgages (almost three quarters of the total) between 2005-2007. That $370 million was money well spent though, given that it was followed, in turn, as the mortgage market imploded, by $700 billion – so far – in troubled asset relief funds – otherwise known as taxpayers’ money. Who said crime doesn’t pay ? That’s a return on capital some 1,891 times bigger than the original “investment”. Now that’s leverage. Strangely enough, US politicians have been largely silent about their own complicity in the theft of the century.

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Debt, doubt and disease

“I respect faith, but doubt is what gets you an education.”

 

-       Wilson Mizner.

 

 

You come to realise just how vulnerable the modern world is to sudden distress when you play Dark Realms Studios’ Pandemic 2. The game has you in the role of a contagious disease and you gain points by spreading infection (which, of course, meets the accusation of appearing tasteless, but the game predates the current outbreak of Swine Flu by at least a year). Throughout the game, aircraft gently scud across the globe and ships slowly track across the oceans; their freight may or may not be deadly. Our convenience of modern transport comes at a price.

 

And infectious outbreak is the perfect metaphor for the storm that has raged across markets over the past two years. For disease, read credit. For plague carriers, read banks. And, in their turn, homeowners, and investors. Very few of us were immune..

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