MoneyWeek has a history of being too early when it comes to spotting bubbles – I’ll admit that right away. We first declared that British house prices were ridiculously overvalued in 2004, and that we were heading for a crash. They were, and we were, but that didn’t stop prices from rising for another three years.
Given that prices have now fallen back to 2004 levels, and have a lot further to fall, we don’t feel too bad about that. But why am I bringing this up? Because I feel the same way about gilts today as we did about house prices then. UK government debt is a bubble – artificially inflated by cheap money, and destined to explode with a bang. I don’t know when it’ll happen. But I do know that I can’t see any sensible investment case.
The Bank of England is trying to pump up to £150bn into the economy (quantitative easing, or QE), largely by buying gilts. Of course, that’s sent gilts sharply higher and forced yields down. But the whole point of QE is to drive inflation higher. Inflation is toxic for bonds. So if QE works, bonds will sell off massively and, as Edward Chancellor put it in the FT this week, “owners of government debt will be the chief victims of this great monetary experiment”.
What if QE doesn’t work, as our regular columnist James Ferguson suspects will be the case? Then the gilt bull market could be here for quite a while longer. But I’m still not keen. What is a gilt, after all? It’s a loan to the British government. And the government’s debts are so high that we’ll be paying them off for decades to come. Do I really trust any future government with my money enough to believe that they won’t try to rip me off in some way, either via inflation or plain old default? I don’t. And I don’t fancy having to keep my finger hovering over the ‘sell’ button every time it looks as though the Bank might call it a day on QE.
The good news is that regardless of whether we’re headed for hyper-inflation or a never-ending Japan-style slump, there are far better places to put your money. While gilts look dangerously expensive, other assets are starting to look cheap. Sure, they may well have further to fall. But our Roundtable experts this week – despite being glum on the economy itself – are much more upbeat on the markets than I’ve heard them be for a long time.
As for me, I bought shares in GlaxoSmithKline (LON:GSK) last week. The share price might fall further, but I feel more secure as the long-term part-owner of one of the world’s biggest drug groups than I do as a creditor of a hugely indebted government that shows no sign of cutting back its spending anytime soon. I might be early – but I’d rather be early than flat broke.