Uncle Sam is Cutting his credit card (22 Aug 2013)

Uncle Sam is cutting his credit card (22 August, 2013)

The financial market is paying attention to when and how US is going to slow down its Quantitative Easing.  It is currently buying USD 85 billion of asset in the market a month.  Such buying supports bond prices and keeps yield down.  Bernanke and his buddies in FED are planning to reduce the credit card limit from USD 85 billion a month.  The market is reacting to the expectation of tapering.

Yield on US 10 years government bond has climbed from 2.5% a month ago to 2.9% as of 22 August. Yield is the “interest” that investors get from buying the bond.  The higher the yield, the better return for investors assuming the government manages to pay.  European investors have probably heard enough about Italian government bond yields which are at 4.4% now, 6.5% in July 2012 and 7.2% in November 2011.  Falling yield means bond prices going up and rising yield means bond prices going down.  This year, bond investors are smiling with their portfolio in Portugal, Italy, and Spain and not so happy with US. Greece 10 years government bond is yielding 9.9% after printing 12.5% March and 7.9% in May.  This is a baby roller coaster versus last year range of 30.4% in March and 11.2% in December.  EU has another cheque ready for Greece.  Most of Greece’s debt is held by other members of EU and the International Monetary Fund so all parties have their interest aligned.  There will be cat fights between politicians but the debate over austerity measures and bailouts have become American Wrestling.

US and Europe stock markets are running out of steam.  US stock market made new high in the beginning of August and pulled back hard in mid August.  Dow Jones Industrial Index closed at 15,658.43 on 2 August and lost the 15,000 level on 21 August.  Eurostoxx 50 Index made a high print on 14 August to close at 2855.89, beating the high in May.  Interestingly, it was the French that led the market with CAC 40 Index outperforming German DAX Index by 2.4% in the past month.  FTSE is looking weak in August. It zigzagged around 6600 level for 2 weeks then tanked to 6390.8 as of 21 August.  While the developed markets are feeling uphill, the emerging markets are sky diving.  India SENSEX Index did a double flip and fell from 19500 level to 17900 level in August, that’s 8.2% move.  At the same time, the Indian Rupree collapsed from INR 60 to USD 1 to INR 64 to USD 1.  In May, it was INR 54 to USD 1.  iShares BRIC 50 ETF (BRIC LN) dropped from GBp 1600 in the beginning of August to GBp 1520 as of 21 August, still 6.6% higher than the GBp 1426 low in June.  If trend is your friend, global equity market is making friends with the bears.

In a money tightening environment with weak markets in BRIC, the mining sector is feeling wobbly. Looking at FTSE 100 Index members, many mining companies appear in the worst 10 performing list. Fresnillo is a gold and silver mining company in Mexico and it is down 37% this year as the worst performer in FTSE 100 index.  Chilean copper miner Antofagasta, mining giant Anglo American, Russian/Kazakhstan miner Eurasian, African miner Randgold, Rio Tinto, BHP Billiton and Glencore Xstrata are down 12-29% year to date.  That’s 8 spots out of the 10 worst performers.  To make the perfect 10, add Tullow Oil and Petrofac who did not seem to be benefited from the rising oil price this year.  Stay away from resources related stocks seems to be the wise choice so far.

There are happier stories in the tech sector.  If you like the Iron Man movies, you may want to take a look at Tesla.  Founder Elon Musk is Iron Man in real life with his success in Paypal and now Tesla Electric cars, not only made him a billionaire, but put him in the same league as Steve Jobs.  Tesla shares (TSLA US) has gone up 336.6% this year from USD 32 in January to USD 147.86 as of 21 August.  Another better known name facebook (FB US) closed at USD 38.32 as of 21 August, beating its USD 38 IPO price in May 2012.  The stock made its historical high of USD 39.32 on 5 August.  Other names on my watch list and their year to date performance are Amazon (+13.4%), Google (+22.9%), Apple (-5.6%), Microsoft (+18.4%).

With US cooling its money printing machine and the speculation on Bernanke successor, the rest of 2013 could be eventful.  Guru George Soros has occupied a front row seat with a bearish call on the US stock market.  The conservative investors may rather be an audience to preserve their cash, sitting on some European bonds believing the EU can stay together for now.

It’s a boy! Where is the bull? July 2013

It’s a boy!  Where is the bull?  2013 July 24

What a great news to Great Britain that we have a new prince.  It is always nice to have something to look forward to.  For most ordinary families, a new born baby comes with responsibilities physically, emotionally, mentally and financially.  Strong financial health definitely can make life easier, a lot easier.  With longer life expectancy and higher unemployment rate among the youth, parents need to look after themselves for 20 years after retirement. They probably need to help their children with their mortgages plus their grand children school fees.

Luckily, the stock market has been behaving for pensioners this year.  After a major scary correction in June, the FTSE100 Index dropped from 6,600 level to barely defending at 6,000 level. July was a joyful month. FTSE100 was back to 6,600 level as of 22 July.  Looking peakish?  True.  Fortunately, the companies are showing good results and the overall Price to Earning Ratio is estimated to be 12.5 times.  It means you are paying for 12.5 times last year profit to owe a piece of the business.  It may sounds expensive if you are paying for a fish & chips shop round the corner but not too bad if you are buying index stocks like HSBC (8.1% of FTSE 100 index weighting), Vodafone (5.6%), BP (5.3%), Royal Dutch Shell (5.0%), GlaxoSmithKline “GSK” (4.9%).  Should investors stay with stocks especially a board based mutual fund on UK stocks?  FTSE100 has recovered from the 2008/2009 financial crisis and went back to the same level as the 2007 peak.  To decide whether to stay with the winning horse, we need to do some analysis.

First, let’s take a look at our neighbors.  With Euro Crisis becoming a soap opera “Home and Away”, the audience is getting familiar with expected surprises and twists.  Investors only need to keep their seat belt fastened for turbulence. It seems the plane will land in one piece.  There will be disagreement between the German and the French.  Greece has a long way to go before it could stand on its own feet.  Italy, Spain and Portugal will give us fire drill.  The cash rich countries will have to put pressure on the poorer ones to please voters but no one wants to see blood.  We will have to paddle together to survive.  A year ago, I wrote about Grexit.  Now you do not really see this word being mentioned by media.

Second, we ask Captain America.  US stock market is still making history and printing new highs.  So much energy!  The manufacturing sector is experiencing a renaissance powered by plentiful of shale gas.  Bernanke may not create enough jobs to please his boss but he has certainly sent both stock market and bond market to the roof during his term.  Yes, we are close to the end of quantitative easing and money might not get any cheaper (higher interest rate).  But these are the results of US economy recovery rather than punishments for the market and hurting investors.  The wealth creation with the bond market and stock market rally has made pensioners happier.

Talking about happy investors, we have to mention the Japan market.  Abe-nomics has made more than a difference.  If you look at Nikkei 225 Index in USD, the peak in May was higher than the peak in 2007.  This is because it was JPY 120 to a USD 1 in 2007 and currently, it is JPY 100 to USD 1.  This made Nikkei 225 at 16,000 level in June 2013 higher value than the 18,000 level in 2007 in USD terms.  So the American fund managers who invest in Japan are even happier than the jolly Japanese pensioners.  If you look at Nikkei 225 performance in GBP, the Brits are laughing to the bank as it was JPY 250 to GBP 1 in 2007 and now only JPY 150 to GBP 1.  Sterling based investment in Nikkei 225 would have made 30% from the peak of 2007 to May 2013.

The world always has some unhappy faces. This time is the investors in BRIC “Brazil, Russia, India and China”.  Looking at the iShares FTSE BRIC 50 ETF listed in London Stock Exchange which closed at GBp 1582 as of 22 July, it is quite a few pennies lower than its peak of GBp 2220 on 23 May 2008.  Some analysts start to call BRIC a “Bloody Ridiculous Investment Concept”.  Well, one should not go that far.  Every dog has its days. Since the financial crisis, the developed markets have been the winning horses.  It looks like the winning horses will keep leading for the rest of this year as both US and Japan have a clear road map financially.

If US stops printing money, we all suffer. 24 June 2013

If US stops printing money, we all suffer.  24 June 2013

On 19 June, Bernanke hinted that the central bank could slow its USD 85 billion monthly asset-buying program.  Stock markets all over the world took a dive.  The US stock market benchmark S&P 500 Index dropped 5% in 4 business days breaking the 1600 level for the first time since 2 May.  FTSE 100 said goodbye to 6400 level and reached the doorsteps of 6000 level.  As of 24 June, FTSE 100 dropped 12.3% since its 6875.62 high on 22 May.  6,000 level was last seen at the beginning of 2013.  Eurostoxx 50 and German DAX took similar paths and dropped 7% and 6.5% in 4 business days after Bernanke’s comments.  Billions of pounds disappeared from the stock markets.  Gold suffered as well. It dropped below USD 1300 level.  China completely fell out of bed with a 10.2% drop from 18 June closing to 24 June closing. 

With such gesture from FED, for sure, there is no further QE (Quantitative Easing) and the current program will be in reverse gear.  It is just a matter of time.  The slowing down of bond purchases by the central bank is like your credit card limit gets cut but you are living off it.  Imagine your household in Canary Wharf costs GBP 8000 a month.  Suddenly, you are limited to GBP 6000.  It is not a simple switch from Waitrose to Tesco.  It means you cannot spend on anything other than necessity.  The market reacted violently and institutions are dumping asset.

The currency world also went yo-yo on Bernanke’s comments.  British Sterling went through a month of correction in May falling from GBP 1 to USD 1.56 level almost touching USD 1.50.  Sterling did great in the first half of June recovering all the losses in May and reached USD 1.5752.  Bernanke’s comment on 19 June triggered a sharp drop from USD 1.567 to USD 1.549 in the early morning in London.  As of 24 June, GBP 1 was at USD 1.543.  Sterling to Euro has been relatively stable since April.  Range bound between GBP 1 to EUR 1.16 and EUR 1.19.  The range has been further tightened between EUR 1.16 and EUR 1.18 in June.  The spotlight is on Japanese Yen that strengthened from JPY 100.72 to JPY 93.79 (per USD 1) range in the first half of June. After Bernanke’s comment, it eased back at USD 1 to JPY 97.6 level.

While USD has been strengthening across all major currencies after Bernanke’s comments, the US Treasuries bonds are getting sold off.  US 10 years treasuries yield has increase from 2.129% at the end of May to as high as 2.538% on 24 June.  In price term, it dropped from 96.62% to 93.15%.  Strengthening in USD and falling in bond prices could reflect overall money withdrawal from the bond market.  This is not switching from Dollar bonds to Euro bonds.  It is taking out cash straight from the financial system.  If you know your biggest customer, US FED, is going to reduce its shopping spree, you will reduce your inventory in all products.

Back to FTSE 100 blue chip stocks in the home market, EasyJet is the winner in the first half of 2013, up 58% year to date as of 24 June.  Up 46%, Persimmon, a residential property developer, is the runner up.  The second runner up is another airline, International Consolidated Airlines Group that owns British Airways and Iberia. It is up 37% year to date as of 24 June.  Who could have guessed that in a weak economy, airlines are the leaders of the pack?  Meggitt and Rolls-Royce, suppliers of parts and engines for planes, are the 4^th and 8^th best performing stock at +31% and +29% respectively.  At 6^th place is Travis Perkins, a distributor in building and construction supplies and materials, the stock is up 30% year to date.  BT, ITV and William Hill ranked 5^th, 7^th and 9^th with 30%, 29% and 29% return in 2013 so far.  Holiday, new houses, home entertainment, a few games and putting a few quid behind your team, it seems the “family” theme is winning so far.    The losers in FTSE100 are skewed towards resources stocks.  Tullow Oil, Glencore Xstrata, BHP Billiton, Petrofac, Eurasian Natural and Rio Tinto are down 20-30% year to date.  Randgold, Anglo American (a global mining company), Antofagasta (a copper mining company) are down 30-35%.  Fresnillo stood out at falling 52% year to date with a worrying drop from 2033 pence at the end of November 2012 to 887.5 pence on 24 June.  Worth mentioning Eurosian Natural was already in the losers list last year with over 50% drop.  Resources are likely to struggle in weak economy especially with China economy stalling.

Bernanke looked at the QE switch and the world shivered 24 May, 2013.

Bernanke looked at the QE switch and the world shivered 24 May, 2013.

Ben Bernanke and his FOMC members are hinting that they may slow down buying US debt.  Not turning the tap off completely but pumping less liquidity into the system.  In technical terms, this is a slowdown in quantitative easing (QE).  As the Federal Reserve (Fed) buys bonds from the market, it pays the sellers money hence pumping money to the system.  A lot of these bonds are issued by the government.  United States are practically buying back their “I Owe You” piece of paper using Greenback that they print.  The Greenback is real money that can be used to buy food and water.  If the Fed slows down their buying of debt, there is less Greenback in the system and may have a negative impact to economy.  Since the Global Financial Crisis in 2008, the US has been using QE to save the world.  The trouble banks are busy reducing their balance sheet and debt through deleveraging and sucking money out of the system.  To counter that, Bernanke has been throwing money at the market through buying bonds and debts with real money.

We saw QE3 in September 2012 that got Fed to buy USD 40 billion of bond a month and QE4 in December 2012 to increase the purchase to USD 85m a month.  These 2 QEs super charged the US stock markets to historical high.  It was mentioned in this column before that QE is like steroid.  It helps you to punch above your weight but long term usage will damage your health and its effectiveness will decrease with time.  Ben Bernanke and his team start to think now is the time to reduce dosage as US.  Dow Jones Industrial was the first to made new high in March 2013 and the boarder S&P 500 Index made new high on 28 March.  With both indices beating the 2007 peaks, it is time for Ben Bernanke to reduce dosage.

One potential outcome of slowing QE is further strengthening of US Dollar against the world currency (Euro, Sterling, Japanese Yen) and even gold.  It is a good idea to see the economy improving with less dosage of steroid.  Investors are concern that this may mean weaker earnings in companies and the next day Nikkei 225 index dropped by more than 7%.  The biggest drop since the earthquake in March 2011.  It puts a big dent to the 70% rally in a year.  Money looks for safe heaven and many people find themselves parking in USD and US Treasury. 

There is another angle to explain the strength of USD.  If you put yourself into the shoes of some big hedge fund managers, especially the global macro funds.  These are the big picture guys and they use the most liquid instruments to express their view.  In the currency world, there are a few currencies that one can move a few billions of dollars without waking up anybody.  These are USD, EUR, JPY and perhaps GBP.  To a lesser extent, gold as well.  Most funds have short EUR for years already on the back of the Euro crisis.  However, this is a very obvious trade and everyone does it.  This is what people called over crowded trade.  The Euro crisis has turned into an on-going concern.  Most hedge funds needs big and sharp move to make a killing.  Remember when Soros attached GBP in 1992.  The attack in GBP in the first quarter of this year sent GBP from USD 1.63 to USD 1.49 on the back of UK credit rating downgrade.  The big winnings come from the JPY move.  It was JPY 80 to USD 1 in November 2012 and in May 2013, JPY 103 to USD 1.  Thanks to Abenomics.  In May, gold was the victim and it dropped from USD 1474 to USD 1360.  So far, every attack is betting on USD strengthening against the other side.  It looks like the hedge fund managers have completed a round.

In the stock market, institutional money has also gone to developed markets like US, UK, Germany and Japan.  Germany, despite being in the heart of Euro zone, its stock market is also making new high.   This reflects two things.  Firstly, hot money has limited choice with bond yielding so low.  Secondly, institutional investors should be having the biggest smile since 2007 with both bond market and stock market rallying.

It does sound too good to be true.  Here comes the big question.  Is it time to take profit in the stock market?  Remember Warren Buffet once said, “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful”.  If everyone around is greedily buying stock, it’s time to get out.  Oppositely, if people are not convinced or neglecting the market, the bull train may have a few more stops to go.

To gold or not to gold 27 April, 2013.

To gold or not to gold  27 April, 2013.

“Should I buy gold?”

“Is gold going to fall below USD 1,300 per ounce?”

“When will gold price go back to USD 1,900?”

Many investors are asking these questions.  Gold price dropped by almost 10% on 15 April to USD 1,355.5.  It was a real shock to investors because gold price was at USD 1,600 level at the end of March.  What happened to all the good reasons to buy gold?  Hedging against inflation?  Euro crisis?  Korean peninsula tensions?  USD and JPY money printing machines?  So what caused the drop?  Some said Cyprus could be forced to sell gold and other cash strapped European countries might follow.  Some blamed it on China weaker economic data.  Well, we can all find reasons after the event.  Put yourself into the shoes of a fund manager.  You have been buying gold since Financial Crisis in 2008 and sitting on a reasonable profit.  Gold does not pay dividend or interest coupon and had a zigzag year in 2012.  Fortunately your stocks and bond portfolio have been performing.  With US stock market still at historical high level, US government and corporate bond prices in strength, some institutional investors are putting more money into stocks and bonds to follow the trend.  Gold price which had been falling since October 2012 from USD 1790 level, lost the heart of some institutional investors.  Considering gold price was below USD 700 for a little while in 2008 and had an amazing run to Sep 2011 to almost USD 1,900, the recent correction to USD 1,355.5 is at a halfway point of the upward slope created by the rally.  The bulls and bears battling in the midfield seem to be retail investors versus institutions.  In China and Hong Kong, there are consumers rushing to the jewelry store to buy gold bars.  On the side of the planet, the biggest gold ETF SPDR Gold Shares experienced nearly USD 13 billion of outflow this year and overall holdings in gold exchange traded products fell by 340 tons.  The selloff in gold ETF in such size reflected overall institutional investors pulling money out of gold. 

The British Pound recovered from March dip and rebounded to USD 1.545 for a pound on 26 April.  A touch above its 50 days moving average and completed a technical rebound.  Let’s consider that factors that could affect GBP/USD movement.  British economy is and will continue to be at a weaker state of health than US.  The UK financial sector is at best not getting more sick.  Euro zone is still a burden, not a gift.  There is one aspect where UK could par with US.  Both US and UK governments are likely to print more money.  Recently, we see a fair amount of media coverage on debt to GDP ratio.  In short, some very clever people said it is bad for a country to borrow too much money versus its economy and the measurement is the debt to GDP ratio.  Some leaders religiously believe this argument and stand firm about austerity measures.  There is another camp of very smart people and they said high ratio of debt versus GDP (say more than 90%) could be managed and question whether austerity is a solution to Euro crisis.  The world has gone around the sun 5 times since financial crisis and the Euro zone is held together by shoe strings.  Austerity measures are definitely not a quick fix and the patient is still dying.  People are now worried if the patients could survive long enough for austerity to work.  What is the point to take a drug that gives the patient so many side effects that would kill the patients before it could cure?  Come back to GBP USD.  The weakening of the School of Austerity means more capacity in money printing.  The US government is still printing dollars faster than it could pay debt while the two political parties bargain over details such as tax and healthcare policy.  The UK government will have a new banker Carney in town on 1 July.  Will he use an axe or scalpel to tackle recession? If he follows Abe-nomics, the pound could be happily sliding.

FTSE 100 Index which reflects the UK stock market, spent April yoyo-ing between 6200 and 6500.  Similar to US market holding on to a relative high level historically.  Going forward, FTSE 100 could be benefited from a weaker GBP and further rally in US stock market.  Most of the companies in FTSE 100 index are global companies like SABMiller, Rio Tinto, Vodafone and BP.  They will react more to global economy than to UK domestic economy.  So don’t get fooled by the depressing local news.

No Greed, Just Fear. 23 March, 2013.

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.

How to win the Currency War? 23 February, 2013.

How to win the Currency War?   23 February, 2013.

The music has stopped and this time, EU has stolen the chair from the UK.  The media, economists and hedge fund managers are now saying Sterling should be weaker due to a sleepy economy, broken banking system and a no way out government budget. Sterling has been falling from USD 1.6293 before Christmas to USD 1.5131 as of 22 February.  That’s a 7.1% drop which is a fair amount even compared to USD/JPY 11.9% drop in the same period.  What does this mean?

Let’s look at the weakening of Yen as an example.  The Japanese Prime Minister Shinzo’s Abenomic campaign is asking for a weaker Yen and lucky him, he got exactly what he asked for.  Abe has learnt a few tricks from Helicopter Ben in US and Draghi’s “Whatever it takes” tactics in Europe.  A weaker Yen has injected steroid to the Japanese stock market and Nekkei 225 went up from 10,000 level to 11,400 level.  Hang on, Nekkei 225 is in Japanese Yen which has weakened against USD by more than 11% and GBP by more than 4% in the same period.  So for those who invested in Japan Fund, the Japanese is laughing, the British is smiling and the American is unmoved.

In a Currency War, governments or Central Bankers try to weaken their own currency to improve their export competitiveness and “earn” foreign money.  A trick that the West has accused the Chinese for a decade to turn everything in their household “Made in China”.  Or if you look closer to home, the weaker Euro since Financial Crisis has helped German car makers to dominate the world.  (But why not the French car makers?)

A weaker currency to a country is similar to an individual worker accepting a salary cut.  It will make the individual more attractive to hire assuming he has competitive skills.  For a product or a skill that is non competitive, a discount may not be enough.  So Toyota car going on discount may make consumers choosing them over Volkswagen.  But Fujifilm offering a discount on its old stock is unlikely to convince digital camera users to buy film.

Will a weaker Sterling improve UK’s economy?

Should be good for Harrods, Selfridges and other tourists driven business, a weaker Sterling could mean more customers.  Not great for foreign workers in UK as their Sterling is now worth less at home.  ASDA will be tempted to increase wine prices as these wines are imported from Europe, US or Australia.  A side effect of a weaker Sterling is inflation.  The Government has already safe guarded property market to make it punishingly expensive for foreigners to buy luxury properties.  Unfortunately, the bread and butter for everyone is likely to get more expensive.  If a weaker Sterling does not create job, it is likely to hurt the unemployed and the retired.

For those who do not need to worry too much about the bread and butter, but have Sterling saving or asset such as property or gilts, they have to either hope their Sterling investment return can beat inflation or they could consider getting out of the Sterling.  Switching to US Equity Fund from Sterling investment is pivoting move, hoping for the US stock market to go up or at least outperforms Sterling against US Dollar.  If one’s Sterling investment is not possible to sell such as investment in SIPP or ISA, trading Foreign Exchange to long US Dollar and short Sterling to cover the notional value of the Sterling investment is an efficient hedge.  Please consult your financial advisor or bank on such Fx transaction.  If you have not traded leveraged Fx before, maybe you do not want to start.

Since the financial crisis, the American, European and Japanese central bankers are all printing money and distorted the bond and foreign exchange market.  Sending bond prices up and swinging Fx.  More importantly, the hedge funds all focus on liquid assets and government bonds and currencies perfectly fit the bill.  Hedge Funds’ herd action may have exaggerated market trend in both speed and magnitude as we have seen in the sharp fall of Yen and Sterling against US Dollar in the last 3 months.  Currency War between the big boys (US, Europe and Japan) is a round the world roller coaster ride that eventually goes back to where you start.  One cannot erase nor conquer the other.  But the ride could be years or decades as we have seen since in EUR from its date of birth to today.  For most people, it is not about making money from Fx swings but to survive them.  Business that import goods in USD, EUR and JPY, and sell in UK to earn Sterling are used to deal with the currency roller coaster.

Many people ask if they should buy Gold as its price has fallen to below USD 1,600 per oz.  My personal view is that Gold has become more of a tool for investment portfolio diversification but not a very effective hedge against inflation.  Many investors are looking for yield (coupon from bonds or dividend from stocks) and Gold does not offer that.  Another asset class that we need to get more cautious is the High Yield Bonds issued by corporates and government from Emerging Markets.  These bonds have rallied a lot in the past 2 years and got to the point that the coupons they pay may not justify the risk for the bond holders.  It is hard to be a happy investor but with bank deposit yielding nothing, investing is becoming a compulsory hobby.