Whoops - BOE downgrades forecast and backs up labours concerns

thor

Rinoa wrote: »

Growth estimates will always fluctuate. Shows how far we've come though when an estimated fall from 2.9% to 2.5% is flagged up as cause for concern.

We can all remember the OP gleefully extolling the possibility of a triple dip recession.

If the economy is doing so well, how come the base rate has not moved from it's record low for 5 or 6 years?

Generali

wotsthat wrote: »

Wouldn't this be priced in to share prices?

Nope.

I can't remember the precise figures but the Fed reckons that the Fed Funds rate will be a little under 2% at the end of 2017. The market has it below 1%. Someone is very, very wrong.

The value (traditionally) of a utility stock with interest rates at 1% is very different to its value at 2%.

The market is chasing yield right now. I think that's a secular issue because of the aging population looking for income. That will make things very interesting as the market will be pulled in two directions: people looking for yield and that yield being worth less as you can get it by buying bonds or just sticking your cash in the bank.

Interesting times my friend.

chucknorris

Generali wrote: »

Nope.

I can't remember the precise figures but the Fed reckons that the Fed Funds rate will be a little under 2% at the end of 2017. The market has it below 1%. Someone is very, very wrong.

The value (traditionally) of a utility stock with interest rates at 1% is very different to its value at 2%.

The market is chasing yield right now. I think that's a secular issue because of the aging population looking for income. That will make things very interesting as the market will be pulled in two directions: people looking for yield and that yield being worth less as you can get it by buying bonds or just sticking your cash in the bank.

Interesting times my friend.

I was hoping that you weren't going to say that, but when I saw your id as the last poster on this thread, I kinda guessed that you might say that. As I respect your opinion, I might have to have a rethink on my strategy. Maybe I was being too optimistic and dismissive in my previous post:

chucknorris wrote: »

I am beginning to doubt that there will be a significant sustained meaningful correction, I do think that there will be a knee jerk reaction when USA rates start to move, but I think any downturn may be short lived. I might be wrong of course, but I am hoping to put my money where my mouth is, I see it as a forthcoming buying opportunity. I say hoping because that depends on having cash available outside the market when it falls, I never feel comfortable with my strategy over that. As far as I can see convention is to have something in bonds, but I think bonds will be hit hard when rates go up, so I am avoiding bonds. At the moment I am doing what you are not supposed to do, I am dipping in and out (only partially, not completely) when the market looks high, and buying back in on small dips. I do realise the dangers of this, i.e. that I can miss out if the market surges whilst I am partially out. But I am comforted by the fact that I am locking in some profit, and also giving myself the chance to be out of the market if there is a correction.

Would you (are you) keeping out of equities? It is difficult to know what to do at the moment.

Generali

chucknorris wrote: »

Would you (are you) keeping out of equities? It is difficult to know what to do at the moment.

The problem is you have to be in something.

Fixed income looks very expensive right now. I mean a third of the bonds in the main benchmark we use for Fixed Income has a negative yield. That means that for a third of bonds in the index you are going to lose money if you hold to maturity.

That is what we economists call 'Absolutely F@#$ing Crazy'. I strongly suspect that the fixed income market is going to see a huge amount of volatility once the Fed increases rates.

The structural problems from ZIRP/NZIRP policies are also becoming clearer. Swiss pension schemes have to pay what amounts to an annuity rate of (I think) 6.25%. I can't remember the actual figure but that is immaterial. What is material is that within 10 years, if the Swiss keep rates negative every Swiss pension fund will be bust. (Google it if you want more details).

In addition there's the insurance industry. When you take out insurance, the chances are you'll make a claim at some point. If you take out life assurance you will definitely make a claim! As a result, insurance companies hold what Warren Buffet calls 'float'. Float is the money that you know you're going to have to pay back to your clients at some point but for the time being you get to make money from.

Now Mr B's insurance companies happen to make an underwriting profit so this float is just a nice little bonus. However, there are a huge number (the majority by a long way) that make an underwriting loss in order to get their hands on the float.

What happens when the return on that float goes negative? You can put prices up and lose all your customers and go bust or you can keep doing what you're doing and go bust.

What about banks? Well they've effectively been kept afloat by QE and actually, for the most part, the bailout is complete. However the spread over the base rate that banks can charge is currently massive. A quick squizz seems to show that a normal mortgage rate is about 4%. Yeah, money saving.....much better rates available...blah.

Normally you'd expect a mortgage rate to be about 2% above base for a normal person (i.e. not an MSEer). Currently they're 3.5% (roughly) above base. The reason is 2 fold. Firstly people can simply afford to pay a higher spread because it's a spread over a very low base rate. Secondly, banks don't have so much money to lend as they've had to put more up in regulatory capital.

Hmm. Can't be in fixed income, can't be in insurance companies, banks look problematical but probably not existentially so. So what to do? Cash? Nil returns don't look very attractive to me. Commodities? Sure but only if you're mad or stupid.

Property? Much as it pains me to say it, I think property mightn't be such a bad place to be. BTL not so much but REITs look good. Regulated infrastructure (pipelines, utilities, toll roads, airport) looks good to me especially if you think that the yield hunters will win out.

What the yield hunters do is absolutely critical to markets in the next 10 years or even more. There are a huge number of people about to retire who are going to live for an unprecedented length of time and they are going to care about two things:

- capital preservation
- yield

I think that they are going to push house prices down as they sell up and move into something smaller. The next generation down simply can't afford current prices. The alternative is that they will use some of the equity in their house to get into BTL. That would cause strong upward pressure on prices simply because they can put up a big enough deposit that any bank would be stupid to turn away the business.

My thought is that the first trend will be bigger than the second. I honestly don't know though.

Ultimately you have to be in something and equities are probably as good as anything else. If a company is paying a dividend then at least you have something to cushion the fall of the value of shares if it happens. The FTSE is trading at a P/E of 23.72 which is high let's face it, and is yielding 3.75%.

If it reverts to mean (15) then that implies a drop in the value of a £100 investment to £63.23. Having said that, if interest rates go up then that means the economy is doing well so companies will be earning more and thus be worth more! In addition, you can reasonably expect that your £3.75 dividend to increase in line with GDP, let's say inflation + 2.5%. That will cushion the blow a bit.

Currently, I'm mostly in diversified equities with a small amount in a fixed income fund that trades actively in an attempt to make money from bigger fools. There are a lot of bigger fools out there at the moment.

All you can ever do really is diversify and hope that the good bits go up by more than the bad bits whilst trying to keep your costs down. I work for an asset management company so my costs are nil as my employer very kindly pays them.

Oh yeah, any company borrowing in dollars (i.e. pretty much every emerging market company outside China) will be FUBAR'd. Avoid EM.

wotsthat

I wish one of the crazies had said all that so I could dismiss it out of hand. My fireworks are a bit damp!

When interest rates have been high paying down debt moved up the priority list and when they've been low I've been shovelling income into high yielding shares in a sipp. I have no idea what I'll do when earned income is zero, I have no debt and all the boomers are retired and chasing the same yield as me.

Generali

wotsthat wrote: »

I wish one of the crazies had said all that so I could dismiss it out of hand. My fireworks are a bit damp!

When interest rates have been high paying down debt moved up the priority list and when they've been low I've been shovelling income into high yielding shares in a sipp. I have no idea what I'll do when earned income is zero, I have no debt and all the boomers are retired and chasing the same yield as me.

Moving away from an unprecedented policy is bound to be fraught with difficulty.

Central bankers have by-and-large done an excellent job of getting to where we are. The problem is, this has never really been done before so there is no road map to get from here to normality.

I think that yield assets are going to behave like bonds as interest rates rise. If you're into stock picking then growth stocks would be the way to go if you think interest rates will rise and yield stocks if you think they won't.

michaels

In general if you are holding a yield asset long term (such as a long bond to maturity) then changes to interest rates in the interim shouldn't matter (except where the interest rate increases reflect increased inflation...)

However with a company share bought for yield over the long term there is a risk that the company is leveraged up so rising rates will reduce the dividend flow at which point if the share has also fallen in value reflecting the increase in bond yields available elsewhere then you are fubar'd.

Thrugelmir

michaels wrote: »

In general if you are holding a yield asset long term (such as a long bond to maturity) then changes to interest rates in the interim shouldn't matter (except where the interest rate increases reflect increased inflation...)

Holding bonds to maturity may well result in a capital loss. As the price that you are paying now may well exceed the bonds nominal value. For example you buy spend £120 buying a bond yielding 5%. The bonds nominal redemption worth is £100. So at redemption £20 is lost. That 5% yield now no longer looks so attractive.

Generali

Thrugelmir wrote: »

Holding bonds to maturity may well result in a capital loss. As the price that you are paying now may well exceed the bonds nominal value. For example you buy spend £120 buying a bond yielding 5%. The bonds nominal redemption worth is £100. So at redemption £20 is lost. That 5% yield now no longer looks so attractive.

For this reason, bond investors use a measure called yield to redemption.

BobQ

wymondham wrote: »

not sure, but most of my sons friends are in Uni doing media studies, History and fabric design, so possibly not?!!

I think this is part of the problem. We have encouraged so many people to go to uni but not incentivised them to do the things that matter to the economy. We should be making it less expensive to study things like mathematics, physics IT and engineering.