James Burns: We have no influence on the one person who threatens our figures right now - Obama

IT NOW looks as though we are in the final leg of a UK government bond bull market that originated in 1981. This bull market has served the Investment Club well since 1995. It also gave the club’s unit price a second consecutive month all-time high in August of £2.87.

According to the club’s analysis, final confirmation that the bond bull is on its ultimate ascent will arrive when the price of 3.5 per cent War Stock breaks above £94. If the analysis is correct, the club should be thinking of an exit strategy.

Currently, analysis is indicating a top in War Loan stock price of £112. At this level the yield would be around the 3 per cent mark and the club could leave with a handsome profit. Unfortunately, I am not at all confident these targets are going to be met before the decade’s first year is out.

There is a reason for this apprehension. My opinion of former Chancellor Gordon Brown’s ability to manage an economy has always been, in scientific terms –459.67F, or absolute zero. The other economic kingpin whose financial acumen I have a very low opinion of is the governor of the Bank of England, Mervin King. Worryingly, my opinions have now been vindicated, if former Labour Chancellor Alistair Darling’s recent revelations in his book, Back from the Brink, are anything to go by.

If my perspicacity extends across the Atlantic there is another comic double act in the shape of Ben Bernanke – chairman of the United States Federal Reserve – and President Barack Obama, whose economic prowess I hold in equal esteem to the Brown-King duo and who could wreck the club’s fortunes.

Bernanke, though amply qualified for his role, recently used his speech at Jackson Hole to blame the US banks’ lack of lending for his inaccurate growth forecasts. Yet apart from the recent Bank of America re-financing fiasco, the 7,531 US banks covered by the Federal Deposit Insurance Corporation are actually in pretty good health.

Their net income was up by one-third in the last quarter; year-on-year, the proportion of profitable institutions is sitting at 85 per cent and the banks are complaining that there is no demand for money.

Surprisingly, Bernanke made no mention of the QE1 and QE2 asset bubbles he created with his quantitative easing programmes, which stifled growth.

However, there was a soupçon of sanity: he also said that the Fed cannot help growth other than set low and stable interest rates.

But we still have the loose cannon of Obama. With his latest $450 billion largesse to curry favour with the US electorate, he continues dishing out money without cutting back the overall deficit.

He is now the main threat to the club’s prosperity. His latest inept stimulus package threatens to derail the recent reduction in US government bond yields, which fell in August by 11.5 per cent. In the same time-frame, War Loan yields have slipped by 2.46 per cent.

Therefore, the US long bond has built up much more of a head of steam with a greater possibility of falling fast. If this happened it would adversely affect the UK government debt market quite markedly and consequently the club’s asset value and wealth.

Alas, there is not a thing the club can do to influence Obama’s recklessness. However, we can try and protect ourselves by selling stock rapidly if our analysis signals danger.