On government (mis)intervention

So we’re in week 2 of the European Central Bank’s (ECB) quantitative easing.  Among the effects:

  • Bond bubble: some commentators have spoken phrases such as ‘bubbles are only obvious in hindsight’.  Well, despite articles justifying the purchase of negative medium-term bond yields, I hope it’s obvious to most that these 10-year bond yields are unsustainable:
  • Let's lock in 1% for 10 years, shall we?  Source: Bloomberg

    Let’s lock in 1% for 10 years, shall we? Source: Bloomberg

    Anybody notice in the above that countries such as Italy, Spain and France can borrow for 50% or less of the US Treasury?  Does that make sense to anyone?

  • Stocks flying: the S&P 500 is more or less even in 2015, despite tepid company results.  European stock indices are flying: the German Dax is up 23% YTD, for example.  While Germany is growing, that’s a big flier. (Side note: I’m happy I did that little bit of rebalancing a couple months ago).
  • UK house bubble keeps going: as written before, this market defies logic.  The UK government’s policy towards soaring house prices has been…um…subsidised mortgage financing.  It’s a sad joke.
  • US Dollar is king: as the Fed is turning the corner to raising interest rates, while Europe and the rest of the world are still cutting/QE’ing, the US Dollar index is up about 10% this year.  As mentioned before, if you’re American and thinking of international travel, or even moving offshore: go now.


Main street?  All the above is great news for investors (though not necessarily savers).  But I’m not convinced this QE helps these economies get back to business.

The direct intervention in financial markets means stock and bond capital gains are much greater (and more predictable) than business investment.  If you’re an entrepreneur, funding can be tight from the banks; why would they lend, when the government bonds they hold spare are making a better return on equity?  If you’re a corporate director, why borrow at low rates to build new plants or try new projects when the return on buying back shares is so good?

In sum: QE had a great initial function, in my opinion.  It loosened credit for big businesses; it jumpstarted merger activity; it finally anchored inflation expectations to essentially zero.  In my opinion, the usefulness of QE has been exhausted for the most part: as central bankers have mentioned around the world (and I’ve written about), it’s time for serious fiscal policy to kick in.  Let’s see some new roads, bridges, broadband, etc.

Makin’ it blow: investing in renewable energy

Old school renewable energy.  Source: Google Images.

Old school renewable energy. Source: Google Images.

I’ve written before about one of my main principles of portfolio management: diversification.  Very important, as I come to this investment game with much humility regarding my ability to forecast asset returns.  Choosing many different return streams should *hopefully* give the family portfolio the best chance at steady, but appreciable, gains.

The latest iteration of this approach finds me looking at renewable energy; in particular, corporate bonds secured on renewable energy infrastructure such as solar panels, biomass power plants or wind turbines.  Here are a few websites I came across while researching the space:

Some thoughts:

  • Returns seem decent-high: most projects offer 6-10% p.a. interest, with tenors of 5-10 years.  Way better than the ~2%ish on government debt, or ~3.5% on corporate debt.
  • Bond security seems decent: in the docs I’ve seen, the asset (e.g. a windmill) is pledged as security for the bonds.  So more security than you get with the debt mentioned above.
  • Key risk is government risk: the economics of renewable energy are still tightly bound to government subsidies of various sorts.  In the UK (the focus of my research) the overarching EU scheme forces countries to generate ~30% of power through renewables by 2020.  The UK, for one, is nowhere near this.  So the government has rolled out several programmes to ensure those building renewable infrastructure get a guaranteed revenue stream.  BUT – as my dad always says, the only risk you can’t hedge is government risk.  In this case, suppose way more windmills get built than can possibly be used – would the government still provide the subsidies, particularly when some/all of these subsidies are paid through consumers’ energy bills?
  • Other risks seem mostly insured/hedged: these include construction insurance, operating insurance, power purchase agreements, etc.
  • In sum: the juicy return is in return for government risk.  If subsidies get slashed, with no grandfathering, you (as bondholder) end up with a windmill which generates uneconomic power.

Will I invest?  Given the timeline for most of these subsidies/schemes/agreements/quotas measure decades, it might be worth a punt for 5-10 years.  By then, we’ll likely either have far too much renewable energy than we know what to do with (not, in itself, a bad thing) or maintain status quo of needing more (with associated subsidies).

Fed ends QE; Treasuries rally?

From what I can tell, the Fed basically announced exactly what the market expected: no more $xx billion of price-insensitive demand for Treasuries and MBS per month; a better economy noticed; and rates will stay low for a considerable time.

So this is how the US Treasury Bond futures market waved farewell to QE:

Hurrah!  Less demand going forward!  Wait...what?  Source: thinkorswim by TDAmeritrade

Hurrah! Less demand going forward! Wait…what? Source: thinkorswim by TDAmeritrade

One would (naively) think the end of considerable, price-insensitive, demand would cause prices to fall.  And…no.  Must be that the event-risk of what the Fed could have said came to naught, so life is OK again.

On the plus side, bonds seem to be back to the ‘anti-equity’ trade: equity futures are off since the announcement.  Better keep those long positions in bonds, then…