To market, to market to buy a fat pig. I could almost hear Bill Lawry shouting, "what a ripper!" in the same way that he would to a classic Shane Warne delivery, but this time it was about markets yesterday. It is not too often that we see a rally that is that broad based. Stocks flew off the shelves faster than a cronut. Err... what is a cronut? Well, a cronut is actually part croissant and part donut. This is possibly the newest and hottest pastry to come along since ...... ok, I have no idea. But if you are interested, read here -> Cronut!
Now that I made you hungry and wondering why these things would be sold out in less than an hour and queues around the corner. I kid you not. Also not kidding was the fact that Mr. Market, the Jozi all share index, closed at another record high last evening. Up nearly a thousand points to 44302.94, pencil that in as your all time high now, on your door frame.
We had the local Reserve Bank delivering their MPC statement, post their meeting: STATEMENT OF THE MONETARY POLICY COMMITTEE. You can read it, I am not too sure that you will be enlightened after all is said and done! The inflation outlook remain dependent on factors that of course beyond our control. We cannot tell what inflation will look like in a year from today, the oil price could be 20 percent higher or lower (or not at all) and the currency could be all over the map. Being part of global markets it means folks have the ability to punish countries, like India (perhaps unfair) when they feel things are out of kilter. And rates went up in India overnight, so perhaps our bank could move quicker than you think......
Amazing fact of the day. Something that you will struggle to absorb. There are 60 billion animals on the planet, and I am not talking about all of them, only the ones that are available for our eating and usage. Eggs, meat, dairy and leather. Wow. At current growth rates in meat consumption (more people eat meat as we get get richer as a collective), we will have in 2050 as many as 100 billion animals on the planet. Roughly 10 and a half animals per person in 2050 and right now around 9, you see what I mean? If these projection rates are correct, there are going to be some serious investment choices and opportunities around this conundrum, feeding everyone and making sure we keep pace with expansion.
As of yet, Thomas Robert Malthus has not been proven right, 200 years later we are finding better ways to feed ourselves as a collective, if not the best distribution methods. The problem with the thoughts of academics that we are doomed because of x or y or z is that they attract us and pull us into their line of thinking. After all, if someone is a doomsday prophet, they must know something else that we do not? So therefore many people hang onto their every word. It is not too dissimilar in equity markets, when someone tells you that their model indicates financial Armageddon, everyone assumes that the person in question must know something that everyone else does not.
Rather listen to the people that run the business of which you own stock, because they both work for you and know the business better. Be more diligent about reading the annual reports and making sure that you can understand it (the business) better.
Oh, and markets are no doubt going to start the day a little lower, some of the excitement has disappeared a little. And I guess the realities are that the Fed are waiting for something to really improve. I had a wonderful reply from a friend who had this to say on why he thought that the Fed did nothing:
"I think everything in the USA is political. The White House and the Democrats are already positioning their campaign for the 2014 Senate and House elections. They would like to go into these with the markets becalmed. The new Fed chairman/woman (if there is one for I think Dr. Bernanke himself would like to stay on) can always say he/she is not confident of the extent of the recovery from 2007/2009 and would like to extend the stimulus. There is also a looming problem in Congress over extending the debt limit which could get ugly as the Republicans are being out foxed at every turn by the White House. That is why their language is becoming so strident.
Nobody actually knows how strong the USA economy is. I have come to realise that economics is neither an art or a science. It is a philosophy, with all the assumptions that that entails. The USA economy is just too big and diversified to be defined at any one point in time in outdated economic concepts.
Finally, unspoken, is a potential threat emanating from China where the shadow banking system is weighed down by bad debts and irrecoverable loans. I think the Fed wants to keep its powder dry until the above two problem areas are clearer as to their potential threats to financial stability."
Deeper insight to the Fed, which essentially is supposed to operate at an arms length away from the government, and their associated activities. Very useful, thanks!
Michael's musings! More money please sir (part1)
Yesterday morning we woke up to the FED having decided that they were not going to cut back QE 3 spending, resulting in stock markets reaching record highs and gold being up more than 4%.
What does it all mean? Let's start with what is QE and how does it affect the average person. QE 3 is where the FED (the American central bank) is buying treasury bonds, $ 45 billion per month, and mortgage backed securities (MBS), $40 billion per month. The reason for doing that is to push down interest rates in the economy, with added emphasis on housing market interest rates. The desired effect of lower interest rates is to stimulate the economy, to get the economy growing and employing people again.
The claim that all this 'printing of money' will cause high rates of inflation has turned out not to be true. The reason is due to inflation being the result of increased demand from consumers because they have more money to spend, the key being that consumers need more money, which has not been the case. Why not if there is all this 'money printing'? The reality is that the only way to create money in an economy is when banks lend individuals money (blew my mind the first time that I realised that banks create money when they lend out money), which banks have not been doing. Banks need a certain percentage of high quality assets for every dollar that they lend out, which they do not have due to increased regulatory requirements.
So where has all this money from the FED gone? There are a couple of places, the first being to the government to fund their spending, which has resulted in marginal amounts of inflation from this money. The next is where the banks are selling their assets (bonds and MBS) to the FED, meaning that one asset (bonds and MBS) being exchanged for another (cash), resulting in no change on banks' balance sheets. The cash has to go somewhere though, and this cash has flown into equity markets or to money markets. Money flowing into equities, pushing up prices, is good for everyone because most people have exposure to the stock market, either through direct holding or through our pension plans.
QE 3 is not printing money that will just lead to high levels of inflation which is sometimes the misconception. What QE3 is doing is to keep interest rates low in the economy, to assist in helping the economy to grow. QE 3 will lead to low levels of inflation, but inflation is not a bad thing if it is stable and at low rates, and is better than the alternative which is deflation.
part two next week will look at what QE 3 means for investing.
Home again, home again, jiggety-jog. German elections are over the weekend. I am nearly finished with the Michael Lewis book Boomerang, which is actually very funny, I recommend it. Not for everyone actually! He talks about the Germans a lot and how they obey the law, a lot. And how they understand that German finances are at risk with peripheral Europeans pushed the envelope. I suspect however that regardless of the outcome of German elections, and the expectations are for Angela Merkel to win (her coalition actually), expect the status quo to continue. More of the same. Such is a society that has advanced to a super aware one, the Greens get around 8 percent of the vote and are lobbying for one day a week to be meat free. Yes. Really. On a Thursday, cleansing before the weekend of course. This is what rich societies talk about you see. Take care, see you Monday!
Sasha Naryshkine and Michael Treherne
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