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Saturday 17th September 2016
Hi Friend,
My childhood nickname was carnage ... let's hope it's not his legacy ...
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What is the Bank up to? asks Phil Aldrick in the Times today. It’s a good question. This week the ONS released data on the economy. Inflation is rising, unemployment is falling and the retail sales boom continues.
The Bank of England indicated a further rate cut was on the cards before Christmas. Rate cuts, more QE and the purchase of corporate bonds, it just doesn’t make sense. We enter “The Winter Wonderland of central bank thinking”. The economy is on the verge of an inflationary boom, the bank is slashing rates and expanding money supply.
When something cannot go on forever, it will stop. Life on Planet ZIRP and the flirtation with the NIRP crevasse must classify as something which cannot continue much longer. Central banks are running out of options and the derivatives of credibility.
In the UK, “business as usual” is the mantra. Yesterday we met with members of the Chambers of Commerce, the Federation of Small Business and the Engineering Employers Federation, together with The Manchester Growth Company. Uncertainty about the future remains but for the moment, order books, investment plans and recruitment plans remain in place for UK domiciles at least.
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The Retail Sales Boom Continues ...
Consumer
confidence has bounced back, along with activity in the housing market.
The retail sales boom continues with sales volumes up over 6% and
values rising by over 4% in August.
Unemployment rates have fallen below pre
recession levels, the claimant count is falling and vacancies are
rising. Money supply is exploding. Consensus Forecasts for growth in the
economy this year are increasing, (as will the trade deficit).
Brexit
may mean Brexit but not for some time yet. It could be five to ten
years before a change in trading arrangements impact. That’s assuming
trading arrangements change at all! No need for drastic bank action to
save the economy. No need for any panic measures.
Why the rate cut? Is something else on
the agenda ...?
Phil Aldrick suggests, “It is hard not to conclude
the real agenda is monetary financing” The bank is deliberately reducing
borrowing costs to help pay for reforms and infrastructure projects”. Inflation is subdued in the process as mortgage costs fall. The fallacy of the falling “equilibrium rate” is supported.
A
1% fall in bond yields reduces the treasury cost of borrowing by £16
billion per annum. The effective near 3.5% bond yield distortion, a
result of QE, is saving the exchequer over £50 billion per year in debt
service costs.
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The nonsense of QE has gradually been exposed …
The nonsense of QE has gradually been exposed.
The Bank effectively buys the gilts from the Debt Management Office.
There is little intermediary impact. Better still, it’s a “Money for Nothing, Gilts for Free” deal. Any coupons payable are returned to
Treasury.” It’s a wizard wheeze!
Why not lash out with a huge
infrastructure bond programme in the Autumn statement. £100 billion per
year for five years. The Old Lady obviously has the balance sheet. The
bank will buy the bonds even if no one else will.
M&G bond vigilantes ...
This month the
“M&G bond vigilantes” advocated cash over gilts as a portfolio
blend. The real return on gilts is zero and the prospect of a capital
loss is substantial if and when normality returns. It’s a fair point!
The Bank is engaging in monetary financing. The Governor is concerned about a U.K
gilt strike, as M&G warn. He is also concerned about the the “kindness of strangers”, as the falling share of foreign owned gilts indicates.
The
markets are losing appetite for gilts. They will lose appetite for
equities too, if pension fund deficits hit distributable reserves and
dividend programmes are suspended as a result.
Life on Planet
ZIRP is mispricing capital distorting the yield curve and leading to
capital misallocation. Sooner or later there will be a threat to equities
as well as gilts.
So what of the Bank’s corporate bond buy ...?
It is
clear the move into the corporate bond market is ill conceived and ill
timed as Kristin Forbes explained to the Treasury Select Committee this
month. Minouche Shafik is moving prematurely from the Bank of England to
the London School of Economics. Not all is well in Threadneedle Street.
The Governor’s £10 billion corporate bond buy is “conjurors
misdirection”. The conjuror’s move will end in clown’s tears if the bank
ends up buying bonds in BMW, EDF and Apple.
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Central bankers are bedazzled by negative rates ...
Central
bankers are bedazzled by the prospect of negative rates. The Governor
has indicated negative rates are off the agenda for the UK. Ah yes, so
much for forward guidance!
The real enemy of negative rates is
cash. Negative rates will lead to bank withdrawals, money stored under
the bed and a collapse in bank lending as a result. Central bankers are
working on cash!
Andy Haldane has suggested random bank note
cancellation could be the cure for hoarding. Turn up with cash at Tesco
only to have them snatched at check out as contraband, disqualified in
the week-end lottery.
Ken Rogoff in the “Curse of Cash” suggests
bank notes and cash should be abolished altogether. Stop and search
laws would be introduced presumably. OK for a little pocket change and a
spliff, valid for personal use only.
Governor threatens to abolish small change ...
The
Governor dipped his toes into the water this week, threatening to
abolish the penny. It’s just the thin end of the wad! The governor
demonstrated his disdain for currency last week, dipping his fiver into a
curry! Well it’s cheaper than a Papadum or soon will be.
This
week the CPI inflation figure was unchanged at 0.6%. Service sector
inflation increased to 2.8% Manufacturing prices are on the move. Input
costs increased by 8% in August. The inflationary impact of oil will
increase by over 30% in the final quarter of the year. It will increase
by over 70% in the first quarter of 2017.
We analyse the
correlation of impacts of oil on manufacturing prices and CPI. The
correlations are high. The lag on CPI is around
three months. Just in time for the pay round! You have been warned!# |
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So what happened to Markets?
Markets, were down - The Dow closed at 18,085 from 18,182. The FTSE closed down at 6,710 from 6,776.
Sterling
moved up against the Dollar to $1.303 from $1.326 and moved down against
the Euro at €1.168 from €1.181. The Euro moved up down the Dollar
to 1.116 from 1.122.
Oil Price Brent Crude closed at $45.79 from $48.00. The average price in September last year was $46.52.
Gilts
- yields moved up. UK Ten year gilt yields closed at 0.87 from 0.86. US
Treasury yields moved to 1.690 from 1.672. Gold closed at $1,312 from
$1,330.
John
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