The Investment Club is in mourning at the passing of the gilts era, which has spanned four decades and helped the club maintain a steady rise in its unit price from £1 in January 1995 to £3.25 at the end of November 2012.
What, then, has potentially opened the gates to Weimar Republic-style hyperinflation and caught the club off guard?
At the end of November, Chancellor George Osborne suddenly started dissembling and backtracking on his deficit reducing promises, much in the same manner as Gordon Brown did when he realised he had lost control of spending.
But George Osborne has gone one step further. He has robbed money from the Bank of England (BoE) to serve his own purposes.
The BoE created an entity called the asset purchase facility (APF). The Bank then printed fiduciary money in an exercise called quantitative easing (QE). To date it has created £375 billion, which has been under the trusteeship of the BoE lodged in its APF entity.
APF then pays the BoE interest of 0.5 per cent for borrowing the money. The APF now goes into the government bond market and purchases gilts, forcing the price up and the yield down.
In spite of forcing the yield down it receives on average interest of 2.9 per cent on its gilts holdings. The APF is now effectively earning interest of 2.4 per cent.
Over the period of QE the APF has accumulated an interest war chest of £35bn. It is this money the chancellor has gone in and robbed.Why should this impact the club? First, confidence is lost because the chancellor is now using stolen money to massage his borrowing requirements and gilt prices go down not up.
Next, the BoE is no longer seen as being trustworthy and independent of the government because it has acquiesced to funds under their trusteeship being taken for the government.
The £35bn was there to absorb some of the losses the bank will incur once it starts selling the APF’s store of gilts. But worst of all, by the Treasury purloining this money, it is now printing money to finance government spending, not to increase the availability of finance to the private sector to encourage growth.
Currently the UK’s debt, as far as one can tell from official statistics, is around the £2 trillion mark.
To put this into perspective, the UK’s GDP is just over half this figure, so at the present rate of cash burn and GDP growth we could have debt of up to 100 per cent of UK GDP over the next couple of years. This all points to out-of-control spending, higher inflation and lower gilt prices. Therefore the club has to sell gilts and buy shares. This process in truth has already started. In August the Club sold half its holding of gilts at what now turns out to be a very reasonable price. Then, last month, we dipped our toes into the share owning world with a purchase of 5,000 shares in Vodafone.
So this month, unless George Osborne suddenly discovers he has a spine and starts getting serious about cutting costs, the club will be getting into the share buying habit.
Let us hope this gives us a merry Christmas and a happy 2013.