Inverted yield curve (again)

ReportInvestor

I'm not invested in coporate bonds or gilts or PIBs or anything similar.

Another factor propping up these investments is that you can get most of them to pay tax free interest in an ISA if you are a 40% taxpayer.

That has a further distorting effect on the market IMHO.

ManAtHome

Deemy wrote:

The way I see it an inverted yeild curve is discounting lower inflation in the future, not necessarily a recession, which basically says that China , India and others will continue to exert deflationary pressures on prices in the western economies.

But on the otherhand we can see commodity bull markets taking off which imply higher producer prices

So that implies the long dated bonds are pricing increased productivity i.e. new technology.

What else ?

Worryingly for the western workers - cheaper labour?

Edit - sorry guys, originally put 'economies' instead of workers - the west will continue to outsource so companies will probably be ok in the short to medium term.

Deemy

blinko wrote:

so am i right in thinking that you guys are saying that the markets arent going to crash or at least not the equity just the bond !!

If bonds crashed so would stocks.

As the stocks have tracked the side to upward trend in bonds over the last 2 years or so.

Deemy

ReportInvestor wrote:

I'm not invested in coporate bonds or gilts or PIBs or anything similar.

Another factor propping up these investments is that you can get most of them to pay tax free interest in an ISA if you are a 40% taxpayer.

That has a further distorting effect on the market IMHO.

I have indexlinked goverment stock, thats done quite well (i.e. 10% per year cap gain), thats despite inflation not taking off ! Which suggests either that there is a lot of inflation coming our way pretty soon, OR somethign is seriously wrong with the way we presently measure inflation, perhaps out dated models ?

Offcourse it could be down to the buying frenzy of any type of goverment debt thats going on for the last few years. But more probably a mixture of all three.

blinko

but surely the purchasing of government debt shows that alot of people have faith in the UK economy doing well !!

blinko

p.s deemy just wondering if you use betfair and do you know any good games to play there or any other casino kinda thingys you would recommend.

Deemy

blinko wrote:

p.s deemy just wondering if you use betfair and do you know any good games to play there or any other casino kinda thingys you would recommend.

I don't use betfair, I use IG index (a spreadbookie) for a lot of market plays.

Deemy

blinko wrote:

but surely the purchasing of government debt shows that alot of people have faith in the UK economy doing well !!

Yes, but that does not mean they are right, well they are right for as long as the bond markets continue to track upwards.

Lets see what happens, if we get the recession or not that an inverted yeild curve suggests...

On the other hand if we get strong economic growth ! :eek: !!! Then you would get a rising stock market AND a falling, perhaps crashign bond market !!!

Oh well... ... just errr.... keep your light investment trust stock portfolio (say 15% of total assets) for the long-term, and some index linked goverment stock ... in the long-term you'l do fine...

What do I want to see happen ? As to whats actually happening ?

A fall in the stock market so I can buy back in ! , well it is already happening in many of the stocks I liquidated i.e. Shell, vodafone, but not so in many others i.e. UU, and Lloyds. I suppose 10% or so on the indices. I posted a while ago on the election and other cycles as to possbile reasons for a tough year for stocks in 2006.

What implications does the bond market have for such a scenerio ?

It would mean that the bond market is wrong, and much of the theory is wrong, that much of the western world is not going to go through a recession, either this or next year or even the year after.

When this realisation dawns on the bond market then it will fall hard and be protracted as rates continue to rise.

The initial plunging bond market would suck stocks lower - temporarily

Well, I suppose thats the bond scenerio that matches what I guessed the stock market would do this year.

ReportInvestor

Deemy wrote:

I have indexlinked goverment stock, thats done quite well

Offcourse it could be down to the buying frenzy of any type of goverment debt thats going on for the last few years.

I think it's primarily that.

The company pension funds and insurers re annuities and having to move with profit funds out of shares. Too much money chasing the asset class.

blinko

what about me im inveted in india, japan and commodities would i at least get some return from a spike in gold if such a recession thing did happen.

and would it affect japan and india ??!!