George the juggler

Geo-political risk took a turn for the worse as Russia reported one of its jets had been downed, speculation was by the Turkish military. The sort of incident that was likely to happen with the level of military action in the region. Equity prices remained fairly resilient in the face of such news.

One piece of rational for this tri-weekly blog is a record to study with hindsight in later years. The blog also wants to record how this time of unprecedented miss matches in asset prices plays out. For example, we often quote in the blog the gap between 10 year German bund yields and the yield on German equities. German bunds continue to yield close to zero, the gap between 2 years and 10 year yields is 10 basis points. The Dax index of leading German companies yields close to 4%. It is possible investors may lose money over the next 10 years in both asset classes, but history would suggest bonds are the greater risk.

Will it prove to be that asset prices have just been held up by a wall of money, or will global economies now grow at a slower but more sustainable pace to allow companies to operate in a far less volatile economic environment? Imagine if the result of the 2007 crash was an ideal that Gordon Brown was committed too, but manifestly failed to provide, a world without boom and bust.

Later today George Osborne delivers his autumn statement on the economy, as he continues to try and find a way to meet his ambition to balance the books by 2020. Despite the gross borrowing figure rising, George Osborne has managed to reduce the budget deficit by almost £100bn pounds from the peak. The problem is now it’s getting harder to squeeze the pips in a world that lacks substantial growth. Measures to further reduce government borrowing become politically difficult. George Osborne may well be right to remove tax credits but has faced political opposition. Cutting policing numbers has met opposition. Placing further burdens on the taxpayer will not necessarily increase revenues to the treasury. The National Health system places an ever-increasing burden on the government, again highly politically sensitive to reduce spending in that area. Mr Osborne has pledged to improve housing availability; the money will need to come from somewhere.

On Tuesday the latest estimates for q3 GDP in the US were released and came bang in line with expectations. As we approach thanksgiving research suggests that the goodwill extends not only to families in America but also stock markets. During the week of Thanksgiving going back to 1942, your return would have been just under 50% for the S&P 500. 

Posted on November 25, 2015 .