Thanks, Barack - your profligacy is making our unit price tumble

A VERY nice man I am sure, but he has to go. Barack Obama who, along with his under-pressure banker Ben Bernanke, has "shellacked" the Investment Club's unit price and brought it crashing down last month to £2.62. How can I blame his actions for the slump in the Club's unit price?

The US gross domestic product (GDP) is the largest in the world. So large, in fact, that at the beginning of this year its value in dollar terms was greater than the sum of the world's next four largest countries' GDPs. This means that when the US Federal Reserve bank acts to manipulate the US economy it impacts the world economy.

In the latest very controversial attempt to stimulate the American economy - so controversial that the German finance minister, Wolfgang Schaeuble, described the policy as clueless - Bernanke is set to pump up to $950 billion into the American economy by June 2011 to boost GDP. He argues that portfolio balance theory stresses that when the Fed buys bonds, depressing yields, investors increase their demand for other assets, particularly equities, raising household wealth and spending and, thereby, GDP.

Hide Ad
Hide Ad

However, the Dow has already risen about 70 per cent so how much further? Say another 10 per cent. US households have about $7,000 billion in equities, therefore every time the market goes up by 10 per cent it raises GDP by a paltry one quarter of one per cent.

But the overwhelming wealth of American households is in real estate, the value of which has fallen by $4.25 trillion post credit crunch. This completely negates any feelgood spending factor of $0.7 trillion engendered by an equity market rise.

The theory assumes that all $600 billion plus goes towards depressing yields. However, quantitative easing targets nothing, it just swills about the economy like fluid in a drunk's bladder. Consequently, a very large chunk of this money will go into markets abroad and commodities, causing inflation. That is why immediately on its announcement interest rates went up by about 30 per cent as reflected in the US long bond yield. This in turn pushed our rates up and caused the Club's unit price to fall.

How does the club react to Obama's profligacy? The club is now forced sellers of bonds and a Johnny-come-lately into the equity markets.

One stock I have been looking at is Scottish & Southern Energy. The share has not yet participated in the general stock market rally. Its share price had been as high as 16.79 at the beginning of 2008, but has fallen precipitously since to support at 10 in October 2008. Subsequently it has stayed within a trading band between 10 and 12.

However, from July this year, after its share price hit its ceiling of 12, it has found support just above 11. It has now tested this support three times and so far it has held.

This month, therefore, the club is placing a limit buying price on SSE of 11.40 and a limit selling price of 70 on War Loan for its bond holdings.