Stimulus Withdrawal: What Does It Mean for Long Term Investment?

The US Federal Reserve finally announced the withdrawal of its stimulus programme, also known as quantitative easing (QE), on Wednesday the 18^th of December. Although anticipated, nevertheless this news will have a major impact on economies around the world. What the Castlestone Management blog wants to ask is what effect the stimulus withdrawal will have on long term investment.

To reach an insightful conclusion we first have to define what quantitative easing is and how it works. Quantitative easing is a programme put in place by the US Federal Reserve to shore up a flailing US economy.

Under the scheme, the US central bank bought government debt and mortgage bonds at a rate of $85bn per month. QE was designed to lower interest rates and boost economic activity. A side effect of the scheme was that it aided economic growth in many developing countries.

The news that the withdrawal of the stimulus has come into effect is a surprise to no one. There has been speculation for months that the Federal Reserve would take this sort of action on the back of a strengthening American economy.

Consequently months of speculation have in themselves done damage. Developing economies around the world have feared the effects it would bring. This means that prices and currencies have been unstable in many parts of the world for weeks, as uncertainly over the stimulus prevented them from stabilising.

So, now that the stimulus has been announced, will global economies stabilise, or will their worries materialise? What does this mean for long term investment?

We can’t know for sure. There is a reason after all that the withdrawal of the stimulus package was so feared. However, there could be argument to suggest that a strengthened American economy may dampen the effects. What is clear is the effect it will have on real assets.

We turn to India to see the evidence of this. India recently announced that it was unwilling to roll back restrictions it had put in place on the trade in gold bullion in the country. This was decided at the time due to concerns over the stimulus. Now it has been announced, we may see a strengthening role for gold in emerging markets.

This is because of the traditional role of gold as a hedge against inflation. India wisely ascertained that the stimulus may affect inflation, which would in turn affect stocks. This is why it chose to maintain restrictions on its lucrative gold trade.

At Castlestone Management we continue to view gold as a good buying opportunity. There’s always some incident ready and waiting to affect financial assets and real assets are proven to be lucrative even in these times. Only time will tell whether this theory bears fruit.  

World Trade Deal Inches Ever Closer To Becoming Reality

At Castlestone Management we’ve been watching the World Trade Organisation deal negotiations over the past few weeks. This is because the type of deal currently under negotiation is the sort that could impact the global economy. Any activity that affects things on a global scale is bound to eventually have an effect on long term investment opportunities. The last time we visited this issue on the CastlestoneManagement Blog the deal was under doubt. It seemed that negotiations had come to a standstill. However time moves very quickly in the financial world. This week the deal seems much closer to actuality

However there is still a problem. This problem focuses around Asian nation India. It’s reported that representatives from the sub-continental nation are currently holding out on the deal due to food subsidies. They have insisted that they are willing to compromise on a policy subsidising food for hundreds of millions of poor. This has put them at odds in the negotiations with more developed countries such as the US

The negotiations are currently in their final stages and are currently taking place at the WTO convention in Bali. This meeting has brought together nearly 160 member countries of the WTO in what would prove to be a landmark global trade deal. The deal has undergone many setbacks. There were also fears that without this deal the WTO would fade into irrelevance; that it wouldn’t fulfil its original remit. However officials are now much more optimistic about the deal going ahead

Commenting on the current state of the deal to reporters, WTO spokesman Keith Rockwell said that “we are very close” to finalising the deal. Furthermore he said that "as things stand now, the prospects are promising."  Vague as they may be these statements are a welcome change from the day before. This was when the deal that was thought would add billions to the global economy was in danger of collapse

He then turned his attention to a speech made by WTO director-general Roberto Azevedo, a former Brazilian trade negotiator. He said of the speech that "he told members they were now very close to something that has eluded us for many years and that the decisions over the next few hours would have great significance beyond this day."

Only time will tell on whether the deal goes ahead or not. However if it does it will add billions to the global economy. This means it will have an effect on all areas of finance, even long term investment. At CastlestoneManagement we’ll be watching to see how this plays out.

Markets Rebound After News of the US Debt Deal

News that the US government came to an agreement that reopens the federal government and averts the debt ceiling yesterday (Wednesday 16^th October), hours before the US was due to default on its debt payments to its international creditors, has been greeted with enthusiasm by Asian markets, as they all sees rises.

At the time of writing (Thursday 17^th October), the news had already filtered through to Asian Markets, the first to start trading since the US debt deal was passed by Congress, and as a result, the news saw share markets from Australia to Japan drive their indexes to the sort of levels not witnessed in weeks. As for specifics; MSCI’s broadest Asia-Pacific index outside of Japan rose to a fresh five month high, last being up 0.6%. Also after scaling a three week high recently Tokyo’s Nikkei rose 0.8%

However US stock futures dipped in a move that resembled a buy on rumour/sell on the fact move having already rallied around 1.3% overnight. Unusually European Markets such as London’s FTSE100 and Germany’s DAX are thought (at the time of writing) likely to open slightly lower, as experts are predicting that investors will be tempted to lock in profits gained last thing on Wednesday when news of the deal filtered through to European Markets.

The deal puts an end to the partial US government shutdown, which began on 1^st October when Republican controlled House of Representatives refused to broker a deal to extend US government funding in a bid to negotiate delaying or removing funding from the ‘Obamacare’ law, the law designed to provide some form of health care to every American, with the Democratic controlled Senate and President Obama. It also averted the US debt ceiling, which the country was due to hit today, which would have seen it default on its payments to holders of US debt, something that has never happened in US economic history. It would have been disastrous for the global financial sector, as the US is the world’s largest economy. It would have had a stunning knock on effect.

The deal, which sees the government funded until 15^th January, reopening the closed down departments as of today and raising the $16.7 trillion US debt ceiling was championed in a bipartisan effort by the Senate yesterday, which saw Democratic Majority Leader Harry Reid team up with his Republican counterpart to draft the initiative. The plan passed an 81 to 18 vote in the Senate, before being sent down for approval by the House. House Republican’s chose to concede defeat and many went along with the bill, with it passing the house 285 to 144 votes. However it must be noted that these are only temporary fixes. The problems are still there, and there’s a good chance we could see a repeat of this whole affair in early 2014.

At Castlestone Management we believe that these broader structural economic issues will continue long term. As industrialised nations continue to support their economies by printing money and holding interest rates low, gold and precious metals are exceptionally placed to begin another long term bull market.

Castlestone Management Details Why Gold is Such a Safe Investment

As far as investments go, gold bullionhas often been seen as one of the safest products to invest in. It has held this reputation over the past five millennia, acting as a safe haven asset in times of financial instability, especially so when the devaluation of international currencies leaves few investments safe from the devastation they cause. Recently, with the looming threat of the US reaching its debt ceiling (at the time of writing, Wednesday 16^th October), which has the potential to have far reaching effects on the world economy, many in the financial sector are once again questioning whether now is the right time to invest in gold.

To understand how gold has acquired its reputation as one of the safest investment opportunities on the global economic stage, you have to understand the history behind it. The history begins far before the first stock markets came into being. gold has always been seen as a commodity to be coveted and a store of value. Ancient civilisations of every race colour and creed valued gold for its unique blend of rarity, beauty and near indestructability.

Gold grew to be the one universal constant in the emerging financial sector. Everybody valued it, which meant that it held a real significance on the world stage. Nations stored gold for wealth and it became the medium of international exchange. The first monetary role for gold was ascribed to it in 1792 by the United States, when Congress put the nation’s currency on a bimetallic standard, backing it with gold and silver, many countries followed and by the end of the 19^th Century, the ideal was for a nations’ currency to be measured against the gold standard.

The great Depression of the 1930’s saw most nations forced to sever their currencies away from the gold standard in an attempt to stabilise their economies, however gold formally re-entered the world’s monetary system in 1944 when the Bretton Woods Agreement fixed all the world’s paper currencies in relation to the US Dollar, which was tied to gold. This lasted until 1971.

Today precious metals including gold have an intrinsic investment value because of their versatility and their necessity for use in heavy industry. This all highlights the versatility of gold. Time and time again the global economy has faced crisis, time and time again gold has recovered its role in said economy. History quite frankly speaks for itself; gold is the most versatile investment you can make and in times like these, where there’s so much instability, Castlestone Management knows gold is the investment that will make sure you can weather the storm. 

Castlestone Management on the FTSE 100 Weakening due to the US Government Shutdown

Although markets seemed to be faring comparatively well earlier in the week at the start of the US government shutdown, as the week is drawing to its close, the strain is beginning to be felt throughout the international economy. At market open today (Friday 4^th October) London’s FTSE 100 edged lower due to pressure from mining stocks over the impasse that the US budget crisis continues to take its toll on investor confidence.

By 0736 GMT, the FTSE 100 was continuing to show the strain caused by the partial US shutdown as it was down 12 points or 0.2% at 6,436.77, off 3%; with miners off by 0.9% as cyclical shares started being sold by investors who have become wary of the risk they might be taking. At the start of the day, during the quiet early morning trading period, mid-cap stock retailer Carpetright proved to be a particularly big faller, off a considerable 9.5% after a previous profit warning .The effects are also being felt by others as downbeat comments had an effect for blue-chip sugar producer Tate & Lyle, hurting them too as they were 0.3% off after they announced that their first half profits were hampered by the cold spring weather in the United states and the slow start to the summer’s effect on their product.

Many are beginning to see the strain that the partial government shutdown; the closing of all non-essential US government services, is having on not just the US, but the international economy, as not only are consumers starting to tighten their belts in an attempt to weather out the storm, but American’s are growing more reluctant to release their capital and invest in a time where they may soon need security.  The US, despite the rise of nation’s such as China and India, is still the world’s largest economy and still fuels a large portion of international investment. It’s the domino effect; when the lynch pin domino falls, the rest feel the knock on effect.

The US government shutdown came as a result of their government’s inability to come to terms on how to pass a new US budget., According to previous negotiations in Washington D.C, the previous budget that was granted to provide capital to government institutions was due to run out on 1^st October, and in order to continue funding for those services, Congress would have to agree a new budget.

That was the problem, Congress wasn’t in agreement. The Republican controlled lower house, the House of Representatives, took the opportunity to use the deadlock to try to push forward their agenda on ‘Obamacare’ (health care being extended to every American). President Obama and the Democratic controlled Senate wouldn’t negotiate and the deadline passed.

Despite these circumstances, much more dire straits could be in store for the global economy, as the US is due to default on its debts unless it raises its debt ceiling by 17^th October. With Congress so divided, Castlestone Management reckons we may be in for a rough ride in the coming weeks, and it looks like things may get worse before they get better. 

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