Return to ZIRP? Its not a game.
Dear Reader,
I finished a week of driving across England to meet a variety of people from all walks of life. The UK road system is absolutely shocking. Perhaps spending some of the projected overrun cost of 85 billion quid from HS2 on fixing what we already have rather than 257,600,000 pounds per mile for a 300 mile vanity project might be a better idea.
Anyway I wanted to consider old computer games and the new paradigm of Zero interest rates. Back in the day there were a fiendishly difficult series of games revolving around an imaginary land called Zork. If you get a chance to try one out it will drive you crazy. In fact here is a link to be able to try them out online...
As of two months time Count Dracula's ECB is likely to combine a rate cut with an asset purchase scheme. One glaring fundamental question for me is WHY do this if the stock markets are high and G10 government bond yields are already in the land of Nirp. I am not a highly paid economist who would roll out some Keynesian trope about stimulus and the need for inflation. I just think they have run out of ideas and are doggedly following Einstein's definition of insanity - A slightly odd macro economic policy choice.
Inflation is one of these City fixations that drives me mad. For me it would be much better to let things find their natural levels before excessively intervening to tinker with things like some rubbish mad scientist.
Given this upcoming tinkering I continue to be underweight Euro denominated funds as I think the currency will have pressure.
I like to imagine there is a school for fund managers out there. A bit like Hogwarts but with calculators. Everyone that has gone through the CFA knows the numerical torture that it entails. The biggest issue facing pension fund managers now is allocating money into government bonds as part of a portfolio. There is no value as you can see below. Who ever thought Greece yields would be 2%? The problem is Portfolio Class 101 says you should own a relative percentage of government debt related to the risk profile of your fund.
There is another common thread that your equity bond risk weightings should be related to your age. Taking me as an example (51) I should by this rule of thumb have 51% bonds to 49% equity. Thank you but no. If I wanted to burn money I would rather blow it on a big night out rather than buy Germany at -0.38%.
I will harp on about this constantly until the Keynesians realise that this easing strategy is utter lunacy. The long term effect on savers' assets is going to be very destructive. Pension fund managers are potentially going to be dragged into hunting for yield in the riskier government bonds like Brazil or India thereby breaking their risk models.
That said if you had ignored the macro economic reality and just bought iShares € Govt Bond 15-30yr UCITS ETF EUR IE00B1FZS913 you would have made 16.3% year to date and would have had a 3 year average annualised return of 5.41% - Not bad at all for a government bond etf. You might still be tempted to jump in even at these levels but I would advise anyone to consider how much further these G10 yields will actually go. What do I know I? Just giving my point of view.
One point worth considering is financials. Dracula is unlikely to be tempted to squeeze governments much more and will probably look to pivot his purse strings into new territory. I think corporate bonds and particularly Banking issues will be on his radar. Possibly worth considering as a play. Personally I will sit that one out as I prefer equity centric funds. Still love US small caps and Tech are forging ahead.
I will leave you with the news that Mario Draghi retires on Halloween the same day as we apparently leave the EU.
With that Bazzer and I wish you a great weekend - I am off out to try out my new 11-28 cassette. 
