No
Greed, Just Fear 23 March, 2013.
Imagine
you get a text from your bank, “Dear customer, in order to save the world,
there will be a 10% tax on any money you withdraw from your bank account.”. Even the Hollywood horror movie could not
match Cyprus’ lawmaker script. There is
no safe place but a gold bar under your mattress. US Dollar, Japanese Yen and British Pounds
are printing money to be ahead in the currency war and keep their currency
cheap. Most of US, UK and Japan debt are
in their own currency so as long as the politicians are willing to sacrifice a
few trees and not to hang the parliament, these big boys will not go
bankrupt. But their currency should fall
and lead to inflation. The Euro crisis
has become the tiger on the boat with Pi.
You just have to get used to it and you may even miss it if it
disappears. However, please remember the
tiger could be erratic and attack your deposit.
With bank deposit rate low and inflation visibly painful, people with
deposit are losing purchasing power every day.
Borrow to buy asset sounds greedy but that’s what makes sense on paper.
Many
people are predicting the end of the bond rally. Media, experts, fund managers comment the
corporate bonds are yielding too low for the risk. But the bond buyers and borrowers are happily
together. Investors are buying ketchup
company bonds. H J Heinz sold USD 3.1
billion bonds at the lowest coupon on record for junk bond. Heinz is paying 4.25% annual coupon for 7.5
year and the company is B1 rated by Moody’s.
Perhaps the corporate bond rally will slow and some lesser credit worthy
bonds may even fall in prices, but there are plenty of demand for bonds from institutional
to high networth individuals. They know
their money is at risk in corporate bonds and they are going in with their eyes
open. That’s better than having your
money in bank deposit and have a surprise one day.
The
British Pounds have been falling like a rock since Moody’s downgraded UK and
kicked it out of the AAA league last month.
GBP started the year as high as GBP1 to USD 1.6381 and printed USD
1.4832 on 12 March. That’s a 9.5%
drop. It regained some ground and
bounced back to USD 1.5230 on 22 March.
This is the lowest since June 2010 but still significantly higher than GBP
1 to USD 1.3503 on 23 Jan., 2009. With
US market looking strong and Europe looking dull, GBP could repeat its pattern
in March to June 2010. Rebound until 50
days moving average which is currently at USD 1.545 level and then dropped
again to USD 1.4231 which is the low on 20 May, 2010.
EUR is
at a cross road. It started a rally from
its low in July 2012 when it touched EUR 1 to USD 1.2043 and posted a beautiful
rally to reach USD 1.3711 on 1 February, 2013.
Good job Draghi for this 13.9% rally against USD! Then Berlusconi’s potential return knocked
EUR down the ski slope and gave up half its gain to USD 1.299 on 22 March. With the noise on deposit tax, it is hard to
imagine any rich daddy and mommy still keep their cash in Euro zone. Hence a good reason for money to goto bonds
even the yield is getting low.
There is
also money going into US stock market and Dow Jones made new historical
high. The US stock market took just 6
years to recover and excel. And Europe
got a heart attack from Cyprus. Who is
healthy and who is unfit? The UK stock
market with the help of the GBP weakening, also posted a nice rally in Q1 until
the bulls got a cold from Cyprus. FTSE
100 broke the 6,000 level in the first trading day of the year and January was
a great month for stock investors with FTSE 100 rallying from 5897.81 to
6276.88, up 6.4%. The 6,400 resistance
was conquered on 5 March but lost on 21 March.
Many retail investors missed the rally and wonder if it is too late to
get in now. The general feeling is “yes”
as experts are saying corporate earnings have been good but run out of upside
going forward. So the good time is over
although most people did not even notice.
Missing
the boat is better than getting on the wrong boat. The gold lovers have been struggling since
October 2012 when Gold was USD 1796.08 an ounce. It went down to USD 1555.13 on 21 February,
13.4% lower. Then zigzagged back to USD
1,600 level. The world is looking for
yield and unfortunately, Gold does not pay dividend nor coupon.
I can
see why money goes to bond. Nothing
beats Heinz baked beans.
