I’m going away for a week and am unlikely to have time to write. So before I go I thought to mention a couple of things to think about.
First I am sure you’ve noticed the price of Petrol/Diesel. The all time crisis high in 08 was 119p/Litre for unleaded. At that time crude was selling for $147/barrel. We were being told those prices were a crisis and would cripple the economy.
Today Unleaded is at 116p -120p/litre depending on where you live. So we are back at all time highs again. And not a word is heard. It seems you really can boil a frog without his noticing, as long as you do it slowly, And the conundrum is that crude is selling for $85/barrel.
The suspicion is that the Big Banks are using some of the tide of government bail-out liquidity to speculate in equities, currencies and commodities. We know that JP Morgan leased a tanker to store crude while it waited for prices to rise. And they have. Fancy! Were they waiting or were they causing?
This is what happens when banks have free cash. They put it to work. But not helping those who are struggling. Struggling people are potentially bad loans. Banks aren’t in the business of helping. They are in the business of making money. Which is why I find it so odd that our politicians keep giving banks all the money and then tell us how the banks are going to lend and help. How long does it take for it to dawn that this is not the bank’s plan at all. Their plan is to make money the fastest way possible. They will say this is returning to profitability. The fact the profits were made in ways that hurt the rest of us, is deemed not mentionable.
How high will petrol go before anyone asks questions?
Second is the bond market. Sorry to go on, but its the Bond market that is the real measure of what is going on not the stock market. For this simple reason. The stock market measures how much money those playing in it are making. Are you in it? So it’s not measuring what is in store for you.
But the bond market does indicate what is in store for you. Because it tells you how much your government is going to have to pay because of the hundreds of billions it has given ( and I maintain – will give again) to the banks. Were it not for the money given to banks and borrowed to insure their losses we would NOT BE BORROWING at anything like the rate we are.
So when the bond market won’t buy debt unless they are given a higher rate of interest that DOES effect you. It impacts your taxes directly and almost immediately. Bonds tell you your future. Stocks tell you theirs (the financial class). It’s a crude division but essentially true.
And what is happening on the bond markets. Well UK Gilts ( our name for bonds) haven’t dome too badly so far. But that is because we have used a LOT of QE. Which when, not if, but when, we resort to it again will cause our sovereign rating to fall and our borrowing costs to go up.
Greece and Ireland are the future we don’t want to be marched into. Greece had a couple of failed bond auctions. Heralding high ( twice the German costs) and perhaps much increased borrowing cost for them. Portugal are going to go the same way. Ireland is in very dire shape.
The US is the important one. Because what happens there effects the rest of us. The US has HUGE debt sales. It has to sell around $139B next week alone! But this last couple of weeks it’s bond sales of 2, 5 and 7 year bonds were flops. They sold – because the FED bought whatever it took. But foreign investors and even foreign banks kept their hands in their pockets. Now that is bad.
The immediate result The yield on US debt started to march up. Yield on 30 yr went up to 5% which is a danger mark before Fed buying pulled it back but only down to 4.75%. The 10 yr went to 3.9%. The 10 yr is what underpins US mortgage rates. They are now at 5% and headed higher. High mortgage rates will kill any hope of housing and commercial real estate recovery. High rates will mean all the Option ARM resets will explode.
I think the signs are rates on US debts of all kinds are going to go UP further.
Can the US government allow this? Obviously not. So what can they do? They can, and will have to, force cash out of commodities and equities and back into bonds. The government did this before by pulling liquidity out of the market with large reverse-repo sales and other means. Such a move would bring bond yields down but at a cost of spiking the stock market down.
They are obviously waiting as long as they possibly can before doing this hoping that the longer they leave it the better the chance that the optimism about a recovery withstands the shock and the markets continue up. Will it work. I don’t think so. But who am I?
Those who believe in the recovery and the plan behind it will say to me what level of stock market recovery, what news of employment picking up is required for me to admit I have been wrong and admit there is a recovery?
My answer is that stock levels don’t convince me of anything except that those who have been given money by our government are making money with it. I see that as evidence, not of a recovery for you and me, but evidence of a separation of a finance economy from the rest of the economy.
I also answer that when I see a sustained recovery in employment and household consumption that too will help change my mind.
But most of all I WOULD ASK THEM, what level of national debt and level of yield on that debt will make them admit that all we have done is transform one crisis into another larger one. The risk of their impoverishment has been replaced by the risk of ours.
It’s not bank profits you want to watch it our debt. Not the stock market but the debt (bond) market. That’s where the danger lies.