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Weekend reading: Taper down the irrelevant talk

Weekend reading

Good reads from around the Web.

Anyone who gets all their financial information from Monevator – hi mum! – won’t know that the US Federal Reserve decided not to dial back QE3 this week.

I didn’t write a post about it beforehand. I didn’t write a post about it afterwards. I haven’t even included articles about it in our Weekend Reading roundups for the past few months.

Now that might not sound to you like a shocking dereliction of duty. Who cares if some Central Banker buys $10 billion fewer bonds a month in a multi-trillion dollar economy?

To which I say:

1) Congratulations, you’ve just said something more sensible than 90% of financial pundits on the subject.

2) You obviously haven’t watched CNBC or Bloomberg since May.

Since late May, the financial media and markets have ceaselessly speculated about “the taper” – not the Barry Manilow-snouted beast of South America, but the extent to which the Fed’s quantitative easing would be scaled back, and how this would effect financial markets.

I can hardly exaggerate the amount of coverage it has got. I wouldn’t be surprised to learn that 50% of CNBC’s daytime output was devoted to taper-talk.

Admittedly that’s like castigating EastEnders for focussing on Albert Square, not Syria. CNBC is about entertainment, not what matters most in markets and investing.

But even so, it’s sidesplittingly hilarious to me that after all that speculation, Bernanke didn’t taper.

Nearly everyone was wrong. What a waste of time and breath!

For the professional pundit of course, no news is good news. They can just re-run all their taper talk for another three months. It sure beats truly educating people about investing, or even companies.1

But I wouldn’t look for a volte-face from me, nor any sudden explosion of taper speculation here on Monevator. Here’s why:

  • Low US interest rates matter much more than Fed bond buying. The Fed funds rate is going to stay low for years, because it’s explicitly linked to an unemployment rate trigger that’s far, far away.
  • Even the part of QE3 that does matter – mortgage-backed security buying, which is mildly helping the US housing market – isn’t as important as core rates.
  • Market rates – such as the 10-year Treasury yield – had approached 3% just on speculation about tapering. The rise did what Bernanke wanted without him doing anything, in my opinion.
  • But my opinion on this isn’t worth any more than all those talking heads on CNBC, so I won’t be sharing it here much.
  • They nearly all got it wrong. So who exactly am I going to be quoting?
  • Whatever we do or say, you and I aren’t likely to outthink the US bond markets, which is one of the most liquid markets in the world.


  • The 90% of financial bloggers and commentators who’ll tell you the US and UK bull markets are a fantasy built entirely on easy money from the Federal Reserve are wrong. They are guys with hammers looking for nails. Of course low rates have been crucial triage for the banks, and for steadying the underlying economy, but it’s not magic or trickery, it’s what always happens. It’s a price our future selves pay for less pain today. Read some market history. Pundits always say the same things. Somehow we push on, make more products, boost productivity, have kids who want houses…

Here end-eth the macro post of the month.

I’ll try and do another one before 2014. Just to show willing to the big boys.

From the blogs

Making good use of the things that we find…

Passive investing

Active investing

  • Fossil fuel divestment and the carbon bubble – UK Value Investor
  • A bull on the cover of TIME can be bullish [Graphic]Ticker Sense
  • Dart’s growth leads to uncertainty [Read the comments]Beddard/iii
  • The US deep value stocks are all played out [Graph] – Mebane Faber

Other articles

Product of the week: A 3.05% rate is enough to get Leeds Building Society back at the top of the best buy tables with its five-year No Access ISA, reports The Telegraph.

Mainstream media money

Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber of that site.2

Passive investing

Active investing

  • How to use investment trusts [Search result]FT
  • We’re in a “What, me worry?” stock market – MarketWatch
  • The dubious logic of an acquisitive CEO – The Value Perspective
  • US homebuilders are still worth buying – Fortune
  • Even the BOE agrees that trading FX is for mugs – MoneyBeat

Other stuff worth reading

  • Degrees of hardship for students [Told you so!] [Search result]FT
  • Lessons from a life well lived – MoneyWatch
  • The collapse in banker’s self-esteem – Peston/BBC
  • Half his pension lost to high fees – Telegraph
  • Buying is “£900 a year cheaper” than renting – Telegraph
  • The cost of dying intestate [i.e. Without a will]Guardian
  • 9/10 of the world’s biggest firms are American (once more) – Economist

Book of the week: As author and ex-hedge fund manager Lars Kroijer is whisking me a copy of his latest book, the index tracker touting Investing Demystified, I feel a replug is in order. I hope to have more from Lars in coming weeks, too.

Like these links? Subscribe to get them every week!

  1. Slight exception made for the daytime Fast Money, which is by far the best of CNBC’s output, although it’s only for active traders. []
  2. Reader Ken notes that: “FT articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”.” []

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{ 25 comments… add one }
  • 1 pc September 21, 2013, 11:36 am

    I agree with you that the Fed got what it wanted without doing anything – I’m pretty impressed.

  • 2 Paul Claireaux September 21, 2013, 12:48 pm

    Your certainty that others are wrong is worrying.
    Surely only one thing is certain with markets – and that is that nothing is certain.
    The problem we face is that so much of our western economies have been built – not on sand – but on thin air. On borrowed money.
    We’ve now passed the Minsky moment and the support from a growing debt pile has turned into the hammer of a shrinking one.
    Until we find a more reasonable level of debt the shrinkage will continue.

  • 3 The Investor September 21, 2013, 1:41 pm

    I wouldn’t say I’m certain. I’m pretty confident, but you’re right, nothing is certain.

    I don’t sense great uncertainty in your comments about the Fed, though?

    As for the rest of your thesis, I suggest you come back in 2006… 😉

  • 4 BeatTheSeasons September 21, 2013, 1:43 pm

    Every day I get an email from Hargreaves Landsdown telling me that that markets are up on this news, markets are down because of something else, markets are about the same because blah blah blah. Many of these made up reasons have been connected to tapering recently. You can even register to get three emails a day to ‘explain’ stock market movements, but they never say markets have just moved randomly and we don’t know why!

  • 5 John Law September 21, 2013, 3:19 pm

    Hi Monevator,

    Think you are wrong on this one.

    Most of the Western Economies have been in a Depression since the GFC 5 years ago.

    The current paltry positive GDP growth rates are being generated by fiddling with the CPI GDP deflator. If you accept real inflation in the UK is >2.7%, you also have to accept that UK GDP growth has been deeply negative for most of the past 5 years.

    If you don’t accept real inflation is greater than the Government fabricated 2.7%, I suggest you get out more and start paying attention to your grocery, tax, energy and transportation bills.

    How can the stock markets boom in a contracting economy? Easy! Just print lots of money, make it really cheap to borrow and encourage speculation.

    How can the value of bonds be at a near 300 year high when the supply
    of sovereign and other debt continues to reach stratospheric levels? Easy! Just print money and buy your own garbage, thus keeping interest rates at historic lows.

    How can the value of Real Estate be shooting up in the UK when real wages are shrinking? Easy! Just manipulate interest rates by buying your own unpayable sovereign debt with printed money, and fund subprime borrowing with tax payer funds.

    You are advocating investing in manipulated markets near all time highs based on nothing buy financial engineering. How can all this possibly end well?

    Time will tell who is right.

    Thanks, but no thanks. I will buy after the bubbles burst

  • 6 dearieme September 21, 2013, 4:13 pm

    The inference that I draw from your wee headlines is that I should consider FX as an investment.

  • 7 Dave September 22, 2013, 12:16 am

    “you also have to accept that UK GDP growth has been deeply negative for most of the past 5 years”

    Yes, of course it has. Real GDP growth in most Western economies has been deeply negative for most of the last five years, which is why real interest rates in most Western economies have also been low/negative for most of the last five years. The standard approach to monetary policy for a long time now has been to minimise swings in growth by cutting rates when growth falls and raising rates when growth rises. An extended period of low rates may create bubbles that burst when rates are eventually raised, but the alternative is to keep rates high to prevent the bubbles from forming at the cost of increasing the extent of the current contraction. Some people may disagree with the central bankers’ choice to deal with the recession problem first and the bubbles later, but I would argue that neither course of action is obviously right and neither is easy or pain free.

  • 8 dearieme September 22, 2013, 10:38 am

    A wonderful Keynes quotation in this morning’s Telegraph:

    To think output and income can be raised by increasing the quantity of money is rather like trying to get fat by buying a larger belt.

  • 9 gadgetmind September 22, 2013, 5:50 pm

    Whenever looking at financial chitchat of the macro kind you always need to consider the question, “OK, so what should I do with my portfolio?”

    As the usual answer is “absolutely nothing” for the simple reason that no-one knows what’s going to happen so a balanced portfolio of diversified assets is the safest play.

    OK, so I do tweak my asset allocation, but rarely, lightly, and cautiously. I’m not sure it helps, mind you!

  • 10 The Investor September 22, 2013, 10:43 pm

    @All — The other reason I don’t talk about macro stuff much is because as soon as you do on the Internet, this kind of doomster comment stuff starts to appear — “manipulated markets” built on “thin air” — and one either has to spend hours debunking it with each new article, or one has to delete it, which doesn’t sit well with me but I would do if I wrote about macro a lot, because I wouldn’t want to have created another doomster portal by accident.

    Seriously chaps, each to their own, but if you really think we’re just living in some fictitious manipulated market where nothing can be trusted and it’s all a grand Ponzi scheme pulled off by the Fed, then I wouldn’t have thought Monevator is the site for you and I wonder what you get out of commenting on it? It’s not like there’s a shortage of places to pow-wow with your fellow Fiat-money hating Fed bashers. Head to Zero Hedge. Or even The Telegraph.

    This site is aimed at the quiet majority of reasonable people.

    Here’s why the Fed is printing money, in simple terms. There was an enormous destruction of value created by the financial crisis. On this we all agree, except to the extent that doomsters and I differ on how much of the destroyed value was “real” anyway (a curious contradiction in the doomster creed, actually — when was year zero? Do they trust nothing since 1971 and the US leaving the gold standard, perhaps? Think you’ve seen an iPhone or the computing/Internet revolution or most people owning two cars and a dishwasher or China pulling itself out of mass poverty or any of the other achievements of capitalism since then? Nonsense, fools! None of it is real! It’s all a fiction!).

    Back to now: the financial crisis damaged both solvency and liquidity throughout the system. In the face of this, the Central Banks could either allow the financial system to fold, unemployment to soar to 1930s levels, etc, or they could do what they ALWAYS do which is pour liquidity into the system to essentially calm the system, stem the rout, by bringing down rates as far as they can, through whatever means necessary.

    As they do so they stop NOT the rampant enthusiasm that doomsters somehow see in a stock market barely getting back to where it was a decade ago in nominal terms, but rather to address the rampant bearishness that in reality drove real interest rates below zero as even institutions became so fearful and bearish and terrified that they were willing to pay banks or the government to hold their money.

    Eventually these extraordinary moves will be reversed. The reversals will be clumsy, because it’s hard stuff. It’s not magic. In my view we will likely pay through it with some combination of (1) higher inflation than would otherwise be the case (2) less efficient businesses (because some were kept alive that should have died in an ideal world) (3) wealth transfers (currently from future productive workers to today’s owners of assets) (4) lower real median incomes.

    That’s the price of not repeating the 1930s in a modern democracy. I don’t blame them for taking it.

    Readers who take too much of this doomster comment seriously might at least ensure they read investing literature from the 1930s, 1950s, 1970s and so on, and understand that this nihilistic vein is nothing new or novel. Believe it if you like, but don’t believe we’re living in some special time that suddenly warrants it.

    Rather, the unbelievers are always with us.

    It’s quite amusing actually reading The Snowball, the Warren Buffett biography. The very young Buffett sits every Saturday morning with his two aged great-uncles, one of who is a perma-bull and the other is a perma-bear who believes US Steel etc is going to zero because of the irresponsibility and recklessness of the US state etc. (Sounds familiar? This is from 80 years ago, and not coincidentally after a major market crash…)

    Later on Buffett’s own stockbroking father champions various gold related causes and promotes the adoption of farmland and other real assets as protection against the coming economic cataclysm.

    Meanwhile only one of them — Warren Buffet — becomes the richest man in the world by not taking it very seriously.

    Sure, there’s a few modicums of truth in the doomster diatribe. All financial systems are unstable, and periodically participants forget this. Systemic crisis is always possible. Perhaps hold 5-10% in gold and other hard assets if you like, preferably including some offshore.

    But go beyond that at your peril. The odds are entirely against you, IMHO.

  • 11 Willem de Leeuw September 23, 2013, 9:52 am

    The Investor +1. Doomsters gonna doom.

    But seriously, markets aren’t always right and if you feel they’ve overshot to the upside or downside then position against it, it’s no big deal. I don’t know why people become so emotional but I suspect it has something to do with the seemingly innate desire of many to be proven right – sometimes mixed with a political view – and wanting others to share their views rather than admitting they were wrong and changing position, but I’m one of the dudes, I think like The Investor, who’s a value investor at heart and saw company results slowly improving from 2010 on combined with governments/CBs doing everything they could to keep the show on the road and thought, “ooh, it’s not the end of the world after all… Buy Unilever, buy Diageo, buy Vodafone, buy utilities, om, nom nom nom.” Most doomsters also wouldn’t know the end of the world if it hit them in the side of the head: they should visit a poor country in sub-Saharan Africa on their next holiday and see.

  • 12 Dave September 23, 2013, 10:02 am

    @John Law
    As a really nerdy technical point the GDP deflator is not the same as inflation. The GDP deflator is related to goods and services produced in the country and so excludes imports. It is also a variable basket of goods, rather than being fixed.

    The two measures are different assume imported oil prices rise.
    We would expect more expenditure on [imported] oil and less spending on everything else. As the demand for domestically produced goods and services falls, so would their prices. Since domestically produced goods and services by definition constitute GDP, GDP-deflator inflation will be low, while the consumer price index (which would include nonexported GDP plus imports) would be higher.

    There is simply no need to assume some massive fraud on the GDP deflator.

  • 13 John Law September 23, 2013, 7:53 pm


    What will happen to the prices of the different asset classes in a conventional “balanced” portfolio when interest rates rise? Equities, real estate and bonds will all crash together. Cash in the form of fiat currencies will no doubt maintain their purchasing power as Central banks double down with the printing presses (sarc).

    By all definitions, we are in a bond bubble. Supply is at historic highs, demand is low(to the extent that Central banks are having to eat their own garbage) and prices are coming off 300 year highs.

    When the bond bubble bursts, interest rates will spike.

    If you think your conventionally allocated portfolio will escape without a catastrophic haircut through the bursting of the biggest bubble in financial history, good luck to you.

    We live in interesting times. See you on the oth side.

  • 14 gadgetmind September 23, 2013, 10:22 pm

    Sell cash, bonds, equities, and property.

    Buy gold, beans, bullets and bog roll.

    Hmmm, that gets me thinking. When did anyone last see a gold bug? We couldn’t move for the a couple of years ago, so where are they now? Off in their bunkers with the MREs (Meals Ready To Eat) stacked around them?

    See you on the other side.

  • 15 John Law September 23, 2013, 11:25 pm

    Hi Gadgetmind,

    Given your preoccupation with coprophilia, thought you mind enjoy the following article.


  • 16 gadgetmind September 24, 2013, 7:49 am

    Blimey, have I accidentally wandered onto the Daily Mail comment pages by mistake?

  • 17 The Investor September 24, 2013, 10:14 am

    @Gadgetmind — Indeed. 🙁 Talk about someone making my point for me. (I preferred the exchange the last time you ran into Mr Law).

    @John Law — I accept your link was more at the dry end of humour in robust debate, but IMHO it didn’t really add to your argument (although it’s quite a bizarre story in itself).

    I just checked how your friendly challenge was coming along, incidentally, and I see that rather than heading towards 1 as you predict, the Dow:Gold ratio has in fact climbed to 11.65, from 8.7 at the time you wrote. (I don’t have the FTSE data, so not deliberately avoiding it. Perhaps it’s done better).

    Still, very early days. And while I agree with very little of your investment strategy (100% in precious metals, financial system doomed etc) I’ll give you credit for going on record with some concrete predictions.

  • 18 gadgetmind September 24, 2013, 10:31 am

    I’ve got a relative who’s working in the Bolivarian Republic of Venezuela at the moment and this certainly requires a sense of humour. Fortunately, he gets to fly around the Caribbean a fair bit and can take a case of triple ply back with him every time!

  • 19 John Law September 24, 2013, 11:54 am

    Hi Monevator,

    I’d like to have a civil discussion about which of the statements below you disagree with. It’s clearly not possible to have a rational conversation with GadgetBrain, so let us leave him out of this.

    1) Bonds are in a bubble

    2) Nearly all bubbles burst (albeit much later and having grown far bigger than most people think).

    The bigger the bubble, the bigger and more precipitous the crash that follows. Following a bubble, prices do not gently revert to fair value; the assets concerned become undervalued. The historical record is near unequivocal (tulip mania, South Sea bubble, 1929 equity, 1979 gold, 1987 Nikkei, 1999 Nasdaq, 2007 US housing). This is why I feel justified in using emotive words such as “spike” and “crash”.

    3) As bond prices fall, interest rates spike.

    4) As interest rates spike, the value of real estate, equities and paper currencies crash. Why?

    Real estate: how much is your house worth with mortgage rates at 5%, 10%, or 15%? Someone else might have to explain the maths to mental midgets like GadgetBrain. What happened to house prices in the 1990’s and 1970’s as interest rates rose to the mid teens?

    Is it better to buy a house when interest rates are at historic highs, or historic lows? Do you believe in reversion to the mean? What problems might a 2-5 year adjustable rate mortgage present in a rising interest rate environment?

    Equities: why buy an equity with a 3% dividend yield when you can buy a “risk free” sovereign bond yielding say 10%? How did equities do in real terms in the stagflationary 1970’s? What happens to share prices when companies find it expensive to finance debt?

    Cash: as the bond bubble bursts, mountains of previously frozen fiat gets redeemed and starts circulating. Technically speaking, the velocity of money increases. As an example, US M1 ~$1 trillion. Value of all Treasuries ~$17 trillion. Good luck hiding out in cash. There are hundreds of examples of fiat currency hyperinflation/devaluation. There are no historical examples of fiat currency hyperdeflation (double digit increase in purchasing power). The CPI in Japan rose for much of the last 20 years.

    The point I’m trying to make is that holding onto a traditionally diversified portfolio of real estate, equities, bonds and cash in a rising interest rate environment might result in massive unhedged losses. A big fail for modern portfolio theory IMO.

    Look forward to debating you on the above points.

  • 20 BeatTheSeasons September 24, 2013, 12:01 pm

    John – what you seem to be forgetting is that interest rates don’t rise until there has been some inflation. I wish I could buy a house at 1970s or 1990s prices!

  • 21 gadgetmind September 24, 2013, 12:20 pm

    > What happened to house prices in the 1990’s and 1970’s as interest rates rose to the mid teens?

    They dropped a little so I used spare cash to buy a property that some would now say is worth close to £1 million.

    Of course, house prices could well drop again if inflation spikes, but I guess I could then use my NS&I linkers to fund buying another house if that happened. Let’s see.

    As for equities, I think you’ll find that those dividends come from profits obtained by selling things priced in “fiat currency”, and the company’s physical assets are valued the same way, so they perform well in real terms.

    As for the clumsy Ad Hominem jibes, they come across as a little 3rd form, I’m afraid.

  • 22 The Investor September 24, 2013, 12:59 pm

    @John — Unfortunately I don’t have the time to reply in detail here, especially now it’s Tuesday, and likely only me, you, and Gadgetmind — on which note please can you stop insulting him — will likely read it.

    I will however try to address most of your points and one or two others in an article in the next few weeks.

    p.s. Just for completeness in case anyone reads this and not my future post, I agree government bonds look a poor bet and I haven’t held any for years. (I do hold plenty of cash though, plus some special situation fixed interest). But beyond that I see an awful lot of extrapolation that has to play out right in order for a 100% precious metals bet to come good. In particular, I think you may risk ignoring central bank reaction in such scenarios, just because you don’t like their response. But the reality is they would reduce interest rates massively in a huge cataclysm, and indeed that you’d probably need that for your bet to come good. (Because in the alternative, a deflationary depression, who wants to buy gold when it will be cheaper next year?)

    I short, I think the risk to likely reward of 100% precious metals is really terrible. But anyway, I’ll have more details in my future post.

  • 23 John Law September 24, 2013, 11:59 pm

    Hi Monevator,

    >I just checked how your friendly challenge was coming along, >incidentally, and I see that rather than heading towards 1 as you predict, >the Dow:Gold ratio has in fact climbed to 11.65, from 8.7 at the time you >wrote. (I don’t have the FTSE data, so not deliberately avoiding it. >Perhaps it’s done better).

    Early days, as you say. This bull market seems eerily similar to that of the 1970’s, where gold corrected from $200 to $100 before peaking out at $850. It is fascinating to read some of the commentary during that period, and compare it to today’s gold bashing in the mainstream financial media. It is said that very few investors ride a bull market right to the end: most get thrown off by vicious corrections along the way.

    I see our present predicament as the stagflationary 1970’s on steroids. I think we are heading for sovereign debt crises in the major western economies, which will be resolved by means of a currency crisis.

    I stand by my predictions of a Dow:Gold ratio of <1 (in $), a FTSE:gold ratio of <1 (in £), and a median priced UK house for <50 oz of gold. I don't think this will take longer than 5-10 years. What do you think of the similar dead cat bounce in the Dow:Gold ratio before the final denouement in the 1970's?


    It seems Uncle Warren is feeling a bit bearish about the markets as well:


  • 24 The Investor September 25, 2013, 11:44 am

    @John — I am very confident that shares will fall 10-30% in the next 1-3 years, and maybe more. What I am not confident about is that trying to trade (being allocation tweaks and rebalancing) these regular falls/crashes is a profitable strategy. Not even Buffett tries it. Even when he saw egregious over-valuation in the early 1970s, he liquidated his funds — nearly unprecedented, and a sign of his class — but still kept virtually all his own money in equities after that. I’m certain he isn’t selling Berkshire’s share portfolio down now, either.

  • 25 John Law September 25, 2013, 6:09 pm

    Hi Monevator,
    Agree that there is overwhelming evidence that share picking, market timing and short term trading does not beat dollar cost averaging on a whole of market basis. I do believe however that different asset classes go through secular bull and bear markets on an alternating basis, with bull markets usually ending in a blow off top and a crash. The start and end of secular bull markets are marked by extremes of sentiment and valuation.

    Here are examples

    Secular bull markets:
    Precious metals: 1971-1980, 2000-present
    Equities: 1921-1929, 1982-2000
    Nikkei: 1970’s-1987
    Nasdaq: 1991-2000
    US housing: 1980-2007

    Secular bear markets:
    PM’s : 1980-2000
    Equities: 1966-1981
    Bonds: 1966-1981
    Real estate: 1970’s, 2007-present

    An asset class that is going up in price can still be in a bear market in terms of real return (e.g. The lost decade for equities).

    I believe PM’s are in a secular bull market, and that equities are in the dead cat bounce portion of a secular bear market since 2000. When this ends with a parabolic blow off top for gold and a “sentiment in the toilet” secular bottom for equities (at a Dow:gold ratio of ~1), equities will be on fire sale relative to gold (not so much relative to debasable, printable fiat).

    Trying to stick with a predominant asset class until its bull market ends, then switching to another that is hated and reviled (e.g Nasdaq to Gold in 1999-2000) can be a very powerful strategy.

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