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Saturday 10th July 2021
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Thanks for commenting on our LinkedIn posts this month. This is the full weekly update emailed on Saturday morning. I have added you to the mailing list. If you do not wish to receive the updates, just let me know, J
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| Recovery on Track Despite Market Wobbles ...
Finals weekend at Wimbledon and Wembley, a great couple of sporting days ahead. Is it really coming home on Sunday! Let's hope so. We wish the England team well, as they put an end to all those years of hurt!
Markets wobbled mid week. The ebb and flow of fortune on court, always evident in the markets. The Dow closed down below 34,200 on Thursday, before closing at a new record high at almost 35,000 by the end of the week.
American markets moved higher, European markets followed. Turmoil in the East, Asian stocks moved down. Beijing keen to pressure tech stocks with a US listing. The tech favorites like Alibaba, Baidu and Tencent moved lower, creating a new buying opportunity in the process.
The FTSE tested the 7,000 level before closing slightly down at 7,122. Markets were troubled by so-called slowing growth in the UK economy. The ONS released the GDP Monthly estimate for May. Growth increased by just 0.8% month on month, compared to 2% in April. Is the economy slowing? Not really.
Year on year, we expect growth of over 22% in the second quarter. The UK economy is on track to hit our central scenario of 7.5% growth this year and 5.5% next. The full slide deck with our scenario forecasts is available to view and down load to TSE Club Members and Premium Subscribers.
In the US, the Federal Reserve is reporting material shortages. Recruitment difficulties are slowing the pace of the recovery. Car output is hampered by the global chip shortage, supply side challenges in the housing market are pushing up prices.
As with all things, the market will resolve the anomalies. Fears of oil price hikes abound, yet world demand will not return to pre-pandemic levels until Q3 next year. OPEC failed to reach an agreement on output levels this week. Oil Prices moved lower at close.
Halifax reported house prices dipping for the first time since January. The annual rate of price growth was just 8.8% in June compared to 9.6% in May. For the second quarter, we model house price increases at 10%. We expect the rate of growth to slow to 6.5% by the end of the year.
The inflation story is abating. Ten year bond and gilts yields closed lower at 1.35 and 0.66. So
what next for bond yields? It takes two sides to make a market. UBS Wealth
Management said this week that it still expects yields to reach 2 per
cent this year. BlackRock Investment Institute is shying
away from government bonds on the basis that skinny yields offer little
cushion to compensate.
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| Don't Worry About Rising Debt ...
Phil Aldrick reports of a mugging in Downing Street this week. The Chancellor received help from Treasury and the OBR to convince the Prime Minister it was time to dig up the magic money tree in the rose garden.
Within days, Sunak was warning of a possible end to the triple lock, an end to furlough scheme and an end to the universal credit coupon. No money for the Biden's Global Belt and Braces initiative, money had to be found for building batteries in the UK.
Does the
state have any “fiscal space” left? Yes, the OBR said, because the Bank
of England can buy the debt issued by the government!
No talk of QE, a clear admission of the process of monetary financing of the fiscal deficit. We call it Dire Straits Economics, money for nothing, gilts for free. Plus we don't even have to worry about repaying the debt. Here's why ...
In 2008 we warned of the dangers of monetary policy. Rates at the zero bound could leave us 'trapped on Planet ZIRP'. Rate hikes on the Planet have led to more than one flight cancellation in the past. In 2021, central banks are still struggling to raise rates. The process of tapering will have to be delayed.
In 2012 we asked and explained what's wrong with QE. Central banks were buying gilts and bonds. Purchases were pushing up prices and lowering yields. Central Bankers were creating the biggest bond bubble in history according to Andy Haldane Chiec Economist at the Bank.
By 2020, the language of "QE" was abandoned. Andrew Bailey, Governor of the Bank of England admitted the Bank was acting as the "Buyer of Last Resort", acquiring monetary assets from the Debt Management Office.
Without central Bank intervention, 'the government would have struggled to fund itself', said Andrew Bailey in an interview with Sky News in April last year. In June this year, the Governor explained, The Bank of England Monetary Policy Committee voted this week to keep rates on hold and to maintain the existing target of UK government bond purchases at £875 billion. No mention of QE. QE is dead.
Central banks cannot as yet raise rates. A reduction in the rate of asset purchases, the process of tapering, cannot begin, until the level of government annual borrowing falls within the capacity of independent financial institutions and the appetite of overseas holdings.
UK Insurance companies and Pension Funds picked up just over 5% of new gilts issued in 2020. Their share of total holdings fell to 28% from 58% at peak before central bank intervention began in 2009.
In 2020, the Bank acquired almost 70% of new debt issued by the DMO. By the end of the year, the Bank of England stock of government gilts increased to almost £800 billion according to the Debt Management Office. The Bank had become the largest owner of UK debt accounting for 32% of total issue.
The promise of the Chancellor's £1 trillion pound bank note will soon be filled. The Treasury creates the borrowing need, the Debt Management Office issues the debt. The Bank Of England, underwrites the Bank of England purchases. The coupons paid on the Gilts held by The Bank of England are remitted, paid back to the Treasury. We call this Dire Straits Economics" "Money for Nothing Gilts for Free".
Better still, the debt, the liability owned by the Treasury, is an asset owned by the Bank of England. Both are owned by Her Majesty's Government. Inter-group consolidation at some date in the future would imply that £1 trillion of government liability could just fade away. No need to worry about the debt burden for your children, grandchildren and great grandchildren and generations beyond. Like old soldiers, the gilts will lose their shine and just fade away. That's the real beauty of Dire Straits Economics.
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| That's all for this week, we will be back with more next week.
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John
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