Market Distortions

20th May 2014

By James Ferguson

The original intention of Quantitative Easing (QE), as clearly outlined in Mervyn King’s speeches in the autumn of 2010, was to prevent the deflationary contraction of broad money supply. As such, QE’s second iteration two years later had an altogether bolder remit; no less than the artificial inflation of nominal GDP; and it appears to have worked. The UK is now widely lauded as a successful growth story, the strong man of Europe and (finally) well on the way back to full employment – despite the puzzling slump in productivity that had previously been attributed to the hoarding of labour during the recession.

But what if there’s a wholly different interpretation of what is responsible for the UK’s recent economic recovery? What if it’s all down to QE? (more…)

Positive outlook in the US offsets heightened geopolitical risk

20th May 2014

By John Chatfeild-Roberts

Western-developed equity and bond markets have been surprisingly stable this year, though the index numbers hide significant stock divergences.

This stability has been in spite of heightened geopolitical risk, most notably the annexation of Crimea by the Russian army, consolidating control of the strategically vital warm water port of Sevastopol for its navy.

Supportive data indicating continuing economic growth in western developed countries reassured investors, as did the expected reduction by the US Federal Reserve of its monthly purchase of bonds from $65bn to $55bn. (more…)

A tax on ignorance and inflation

20th May 2014

By Merryn Somerset Webb

I listened to BlackRock’s Larry Fink speak at the National Association of Pension Funds conference in Edinburgh this week.  He was very clear that everyone must save more; that his industry must somehow “communicate the urgency to save today” and that anyone who doesn’t act on this urgency faces a “miserable future”.

Of course, asset managers are always saying that.  They would. The more we save, the more money they rake off in ad valorem fees. And there’s a large group of people who are following Mr Fink’s advice already, but also face a miserable future – or at least, a miserable tax bill. Far from under-saving, they are over-saving.  Why? Because of something called the lifetime allowance.  The LTA was introduced eight years ago with little fanfare and has fluctuated all over the place since then.  It started at £1.4m, went to £1.8m and then fell back to £1.5m. And it’s about to change again: from April 6 it will be £1.25m. (more…)

An Undeclared Tax on Savers

20th May 2014

By Merryn Somerset Webb

This week saw a pretty depressing anniversary:  the UK base rate has now been at 0.5% for five long years. Five years is enough time for most people to get used to anything. So it is worth remembering how extraordinary this is. We have records of UK rates going back to the late 1600s, so we know that they have never been this low before.

Interest rates are at 300- year lows. There have been huge winners from this – anyone with a mortgage they shouldn’t really be able to afford, banks, big companies who can easily take out cheap debt, the government (which has been able to keep borrowing at very low rates), and holders of real assets (who have benefited as equity markets have soared). (more…)

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Andrew Benson - Managing Director of Bow House

Over the past 25 years, Andrew has held several key positions with major financial organisations including international life companies and asset management organisations.

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