Quantitative Easing - Does it work?????

So time for a bit of thought on such a romantic day!  happy st valentines day to you and the bank of England!!!

Central banks try to raise the amount of lending and activity in the economy indirectly by cutting interest rates. Lower interest rates encourage people to spend, not save but when interest rates can go no lower, a central bank's only option is to pump money into the economy directly. That is quantitative easing (QE).The way the central bank does this is by buying assets - usually financial assets such as government and corporate bonds - using money it has simply created out of thin air. The institutions selling those assets (either commercial banks or other financial businesses such as insurance companies) will then have "new" money in their accounts, which then boosts the money supply.

In March 2009, the England Monetary Policy Committee (MPC) announced that it would reduce Bank Rate to 0.5%. The Committee also judged that Bank Rate could not practically be reduced below that level, and in order to give a further monetary stimulus to the economy, it decided to undertake a series of asset purchases. Between March 2009 and January 2010, the MPC authorised the purchase of £200 billion worth of assets, mostly gilts – UK Government debt. The MPC voted to begin further purchases of £75 billion in October 2011 and, subsequently, at its meeting in February 2012 the Committee decided to purchase £50bn to bring total asset purchases to £325bn but doubts linger over how well its policy of quantitative easing is working

A Bank of England report into the effect of the first round of QE suggested that the measure had helped to increase gross domestic product by between 1.5% and 2%, indicating that the effects of the programme had been "economically significant".  QE worked in 2009. Deflation in the cost of living (the all-items retail prices index measure) peaked at just under 2 per cent (i.e. the price level fell about 2 per cent) in mid-2009. The money stock would have fallen something like 5-10 per cent without QE. The plan to lower bond yields has obviously worked with the 10yr bond falling by 39% in the past 3 years. QE works by the Bank buying bonds in the open market with the demand causing the yield to fall and their attractiveness as an investment to fall as well. This has allowed the UK to maintain a level of bond auctions, and public debt, without too much trouble from the ratings agencies or any vigilante bond traders.

From an inflation point of view the result is less certain. Inflation in the UK has remained sticky throughout the crisis with CPI remaining above the Bank’s 2% ± 1% target since January 2010

2012 What is in store for you! The True story!

It's December and every analyst and economist and financial man dreads the predictions of what is in store for your for 2012.  The stars and astrologists and gurus etc are in a quandary because they need to re-invent new strategies as we move into a super brand new age!  Watch this space!!

Some may love this opportunity to look into their crystal ball and cast their eye forward to the year ahead. However, most financial whizz kids do not want to look silly when unpredictable world events and occurrences take us off in a completely unexpected direction.  Expect the unexpected.

So,  best way to predict the future was to invent it. Predictions in calm markets are pretty useless, let alone in the kind of markets that we are seeing at the moment. Nevertheless, it is now time for all economists to prostrate ourselves and have people throw rotten fruit and the occasional curse word at them , toy toy in the crowds as we proceed to predict what the next 12 months might have in store for us.

So we base this on a huge assumption - the Eurozone does not fall apart. If it does then all bets are off and you better get used to growing your own veggies. Here goes..

Chinese Investment in SA quadruples

China is the biggest investor in Africa. All across Africa, new tracks are being laid, highways built,ports deepened, commercial contracts signed—all on an unprecedented scale, and led by China, whose appetite for commodities seems insatiable. Do China’s grand designs promise the transformation,at last, of a star-crossed continent? Or merely its exploitation?  SA backs down in all aspects for the big buck and watch them own all the land soon.  Look at Centurion in Gauteng almost completely owned by MNT developments.  Guess who?

The UK economy will not enter a double dip recession

The UK economy, as is the same in most developed nations, is struggling along at the moment with little optimism in the short term. We expect that the two toughest quarters for the economy will be Q4 this year and Q1 2012 as consumer spending slows, business investment remains weak and government spending cuts continue.   It’s year end, so maybe forgive me for coming across as overly negative, but everyone must realise that the next couple of years regardless of whether you live in Kensington, Kuruman, Kuwait City or Kenton-onSea are going to be tough. You don’t get over 10 years of excess without a significant hangover.

EU leaders will sort themselves out in 2012

A great point of debate.  The danger of implosion is high  and being an optimist (sometimes blindingly so) but I think that the great and the good of the European political system will come to their senses in 2012 and a lasting resolution to the continent’s debt problems or the start thereof. So lets dream forward - This will come from a new “fiscal compact” – a centralised government and the eventual transition to a United States of Europe. They will not do this as a result of anything other than another brush with the apocalypse. I’m not sure what the trigger will be (3 bad business confidence numbers from the Germans, France’s credit rating being cut, social unrest in Italy or the fall of another government) but something large will happen that will eventually shake the political class from this malaise. and the Greeks will still avoid taxes.

House and Homes around the World

Less people will be able to afford houses anywhere and the rich will still buy obscure investment properties.  A new term the FAMILY HOME will start, we already see signs of it.  This is where the family from Grandparents to Grandkids will start sharing commune based homes, double stories, one land one family (Large) approach and all will contribute towards it.

Banks and Mortgages

New home loan products will hit the market being structured finance packages that include all aspects of financing, short, medium and long term structures and used as savings vehicles.  A one account for all your, your children, larger family needs - just to restrict the banks risk.  Normal lending will resume from 2013 only, forget about 2012.  Repossessions will increase at least by 10 times.

The Green Effect

If you ever thought COP17 was going to do anything else but give people a great paid for holiday, stimulate the KZN economy and make all the scientist feel important forget it.  They could never and never will stop what they have started - because they do not really care. A sad day for all but the good news is that people like you and I will make huge efforts because we want to.  There is a superhero in each of us.

And for fun, just for you…

The ANC will be rocked by a strategic partnership split.

The Duke and Duchess of Cornwall will announce a royal pregnancy

Petrol Prices will rise to unprecedented heights

Sales of scooters will exceed expectations by far

A new leader emerges in SA.

I would like to wish you all the best for the festive season, and a Happy New Year and c'mon 2012!!

Who is recovering in the Worlds Housing markets?

According to data compiled by the Economist, only one national housing market has recovered to “fair value” after the real estate boom of the late nineties and early 2000's

Disregarding the housing markets in Germany and Japan, which did not witness a property boom in this period, the US is now the only global market (which the publication analyses) where prices are below the long run price to rental income ratio.

South Africa, seems to be OK, but its very up and down even though slaes seem fine in the lower brackets and banks are offering mortgages albeit tentatively.

According to data compiled using the Case Shiller national index, prices are now 11.5% below “fair value” which compares to overvaluations of 48.5% in France, 39.2% in Spain and 27.8% in the UK.

Although there is some debate over the Economists measure of “fair value” (house prices are more a function of affordability and therefore real incomes and interest rates rather than rental incomes) the conclusion is probably a sound one. The US housing market is in better position than most Western markets.

At the turn of the year, we tipped the US market as one of the best markets for investors and agents. The news since then has been far from positive with prices continuing to decline in most regions (although sales volumes have picked up in many states such as Florida)

The best property market in the world?

Well you certainly can pick up awesome deals for properties in possession and these lists are easy to come by, with 100% homeloans and cheapper trasnfer or no transfer fees.

Although the social consequences have been awful, in pure economic terms, the US property market is arguably one of the best functioning real estate markets in the world.

The US fell earlier and more rapidly than almost every other national market. A big reason for this is the US system of non-recourse loans. Home owners in negative equity can walk away from their debts and developers and lenders have no recourse to reclaim the debt. The result has been a flood of supply and sharp price corrections.

Almost every Western economy is going through a process of painful debt reduction. There are only four ways out:

Save more (austerity at both a personal and government level)

Earn more (increase real incomes and/or economic growth)

Inflation

Debt default

Through a process of mortgage debt default, the US has put itself in a strong position to recover strongly from the credit-bubble-inducued recession (although it still has severe sovereign debt issues).

As Robert Shiller points out, US house prices may decline another 10-25% so the crisis is not over but its long term position is much healthier than most European markets.

The UK and Spain for example face a long period of “deleveraging” which means either high inflation, austerity or a sharp rise in repossessions. Without a mix of all three for a sustained time period, there can be no return to a “normal” market and that means no short-term bounce back in the lifestyle market of overseas property.

South African Repo rate remains unchanged

Well it really comes as no surprise that Gill Marcus left the REPO rate unchanged this month. South Africa's uncertainty with regards to inflation and rising food and fuel prices kind of made us aware of this.

However, if you're a property buyer and in the buyers property market I highly suggest that you keep an eye on REPO's and repossessed properties, as this is definitely time to get bargains in South Africa.

Repo Rate - March 25 2011 - 5.5%