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The Inflation Mega-trend Implications for UK Borrowers and Savers

Personal_Finance / Savings Accounts Apr 20, 2010 - 02:59 AM GMT

By: Nadeem_Walayat

Personal_Finance

Best Financial Markets Analysis ArticleThe following is an excerpt form the Inflation Mega-Trend Ebook Pages 50-51 (FREE Download) The ebook includes in depth analysis of the unfolding inflationary trends and 50 pages of wealth protection strategies.


Firstly do not forget that the primary purpose of the banking sector is to turn everyone (including government's) into debt slaves. So the first objective is for people to implement a plan to FREE themselves from DEBT SLAVERY. The artificial banking system is currently running on a huge profit margin which means borrowers are paying through the nose despite a 0.5% base interest rate and 0.63% interbank rate i.e. borrowers are paying many multiple of times in excess of the rates banks borrow at, from mortgages with SVR's hovering around 6%, to personal loans of 10% to 15% to credit cards of 20%+, which are generating huge profits for the tax payer bailed out banks supposedly for the purpose for the banks to rebuild their balance sheets but as we are again witnessing is in significant part being pocketed by bankster's as bonuses for profits that ONLY exist because of the tax payer cash.

So given the fact that the banks are already running on huge profit margins, therefore I do not see much change in rates for most borrowers during the year as the interest rates charged are already excessively high which effectively discount a much higher base interest rate north of 4%, which means there is plenty of scope for borrowing rates to actually fall during the year rather than to rise.

Mortgages - Most people can only get on housing ladder with a mortgage, therefore the prime consideration for borrowers is in able to service the loan, in this regard the long standing but often broken rule of not borrowing more than X3.5 salaries should be at the forefront of ones mind. This rule is not to prevent you from buying a bigger house, but to prevent you from LOSING your current home. That, coupled with a minimum deposit of 25% should signal when someone is ready to buy. If someone only has a 5% deposit or not enough income, then to be blunt you should NOT be considering to buy a house. I will cover the UK housing market in depth in my next ebook. I expect mortgage interest rates to be little changed for most borrowers. However those that are the most desirable customers in terms of credit risk are likely to see the rates on the best products rise marginally.

Pay Day Loans - During the great recession many pay day loan outfits have sprung up that offer to fill the gap between each pay cheque with near instant small loans of upto £1000 that borrowers are further enticed to roll over into the next pay day. To be blunt, if you are considering these types of loans then you might as well put a gun to your head for all of the distress they will eventually cause you. Whilst the base rate is at 0.5%, pay day loan outfits are charging over 2,000% APR. These types of loans should be illegal in Britain but they are not, which just illustrates how inept the financial regulator is in allowing ordinary citizens to fall victim to 'legal' loan sharks. If the FSA had the best interests of the general public at heart then it would lobby the government to introduce legislation to CAP ALL interest rates at base rate plus 10%. Yes it would mean that the financially illiterate presently taking on extremely high risk loans would usually be denied loans due to the risk / reward factor, but that is how it should be.

SAVERS

After the wipeout of 2009 when savers subsidised the bailout of the banking sector through ultra low interest rates of as little as 0.1%, 2010 should see some decent recovery in nominal savings rates and hopefully in real rates of interest as well (after inflation and taxes). The best variable rates are usually 1% to 1.5% above the base rate. Fixed rates offer a premium of approx 2 to 3% depending on the term fixed. So by the end of 2010, this is suggestive of a variable interest rate in the region of 2.75% to 3.5% and fixed rates of between 4% to 5%, which should take place BEFORE the first base interest rate hike as market competition will move ahead of the curve to discount future interest rates mid year. This suggests savers are probably better off NOT fixing now in advance of rising market savings rates by the time of the first base rate hike.

Cash ISA's - Whilst NOT an inflation hedge, however they do allow savers to receive interest payments tax free in perpetuity (until death) and provide a hedge against future tax rises which will soon hit all income brackets. Currently, the equivalent taxable return on a 3% cash ISA for standard rate tax payers is 3.6%. For higher rate tax payers it is 4.2%.

The cash ISA allowance is currently £3,600 per annum which is set to rise to 5,100 from 6th April 2010. Savers need to shop around before depositing as there is a wide spread in interest rates offered between institutions.

Foreign Banks Offering Higher Rates - Remember Iceland ? Stay with British institutions which is both good for Britain as well as depositors, because if a foreign institution goes bust and then the foreign government defaults on its obligation to pay (as Iceland has apparently done) then the British tax payer will be black mailed into stepping in to cover this money as the consequence of not doing so would result in a run on virtually all banks.

Inflation Index Linked Bonds - Whilst traditional government gilts may fall in price, index linked bonds linked do the RPI index may buck the trend to some degree, which depends on how high this measure of inflation actually goes, since the RPI is more volatile than the CPI then I would expect it to spike significantly higher than the CPI and with an overall long-term tendency to trade higher than the CPI. Therefore offer good inflation protection. Though index linked bonds are investments, rather than deposits and thus do require monitoring for entry and exit timing to maximise returns and limit risk, they are not a buy and forget, not unless all you want to do is secure index linking into maturity.

Strong interest in index linked Government bonds is also illustrated by the fact that the Bank of England's own staff pension fund has tripled its holding of Index Linked Gilts to 70% of the total fund.

Inflation Index linked Certificates - These are issued by the Government's National Savings bank. The certificates offer a bonus interest rate on top of the RPI inflation index which is dependent on the term bought, typically paying between 1% and 1.5% interest on top. These are ultra safe government backed savings without any risk to the capital that provides a good hedge against inflation loss as measured by RPI.

These are probably the best suited for those that want to hedge against inflation but do not want to carry any capital loss risks or want any of the responsibility of having to monitor bond price movements for timing of entry and exit. And last but not least there is a tax advantage to investing in Index linked certificates which especially benefits the higher rate tax payers.

UK Gilts / Government Bonds Generally - Rising inflation and large persistent budget deficits are ultimately a killer for government bonds, therefore despite the illusion of being the safest investment in the land i.e. in terms of the virtually zero risk of default, however what you will see increasingly over the coming years is that UK gilt yields will have to rise i.e. falling bond prices. The bond market is not going to continue to put up with either the large budget deficits or the Bank of England's Quantitative Easing smoke and mirror bond purchases. However if you do want invest in government bonds then it should be at the shorter end of the yield curve with the objective of holding the bonds into maturity to ensure you avoid next capital loss (net of interest earned against the market yield).

It is amazing that despite the fact that government bonds are the worst place to be invested in that many trillions have been parked in them. Whilst I understand China and Japan's strategy as a consequence of currency manipulation, what I fail to understand is the behaviour of investors and pension funds having such a large exposure to government bonds, perhaps they have yet to wake up to the inflation mega-trend that will seek to destroy the value of the capital after all over the last 100 years virtually all fiat currencies have lost 97% of their value.

But Government bonds are probably the worst place to be invested, not for 2010 but for many years. So do not be deluded by current government bond market stability for it is an illusion as a consequence of money printing monetization of government debt which IS sowing the seeds for future inflation that erodes the real value of capital invested in low interest bonds over real time and when interest rates rise, as they surely will so will the actual price of longer dated bonds fall significantly (unless held into maturity).

As with all markets, there will be a once in a lifetime investment opportunity to invest in government bonds, that will be when inflation and interest rates are high thus resulting in very high bond yields, i.e. as occurred during the earlier 1990's. But that time is NOT now.

Download the full 100 page Inflation Mega-Trend Ebook for FREE (only requirement a valid email address) which includes precise forecasts trends for major markets for many years :

  • Interest Rates
  • Economy
  • Inflation
  • Gold & Silver
  • Emerging Markets
  • Stock Markets
  • Stock Market Sectors and Stocks, including ETF's
  • Natural Gas
  • Agricultural Commodities
  • House Prices
  • Currencies
  • Crude Oil

Source: http://www.marketoracle.co.uk/Article18785.html

By Nadeem Walayat

http://www.marketoracle.co.uk

Copyright © 2005-10 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on UK inflation, economy, interest rates and the housing market and he is the author of the NEW Inflation Mega-Trend ebook that can be downloaded for Free. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 500 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

Nadeem Walayat Archive

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

GBS
21 Apr 10, 15:52
UK Houses

Hi Nadeem,

My family and I are currently renting but are wanting to buy a long term home.

When do you think normal supply levels will return to the South East UK housing market? I'm currently seeing some sought after properties in Sussex selling very quickly at prices significantly higher than the 2007 peak price!! There is still a big shortage of quality family houses coming on to the market in our area unfortunately.

How long do you expect the consecutive interest rate rises that you forecast from July this year to cool the housing market again?

Thanks,

GBS


Nadeem_Walayat
21 Apr 10, 23:51
UK house prices

Hi

I will be producing an indepth analysis of UK house price trends after the election to be completed during June 2010 that will map out house price trends for several years.

However house prices will be under a tug of war between the forces of inflation and the forces of government spending cuts and rising interest rates


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