Light the Blue Touch Taper
Just two weeks after taking fright at the prospect of the United States government tapering off its quantitative easing programme, the stock market has again taken fright as Ben Bernanke, head of the Federal Reserve, has confirmed that possibility will become reality. The fall is wrong, overdone and irrational, just as it was two weeks ago.
I stand by my argument that the decision reflects the fact that the US economy is recovering reasonably well and that it no longer needs bolstering artificially. Bernanke is not threatening to do anything rash.
Tapering off the third bout of quantitative easing will not start until later this year and only then if the US economy continues to expand. The tap will not be turned off fully until the middle of next year. Again, this will be subject to further growth in the economy.
In other words, if tapering off QE leaves the economy struggling, the programme will not end even in 12 months’ time. There is plenty of leeway for fine tuning.
Apart from giving a signal that the US economy can stand on its own two feet, ending QE has much to commend itself. Even those strongly in favour accept that each round is less effective than the previous one. And the more money that is pumped in, the longer and more painful it will be to suck it all out again.
Until this week the FTSE 100 index had not closed below 6,200 points since powering through that level in January. I fear that if we slip lower we are looking at 5,900 points before investors realise that enough is enough.
At current levels the market offers some decent buying opportunities. Below 6,000 points and the case is compelling, although it will take a brave soul to venture in.
George and the Dragon
I would like to think that the Chancellor of the Exchequer reads this column and takes note but I suspect that I cannot claim credit for the fact that he has stepped back from what I described last week as a Gordon Brown moment and has opted for a sensible approach to the privatisation of Lloyds Bank (LLOY).
The big fear was that in an attempt to appease voters, Osborne would go in for some convoluted scheme to distribute shares widely and at a deflated price that would minimise the return to the Treasury, just as Gordon Brown chose the wrong moment to sell gold. It seems from Osborne’s Mansion House speech this week that he will let the shares go in large chunks through the City.
One appreciates that there will be an outcry over City advisers getting on the gravy train and I normally take the view that share sales should be spread as widely as possible but these are exceptional circumstances. Selling in well spaced tranches maximises the possibility of getting the government’s whole 39% away early at above the breakeven price of 61.2p.
The sales, until completed, will inevitably hold down the shares because investors will know that any rise in the share price will spark a further sale. However, the overhang is already holding them back, while the sale of the government’s holding will allow the shares to start moving upwards, assuming that Lloyds can demonstrate that it really has turned the corner and will be profitable from now on.
In any case, any private investor fancying a punt on Lloyds has the option of buying in the market now. This is probably as cheap as you are going to get in should you want to take the risk but do bear in mind that there is a long hard slog ahead with no dividends for the foreseeable future and no quick profits to be made.
Me Old China
Some interesting political and economic research was put out this week by Pauline Loong, a former colleague of mine in the halcyon days of the Far Eastern Economic Review and now managing director of Asia-analytica based in Hong Kong.
She argues that China’s policy on the renminbi is about re-positioning the Chinese economy, not growing GDP or exports. She says: ‘Rapid appreciation of the Chinese currency this year is about tough love for exporters and sweetening the market for the coming wave of "dim sum" or offshore renminbi bond issues.
Loong points out that the Chinese currency has risen 2.11% against the US dollar since the beginning of the year with sharp gains so far in June. She expects appreciation to continue to the end of the year, though at a slower pace. The twin goals are globalisation of the Chinese currency and a rapid and successful transition from cheap exporter to value-added manufacturer as the pool of labour starts to contract. A strengthening renminbi is essential for both these goals.
I reckon this analysis has considerable implications for the UK. A myth has grown up in the West that we are reliant on growth in the Chinese economy to keep the world going but all it has meant is growth for China and the mining companies supplying raw materials. If anything, in my view China has been squeezing other countries out of global markets and depressing economies such as the UK and US.
A weaker renminbi will help our exporters to find much needed new markets while Europe is depressed. On the other hand, the days of China as a low cost producer to replace manufacturing in the West are numbered (Hornby (HRN) and others who have followed this route, please note).
Trick and Tweet
I have finally succumbed to the argument that I am missing a trick by not tweeting and have opened an account or whatever it is called at twitter.com/rodneyhobson. You will not learn what I had for breakfast but I will be commenting succinctly on financial and investment issues day by day. Some of these themes will be expanded in this column every week.
And while we are on unashamed self publicity, can I mention that my second detective story is now available on Kindle. It is called Unlikely Graves and like the first one, Dead Money, is published by Endeavour Press.
Rodney Hobson is a long-term investor commenting on his own portfolio; his comments are for informational purposes only and should not be construed as investment advice.
Morningstar’s Most Popular
Be Careful What You Wish For: FTSE, RBS and Gold
THE WEEK: Morningstar columnist Rodney Hobson shares his take on the latest FTSE falls, talk of the government selling its RBS stake and the drop in gold prices.
4 Tips for Finding a Sustainable Dividend
VIDEO: Morningstar's Todd Wenning shares his four top tips for finding a company that can reliably pay out a dividend year after year.
Bogle: Yield Seekers Shouldn't Go Out on a Limb
VIDEO: Investors may need to stretch for a bit more yield, but to get entirely out of a very safe bond index fund and into riskier fare should be unacceptable, says the Vanguard founder.
The 12 Safest Dividends in the UK?
Morningstar analysts dig the data to try to find the most stable dividend-payers on the UK market.
Watch Out for These Signs of a Dividend in Danger
VIDEO: Morningstar's Todd Wenning tells us his list of important signs to watch out for if you own a stock for its dividend.
