As US 10-year Treasury yields flounder in 1.73% territory, UK 10-year around 1.69%, as ultra high risk euro-sovereigns yield (ex-Greece & Portugal) and trade in the 6-7% universe (Spain c.6.7% Italy c.6%) , as monetarists stand by the taps to turn on the QE printing presses for the umteenth time there is one thing that everyone should be made aware of now. Well, two things actually but who’s counting in the scale of incalculable accounting inaccuracies everywhere.
In reference to the titled equation at the top of this blog just what is “PQE” then? Well, it’s something else I’ve just coined. It’s called “Personal Quantative Easing” and it goes like this. If say Mervyn King thinks that future generations of Brits are having their jobs and incomes protected through QE then “PQE” may be a valid alternative for those fed up with QE and the lack of growth equating to job creation, etc. QE as we all know creates electronic money in order to buy gilts (UK gov debt) with the idea of injecting liquidity into the financial markets and eventual economy. It’s supposed to catalyse bank lending too but since there wasn’t any lending to SME’s before the crisis started in 2007 I don’t see how we can expect to have a banking system designed to stimulate business when actually it has been profiting from the very same businesses the banking industry is and was designed to support. Pretty well since the late ’80s all our commercial banks have traded against us not with us. This has been particularly true ironically of the financial services industry as we all know. That subject is for another day.
So if one has cash and one is concerned about the UK economy what does one do with it? Buying gilts has been and is a pointless exercise. They are all horrendously over-priced and only for the brave bar the odd index-linked variety. With official inflation today at c. 3% (from 5%) and possible real inflation (“pri” oh stop it!) nearer to 10% there is little scope for liquid asset protection. Banks are paying zero to a farthing on deposits and current accounts whilst higher risk building societies challenge the bank rate mechanics by offering HIGH RISK RATES without health warnings to countless unsuspecting depositors. Are these cash packages really protected by FSCS £80,000 threshold? Well, time will tell.
No, the extraordinary observation and opportunity is in “PQE”. Whilst tax payers annd ordinary citizens stand by to allow QE there is a market methodology all of its own that is being devised as I speak. Starting with the premise that Gold is cheap and going up (see countless sensible analysts and their arguments for this premise) then it is easy to assume that a bonanza in gold shares will ultimately follow. Meanwhile today one can take very little risk in capital markets by purchasing shares (is the risk really any different to government backed guarantees in an horrendous debt enforced environment?) in some of the large producers at rock bottom prices (p/e’s in low single digits). For example (note ALL gross yields before tax) Newmont yields 2.87%, Freeport McMoran 3.86%, Agnico Eagle 2.01%, Barrick Resources 2.00% (on LSE African Barrick yields 3.01%, Petropavlovsk 3.25% and Randgold 0.50% by comparison), GoldCorp 1.43% and there are countless others also paying out dividends on a more favourable basis than bank deposits and with the added bonus of a major pick up in prices in the foreseeable future. Much has been stated about the reason for the pricing anomaly but in essence it would appear that our old adversaries at JP Morgan and Goldman Sachs have been shorting gold shares for several years whilst going LONG the gold ETF market. It’s feasible that the hedging will get reversed quite soon with new sovereigns openly buying bullion positions. The IMF and UK are just two powers that have virtually exhausted their gold reserves. I’d expect this to be reversed as the penny is indeed dropping. As an aside Newmont has stated that it’s dividend policy will reflect the gold price; so if Gold goes say to $3,000pto the dividend should increase pari passu. It’s mind boggling to consider though if Gold goes to the top end forecast of $60,000pto. Who said that Gold is NOT a credible investment (or currency) against a derivatives driven banking and capital markets universe? In addition if one’s a bull of the oil price similar attractive yields can be found in oil majors right now. Conoco Phillips yield 4.98%, Royal Dutch Shell 5.11%, Encana 3.84% with a host of others offering returns around 2 x (+) higher than current UK and US 10-year yields. DYOR.
So try a bit of “PQE” if you recognise “PGS”, you know it will one day make sense and may well get us all out of a rather large hole.
NOTE THIS BLOG IS NOT DEEMED TO BE AN INVESTMENT RECOMMENDATION FOR ANY COMMODITIES OR EQUITIES MENTIONED IN THE ARTICLE.