Bank of England pumps more cash into economy

February 10, 2012

The Bank of England voted to inject more cash into the economy to shore up a fragile recovery and shield the country from fallout from the unresolved euro zone debt crisis.

The central bank said on Thursday it would buy another 50 billion pounds of assets - mostly government bonds - with freshly printed money, taking the total to 325 billion pounds, as economists had expected. The BoE also left its key interest rate at a record-low 0.5 per cent.

The cash boost is welcome news for the government, which has come under pressure again to loosen its austerity drive after the economy shrank at the end of 2011 and unemployment hit its highest level in more than 17 years.

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"Some recent business surveys have painted a more positive picture and asset prices have risen," Bank of England Governor Mervyn King said in a letter to finance minister George Osborne, explaining the decision.

"But the pace of expansion in the United Kingdom's main export markets has also slowed and concerns remain about the indebtedness and competitiveness of some euro-area countries," he added.

The central bank said inflation would have probably fallen below the target of 2 per cent over the medium term without further easing, as a significant amount of unused capacity in the economy was bearing down on prices.

Some improvement in Britons' real incomes was set to support a gradual recovery this year, though the tight credit conditions and the government's austerity measures presented headwinds.

Osborne said the central bank's loose monetary policy continued to play a "critical" role in supporting the economy as he continued his austerity program, and remained the main tool to respond to changes in the outlook.

Vote split?

Sterling rose to a session high against the US dollar while gilts reversed gains on Thursday after the BoE decision.

The BoE surprised markets in October by deciding to restart its program of gilt purchases funded earlier than expected, going on to buy 75 billion pounds' worth of gilts over four months, largely to shield Britain from the euro zone crisis.

This time around, a majority of analysts polled by Reuters had penciled in a 50 billion pound injection over three months. But most were surprised by what the BoE described as an "operational" decision to focus its gilt purchases on slightly shorter maturities than before, to avoid market frictions.

Many economists expect further increases in quantitative easing in May, although they also noted that some policymakers may already have second thoughts about more easing.

"We still think that QE2 has much further to go," said Vicky Redwood from Capital Economics. "There is a chance that today's decision was not unanimous, with those members less convinced that inflation will fall sharply, for example Spencer Dale, perhaps voting to keep the asset purchase program at 275 billion pounds."

The minutes from the two-day Monetary Policy Committee meeting will be released in two weeks, but economists will get an earlier steer when BoE Governor Mervyn King presents fresh quarterly inflation forecasts next week.

Inflation fell from the three-year peak of 5.2 per cent in September to 4.2 per cent in December, and policymakers have voiced confidence that it will dip below the BoE's 2 per cent target later this year, as predicted in November.

With the government's hands tied by its pledge to erase the country's huge budget deficit over the next five years, the onus to boost the faltering economy is firmly on the central bank, though doubts about the impact of its easing continue to linger.

Britain's recovery from a deep slump during the 2008-2009 financial crisis has been weak so far, and the contraction of the economy in the final quarter of 2011 stoked fears of a renewed recession.

But recent surveys indicated that manufacturers and service firms made a surprisingly strong start to the year, and on Thursday data showed that industrial production already rebounded in December from the slump in the previous months.

In addition, the European Central Bank's long-term liquidity operation in December eased banks' funding strains and associated money market tensions.

Reuters

Read more: http://www.smh.com.au/business/world-business/bank-of-england-pumps-more-cash-into-economy-20120210-1s5w7.html#ixzz1mJ6O6hMg

The Four Big Threats to Your Wealth in 2011 (Toxic Investments)

Uploaded by moneycontent on Apr 7, 2011

The Four Big Threats to Your Wealth in 2011 (MoneyWeek Magazine)

UK Housing threat
UK Stock market threat
Drop the Euro before it collapses
The "bond bubble" is about to burst


The fact is we're in unchartered territory ... and it's a very dangerous and unstable situation.

Does a 40% rise in the FTSE and a 9% rebound in property prices over the last 18 months seem right to you?

The way we see it, these aren't healthy markets at all ... they're not even recovering markets ...
...these are grossly inflated markets, pumped up by desperate government intervention.

Will the UK economyh sink into deflation if the Government follows through its pledge to rein in our national debt? ...

... Or, with the Bank of England's furious attempts to keep the ball rolling, is it inflation we have to fear?


So ... what should you do?
Survival Action #1 Buy defensives and "bear market protectors"

Defensive stocks: These kinds of companies don't need economic growth to make money, because people have to spend on their products out of necessity. In short, they're specifically suited to keep your portfolio ticking over in times of upheaval ... and GROW when the market truly recovers.


Survival Action #2 Get the right dividend players into your portfolio now

But since the bust up of 2008, investors have rediscovered the appeal of dividend cheques. This is for three reasons ...

1. Dividends outperform bond yields. According to Bloomberg, by the third quarter of 2010 more U.S. stocks were paying dividends that exceed bond yields than any time in the last 15 years.
2. Dividends can't be fudged - they have to be paid with real money.
3. Dividend-payers are excellent stocks to own in times of unprecedented uncertainty.
Dividends contribute to share price stability. If the share price of a dividend-paying firm falls, it is likely to fall less sharply than a pure growth stock. That's because as the price falls, the yield tends to pick up, encouraging investors to buy back in.


Survival Action #3 Ride gold all the way to $2,230 .. or even more!
... you're talking an eye-popping gold spike to $23,450 per ounce. And during times of confusion, gold often performs better than most other assets. Consider this ... adjusted for inflation, the 1980 gold peak of $850 gives you a price of $2,230 still on the horizon today.

Plantation Stocks

Top 10 Plantation Stocks Summary Table (Based on Mkt Cap)

http://www.stocks-unleashed.com/2012/02/top-10-plantation-stocks-summary-table.html

Australia is caught in a credit crunch and the banks just made it worse, not better.

Banks' rate moves reveal system cracks

David Llewellyn-Smith

February 13, 2012

The media reaction to the banks' Friday rate hikes has been dominated by a schoolyard binary construction of the problem: the banks versus the government.

Some have taken the side of the government, that the banks are a greedy bunch of so and sos. Most have taken the side of the banks, that the government has no right to interfere in private business decisions.

Laudable sentiments if the banks are private. Which they are not. But let that pass.

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This columnist has already written that what's really at stake here is the political economy of banking and the government's failure to openly address that fact is now coming back to haunt it.

Instead this column will argue a much simpler point: Australia is caught in a credit crunch and the banks just made it worse, not better.

How so? To understand you have to have a handle on the basic tenets of banking. Like all businesses, banks have a balance sheet. There are two halves to the balance sheet: assets and liabilities.

For banks it's a little confusing because outgoing loans - for houses, cars etc. - are in fact assets. They are the stuff from which banks draw an income.

The bank's liabilities are also loans, but those taken from others, like deposits or bonds. The difference between these two is the bank's equity or capital base.

The ratio between the amount of capital and total assets is called the leverage. It's the number of times against which the bank's capital has been multiplied in its outgoing lending book.

That's it, not so hard.

Trouble triggers

There are two ways in which a bank can find itself in trouble. The first and most common is when its assets - the loans it has given to its clients - deteriorate in quality.

This problem happens when the folks who borrowed the money struggle to repay it. They might have lost their job, or the asset they offered as collateral against the loan - say, a house - may have lost value and their own balance sheet is under pressure.

If they sell, they can't repay the whole loan amount. You can see how this process can feed upon itself as distressed sales leads to more falling prices.

At a certain stage the banks themselves get into trouble as enough assets are impaired and their capital begins to decline. They must then restrict lending and the problem gets worse again. This is called a credit crunch.

This is what happened in the US. Australia is also in the early stages of such a process with falling house prices, rising unemployment and rising impaired loans at the banks. It's difficult to judge how far into this we are and whether it can be reversed.

The jobs generated by the mining boom offer the hope that it is possible to arrest the decline and instead of a credit crunch we get a stall in housing and a redistribution of capital elsewhere.

The primary protection against the process getting out of control is monetary policy, or interest rates, which can be lowered to alleviate the borrower stress at the heart of the problem.

Nervous creditors

The second way in which a bank can find itself in trouble is on the other side of the balance sheet: the liabilities. This happens when the people lending money to the bank - depositors or investors - get nervous and want a higher interest rate to give the bank their money.

In the past this was not much of a problem for Australian banks as they relied upon steady deposits. However, after the new millennium began, the banks went a bit nuts borrowing less stable money from investors here and abroad and loaned that money largely to punters betting on houses.

Now, through a combination of the troubles in Europe, the fact that the process of deteriorating assets is under way, and through their own incompetence in the mishandling of covered bonds, investors want much higher interest rates to lend our banks money.

So yes, they need to raise interest rates to extract more money from the other side of the balance sheet to compensate. If they don't then they'll not be able to lend money on unprofitable loans and the credit crunch still transpires as the banks limit the supply of credit.

In short, whichever way the banks turn right now, whether they pass on their borrowing costs to mortgagors and put downward pressure on their assets, or they absorb the higher funding costs and stop making unprofitable loans, we edge further into a credit crunch. And indeed, as you can see, the two halves of the balance sheet aren't at all separate.

Credit crunch

As risk builds in one then it has a deleterious effect on the other and so another feedback loop threatens. This is systemic stress and is exactly where we are now, whether you want to blame the government or the banks (or, in this writer's case, the politico-housing complex).

So, the only question that matters right now is this: can the RBA arrest this developing feedback loop by cutting interest rates?

To my mind it is now clear that the central bank, which handled its actions flawlessly last year, erred dramatically last week in staying on hold.

By pushing the banks to hike unilaterally, the first time in history, the banks have shaken the foundation of the one commonly (and sensibly enough) held truth in Australian asset markets, that when asset prices decline, unemployment or other economic adversity threatens, the RBA will save us by cutting interest rates.

The insurance is still there but a nasty crack now runs through its base and this commentator can only see this making asset markets worse.

We're into a credit crunch all right.

David Llewellyn-Smith is the editor of MacroBusiness and co-author of the Great Crash of 2008 with Ross Garnaut. This is an edited version of a longer article available free at MacroBusiness.

Read more: http://www.smh.com.au/business/banks-rate-moves-reveal-system-cracks-20120213-1t0ce.html#ixzz1mIsQMilO

All the Big Banks lift Rates

Eric Johnston

February 13, 2012 - 5:46PM

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ANZ won't rule out more job cuts

Despite slashing 1000 jobs and raising mortgage rates to protect profit margins, ANZ Australia CEO Philip Chronican says there could be more pain.

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The Commonwealth Bank and National Australia Bank have become the latest banks to raise their variable lending rates outside the Reserve Bank's regular monthly cycle.

National Australia Bank this evening said it would lift its standard variable home loan interest rate by 9 basis points to 7.31 per cent.

• ANZ to cut 1000 jobs by September

Earlier, the Commonwealth Bank, Australia's biggest mortgage bank, announced that its standard variable mortgage rate will rise 10 basis points to 7.41 per cent from February 20.

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Commonwealth Bank and regional lender Bendigo and Adelaide Bank become the latest banks to break ranks with the RBA. Photo: Jessica Shapiro

The moves round out the out-of-cycle rate rises among the big four banks.

Also today, Bendigo and Adelaide Bank increased its standard variable mortgage rate 15 basis points to 7.45 per cent.

Westpac and the ANZ defied Treasurer Wayne Swan and lifted variable rates 0.10 and 0.06 percentage points respectively, on Friday, despite a decision by the Reserve Bank to hold its cash rate steady. The ANZ bank today announced it would cut 1000 jobs by September 30 to cope with weaker demand for banking services.

Rising costs

As with other banks, CBA blamed today's rate increase on rising funding costs, adding that greater uncertainty emanating from Europe was exacerbating the situation.

“In making this decision, we have been cognisant of our total funding costs, of which the official cash rate is only one factor,’’ said CBA group executive of retail banking Ross McEwan.

‘‘The Commonwealth Bank believes Australian banks should continue to price sensibly, taking into account factors both on and offshore, rather than experience similar problems to those that many banks overseas have experienced,’’ Mr McEwan said.

"Whilst we understand that any increase in interest rates is not favourable to borrowers, our millions of deposit customers are favoured and since the commencement of the GFC we have seen significant competition in retail deposits pricing," he said.

CBA said it would raise the interest rate on its six-month term deposit account by 20 basis points, also effective February 20.

National Australia Bank, the last of the four big banks to announce its interest rate stance, said it is reviewing its rates.

Commonwealth Bank shares rose 41 cents, or 0.8 per cent, to $50.29, slightly less than the overall market's gain. Bendigo and Adelaide Bank shares rose 6 cents, or 0.7 per cent, to $8.19.

Bendigo move

Bendigo, like ANZ, has also said it would review interest rates independently of the Reserve Bank. Westpac's new variable mortgage rate is 7.46 per cent and ANZ's is 7.36 per cent.

Bendigo managing director Mike Hirst said current banking margins are not sustainable and adjustments to interest rates must be made.

“This is not a popular move, we know that, but it is the right thing to do to restore a proper balance between depositors, borrowers, the Bank’s shareholders and our community partners. At current funding cost levels that balance is out,” he said.

At current pricing levels banks were “subsidising mortgages,” Mr Hirst said.

“If you look at the traditional role of a bank this makes no sense and is unsustainable,” he added.

Mr Hirst said banks had a fundamental choice to make: adjust the pricing on loans or restrict lending. He added the latter option would have significant implications for the economy and would not be the right thing to do at this point in time.

He also said many staff at Bendigo have taken unpaid leave to help reduce costs, while no new back office staff are being hired.

Bendigo’s new mortgage rate will apply from February 21.

ejohnston@theage.com.au, with Chris Zappone

Read more: http://www.smh.com.au/business/all-the-big-banks-lift-rates-20120213-1t1ae.html#ixzz1mIuF0oCu

Smarter people own shares, study finds

January 19, 2012

Share ownership is linked to intelligence, researchers have found. Photo: Reuters

The smarter you are, the more stock you probably own, according to researchers who say they found a direct link between IQ and equity market participation.

Intelligence, as measured by tests given to 158,044 Finnish soldiers over 19 years, outweighed income in determining whether someone owns shares and how many companies he invests in. Among draftees scoring highest on the exams, the rate of ownership later in life was 21 percentage points above those who tested lowest, researchers found. The study, published in last month's Journal of Finance, ignored bonds and other investments.

Economists have debated for decades what they call the participation puzzle, trying to explain why more people don't take advantage of the higher returns stocks have historically paid on savings. As few as 51 per cent of American households own them, a 2009 study by the Federal Reserve found. Individual investors have pulled record cash out of US equity mutual funds in the last five years as shares suffered the worst bear market since the 1930s.

"It's what we see anecdotally: higher-IQ investors tend to be more willing to commit financial resources, to put skin in the game," said Jason Hsu, chief investment officer of Newport Beach, California-based Research Affiliates LLC. "You can generalize a whole literature on this. It seems to suggest that whatever attributes are driving people to not participate in the stock market are related to the cost of processing financial information."

'So Strong'

While intelligence influenced things that might naturally increase equity ownership such as wealth and income, the authors said IQ determined who owned the most stocks within those categories as well. Among the 10 per cent of individuals with the highest salary, "IQ significantly predicts participation" in the stock market, they wrote. For example, people in the highest-income ranking who scored lowest on the test had a rate of equity market participation that was 15.7 percentage points lower than those with the highest IQ.

"If you look at the significance of IQ related to other factors like income or wealth, certainly it plays a very large role," Keloharju, a finance professor at Aalto, said in a phone interview. "It's very difficult to get around that problem, but the results are so strong here. We are playing with lots of different controls and lots of different specifications, and all the time things work really well."

Financial Education

Hsu of Research Affiliates said an explanation for why draftees with lower test scores owned less stock is that they found it harder and more expensive to receive financial education. Getting people information on investing at a younger age may help limit the disparity, he said.

"The costs to achieve that are certainly higher if someone isn't providing that at an earlier stage in one's education," said Hsu. "If we could provide advice, or provide education, to help reduce the cost of acquiring financial knowledge, that would seem like a good thing."

The paper is part of a broader debate about the role individual characteristics such as affluence and education play in investor actions. In the 1980s, so-called behavioral economists broke away from theorists such as Sharpe, who tended to think of all investors as rational.

Greg Davies, head of behavioral finance at Barclays Wealth in London, said his team tries to gauge clients' risk tolerance with personality profiles and investment strategies that appeal to "emotional needs."

Implications

"As advisers, of course, we see our role in overcoming the irrational, emotional, inaccurate elements on behalf of our clients," said Davies. "But the implications of this for the mass markets are much greater."

Markowitz said the argument that intelligence and personality sometimes trump rationality in guiding investors has little bearing on his work. His theory comes down to the view that anyone hoping to get the highest payout at the lowest risk should broaden their asset ownership.

"It's advice for the individual investor," Markowitz, 84, said in a telephone interview. "I am delighted to learn the more intelligent a person is, the more likely they are to act in the spirit of what I wrote."

BLOOMBERG

Read more: http://www.smh.com.au/business/world-business/smarter-people-own-shares-study-finds-20120119-1q7lz.html#ixzz1mImsSYrJ

Risk and Return - Find Investments offering High Returns with Low Risk

A positive correlation between risk and return would hold consistently only in an efficient market.  Any disparities would be immediately corrected, this is what would make the market efficient.

In inefficient markets it is possible to find investments offering high returns with low risk.  These arise 

• when information is not widely available, 
• when an investment is particularly complicated to analyze, or 
• when investors buy and sell for reasons unrelated to value.  

It is also common place to discover high-risk investments offering low returns.  Overpriced and therefore risky investments are often available

• because the financial markets are biased toward overvaluation and 
• because it is difficult for market forces to correct an overvalued condition if enough speculators persist in overpaying.  
• Also, unscrupulous operators will always make overpriced investments available to anyone willing to buy, they are not legally required to sell at a fair price.

Since the financial markets are inefficient a good deal of the time, investors cannot simply select a level of risk and be confident that it will be reflected in the accompanying returns.  Risk and return must instead be assessed independently for every investment.  

In point of fact, greater risk does not guarantee greater return.  To the contrary, risk erodes return by causing losses.

It is only when investors shun high-risk investments, thereby depressing their prices, that an incremental return can be earned which more than fully compensates for the risk incurred.

By itself risk does not create incremental return; only price can accomplish that.

Value investing is simple to understand but difficult to implement.

Value investing is simple to understand but difficult to implement.

Value investors are not super sophisticated analytical wizards who create and apply intricate computer models to find attractive opportunities or assess underlying value.

The hard part is discipline, patience, and judgment . Investors need discipline to avoid the many unattractive pitches that are thrown, patience to wait for the right pitch, and judgment to know when it is time to swing

Value Investors are absolute-performance oriented and are willing to hold cash when no bargains are available

Value investors, by contrast, are absolute-performance oriented; they are interested in returns only insofar as they relate to the achievement of their own investment goals, not how they compare with the way the overall market or other investors are faring. Good absolute performance is obtained by purchasing undervalued securities while selling holdings that be come more fully valued. For most investors absolute returns are the only ones that really matter; you cannot, after all, spend relative performance.

Absolute-performance-oriented investors usually take a longer-term perspective than relative-performance-oriented investors. A relative-performance-oriented investor is generally unwilling or unable to tolerate long periods of underperformance and therefore invests in whatever is currently popular. To do otherwise would jeopardize near-term results. Relative-performance-oriented investors may actually shun situations that clearly offer attractive absolute returns over the long run if making them would risk near-term underperformance. By contrast, absolute-performance-oriented investors are likely to prefer out-of-favor holdings that may take longer to come to fruition but also carry less risk of loss.

One significant difference between an absolute- and relative-performance orientation is evident in the different strategies for investing available cash. Relative-performance-oriented investors will typically choose to be fully invested at all times, since cash balances would likely cause them to lag behind a rising market.  Since the goal is at least to match and optimally be at the market, any cash that is not promptly spent on specific investments must nevertheless be invested in a market-related index.

Absolute-performance-oriented investors, by contrast, are willing to hold cash reserves when no bargains are available.

• Cash is liquid and provides a modest , sometimes attractive nominal return, usually above the rate of inflation. 
• The liquidity of cash affords flexibility, for it can quickly be channeled into other investment outlets with minimal transaction costs. 
• Finally, unlike any other holding, cash doe s not involve any risk of incurring opportunity cost (losses from the inability to take advantage of future bargains) since it does not drop in value during market declines.