Interest rate rise klaxon!

My goodness. 

The denizens of the Bank of England have only gone and done it, raising interest rate by 0.15% today. A harbinger of the doom to come. 

Inflation sits at a mere 5% or thereabouts and surprisingly wages for the year have manager, err, 0% rise. Too much covid and change in the economy to sustain wage rises even though some sectors have done well. 

Still this is almost the first rate rise I can remember! People under 30 won't even really know what the Bank of England does or what the significance of interest rats is - we have been in a zero-interest economy for so many years, nearly a decade and a half now. 

Of course, with Quantitative Easing and inflation, real interests rates are at -5%. Holding cash is very bad for your wealth, much better to spend it or buy assets as quick as you can. 

It is still a long way from going back to a 'normal' economy and I still feel in the end the only way back will be with some very high inflation to erode the debt pile of the West vs East dynamic in the world - and that will be so painful that the politicians might try and put it off for generations yet. 

Bank of England - What inflation?

 So as we see record rises in inflation and to continue Nick Drew's theme some key elements are being ignored...

There is a much wider theme at work, there is a huge shortage of computer chips due to raw materials shortages. The big issue is the change in demand with cars now needing more chips as well as phones and most things electrical - the supply chain for the near doubling of demand is going to take a couple of years to fix. Plus China, as ever, interferes where it can with raw materials and supplies to Taiwan which is the home of much of the world's chip production (recent military manoeuvres too on the China side of the Taiwan strait are fund too....).

So used cars, used computers etc are all seeing huge bump in price, as are say new cars which are limited in number. 

Against this background, the Bank of England issue another £1.5 billion of quantitative easing this week to try to get the UK economy booming again.  Err....excuse me? Wage inflation is at over 5% this year, supply of goods is restricted. There are only two outcomes.

Stagflation - inflation but little economic growth or just plain old inflation with higher wages and prices in a spiral. 

The genie is out of the bottle, last time this happened, it was 20 years to get it back in. Plenty of time over the summer for us to reflect on how this will impact the Economy, markets and Government. 

Are wild markets a late stage symptom of the policy disease?

 When can we be rid of this virus? No, not Covid, the Federal Reserve. 

Yes, I know, you think I am about to enter a conspiracy world of who owns the Fed and how it is all some cabal of Jeremy Corbyn's deepest and closest friends. 

Well, sorry to disappoint, but instead there is a huge story here. When Tesla fell on Monday 20%, erasing in truth only a month or so's gains, Bitcoin fell in sync. Suddenly, Jerome Powell, chair of the Federal Reserve, decided to remind the markets that the Fed would not remove the trillions of excess liquidity from the economy anytime soon. The liquidity is a feature, not a bug of the current system. 

The same is the case with our own Bank of England, but we have not had a huge run up in share prices and other assets like the US. Here, Government debt has easily absorbed all the extra debt created by the Central Bank. 

In the US, we are seeing crazy wild markets. Bitcoin and other digital currencies are hitting all time highs, SPAC's (Special Purpose Acquisitions Companies) are literally raised like South Sea bubble entities - "for reasons for which no one is to know the purpose." Sadly, I see the FT and lawyers etc rushing to promote shell companies in the UK and to try to get SPAC's registered here. 

SPAC's are a sign though, as are the crazed valuations of a few successful stocks. There is not much to invest in and there is far, far too much money chasing it. Private Equity sits on its largest amount of 'dry powder' - money raised but not deployed, ever. This is getting put into SPAC's to 'deploy' it but really it is just moving around savings and charging fees to the investors. 

With the markets the way they are, the underlying economy is in a wild phase itself with Covid smashing some sectors and boosting others. Forcing technology change in a year that would have taken a decade before. 

Central banks have created this monster and Governments love it - after all for them it is the magic money tree come true. Massive extra spending and no inflation. If inflation comes about then it is easy to cancel the fantasy QE bonds so goes the Central Bank theory and reduce money supply.

See below for what we are really doing though - a huge currency debasement strategy with apparently limited inflation impact. 

I am thinking hard on how this ends. In 2006, a huge run up in credit and debt ended in Great Recession, which was entirely predictable for 2 years beforehand. Here we see the Central Banks juicing the market and Covid providing both the spark but also the cover. My base case is the blow off phase lies ahead of us still - perhaps after another run up of asset prices. In reality the end phase must be some serious inflation or, if the Central Banks execute on slimming their balance sheets, huge deflation and bust. Either way, it is not a happy ending. 

Emergency measures from Central Banks to support Hedge Funds

Life is strange, here we were thinking 2020 was going to be a good year with Boris on his political honeymoon, then, boom it is all over.

The Bank of England has reduced interest rats by 0.5% to help calm the markets after a start to the week that makes it feel like 2008 again. It is the biggest move by the bank in ten years.

We may wonder, why does moving interest rates down from 0.75% to 0.25% make any real difference to the economy? And we would be right, as this move has next to no impact on the real economy. Unless you happen to be re-mortgaging today (tick for me!) and are able to take advantage of it, it makes no difference. It is not like Amex or Wonga are going to pay any attention  and help their 'customers' and it is not like Banks were paying any interest on deposits anyway - such has been the ruination of our economy since 2008.

So why do it? Well this is all about banks and hedge funds. The hedge funds are borrowing money to play the markets and the ones that are doing well need more cash, the ones that are doing badly are facing huge margin calls. Some of the Asian ones facing margin calls are proving difficult to get hold of I hear.

These huge calls on the banks  to lend or borrow in busy markets mean they themselves can run short of cash very quickly. The key thing for them is to be able to access the central bank Repo markets to get more money very quickly...but this money is not quite free, nearly free, but there is a price. So the banks find the busy markets a very expensive place to be and that can mean they consider limiting the action.

So they could choose to call in the money and not lend, but that runs the risk of further drops in the market, more margin calls and from 2008 we know where that leads. So instead the Central Banks are reducing the rates that they lend money at to keep the markets as liquid as they can and the Banks solvent. Keeping the banks solvent though, now means keeping the Hedgies solvent.

The side effect of all this is that Hedge Fund keep playing and Prime Brokerage banks make some lovely fat margins.

So when you see pictures in the newspapers about the lack of chinese imports or other real world causes like Corona virus, just smile to yourself. This is all about the traders and the trading. As it happens, the US Repo market is 50% busier overnight than it was in September 2008, now partly of course inflation has reduced the value or money and the economy has grown, but it is a sign that things are very awry in the financial markets.

A key week ahead I feel.

Interst rate rises...now....really?

OK - so this post is very counter-intuitive for me, having long argued we need to raise rates on this blog to normalise the economy. But as it happens there are many signs in the economy of the top being reached and an uncertain global economy - a few facts to consider:

- Chinese stock markets down 20% Year to date

- Copper price, a real bell-weather for all industrial production and the general economy, is also down markedly on the year

- As BQ oft reports, the high street is beyond on its knees and into catastrophic meltdown after 10 years of hard bashing by government policy and digital transformation, major brand names like House of Fraser are finished

- UK private debt is at record highs with a negative savings rate:

All the above point to a notable inflection in the economy. The boom has been going for nearly ten years since the crash, it may yet last another year or two, but housing is toppy. The UK Government is still in debt and still is running a deficit, even as private sector debt grows. The corporate sector debt is the one area where there is room for expansion, but the doom-laden atmosphere around Brexit is really lowering investment by corporates.

In this environment, basically until Brexit is sorted out satisfactorily, it seems weird to raise rates right now when there is no evidential inflation pressure. Of course, Remainiacs at the Bank of England may want to slow the economy as a tool for helping the Government renege on Brexit. Historically, the BOE always get things wrong of course so this interest rates rise may well be a sell signal!

UK April 2018 Government borrowing falls to lowest leve since 2008

So the good news is that in April, Government borrowing fell to £6.2 billon, down from £7.3 billion the year before. Okay so as a percentage of UK Government spending who cares about a billion here or there, but as ever these things add up.


The critical piece is for me yet again this will show up the Bank of England forecasting and prediction capabilities. Last month they were quite happy to quote the UK GDP slows to 0.1% growth in Q1 of 2018. On the back of this they held interest rates at near record lows and enabled yet another spasm of Remainer questioning of Brexit.

However, when you see that the ONS also showed Public Sector Net Borrowing was down from £2.1 billion to £1.3 billion in March - also a ten year low, then we might wonder why.


Is Government spending much less? Well that is unlikely as our overall debt to GDP ration is still rising.


What is happening are rising tax receipts, Corporate tax, Inheritance tax and Stamp duty taxes have all shown strong growth over the past year. Rising tax receipts can only realistically happen in a growing economy unless they have been raised or reduced around the Laffer curve.


So for me something is amiss, there is no way the economy is producing a few billions in extra taxes over the first months of the year whilst also posting sclerotic growth - one of these numbers has to give.


My guess will be the first three months of the year will be revised up to around 0.3% GDP growth, not stunning but adequate in the circumstances. The annoying thing is that for the Remainiacs this will not affect their mantra of the economy is crashing due to Brexit when there is simply no evidence of this and to date all the evidence has been the to show that threat of Brexit has either no effect or a slight positive to date.

Still a long road to normality: Update

The US raised interest rates yesterday, as did China following suit. It is a very long road back to financial normality after a financial crash of the like that we had in 2008 (on average 19 years historically, so we are only just over half-way!).


However, in the UK we have a particularly dovish Bank of England Governor at the moment in Mark Carney. This week has seen wage growth pick up and the economy continue to modestly improve alongside record employment. Few commentators or even economists seem to notice that with near full-employment the days of rapid economic growth are gone - all improvements have to come from either improving productivity or investment, neither of which is easy to do in the UK economy. The days of just hiring more migrants on shit wages and declaring economic nirvana as nominal GDP rises are over - THANK BREXIT FOR THAT!


Still, the Bank of England is left with a choice today, does it raise interest rates again? The Bank will likely decide to wait another month or two to see what is happening in the economy and take a view that the awfulness of Brexit means that it should stay with very low rates.


Which is a shame because we won't get investment levels from companies up and from individuals whilst the saving rate remains so low. All we see now is the continuation of the nightmare economy where the already rich borrow very cheaply and make easy returns; whilst the small companies and business are starved of capital holding back productivity gains.


Of course, too high rates can stall the economy; food retailers and general retailers are already struggling in an easy money environment so won't cope. But the wider economy will not recover its vigour until we move back to a more 'normal' economy - its a difficult balance to achieve but the Bank of England really needs to get its Hawkish skates on to fix the economy.


UPDATE: BOE holds rates, murmurs about doing something next time, circumstances allowing etc etc.

Some Actual 'Prudential' Regulation Ahead?

The usual rule of thumb about articles ending in a question-mark is that the answer is 'no'.  (Nice Grauniad example today: "New generation wave energy: could it provide one third of Australia's electricity?")

But let's not be too cycnical.  So now the Bank of England has been conducting another round of stress tests.

The Bank subjected seven major lenders to a hypothetical scenario that involved a dramatic slowdown in the Chinese economy, prolonged deflation, a reduction in interest rates to zero and a huge increase in costs for fines and legal bills of £40bn. The test found that profits would fall more than than they had done during the 2008 banking crisis – by £100bn by the low point of the hypothetical scenario in 2016 - but capital cushions remained strong enough to withstand the downturn while increasing credit to the economy by 10%.

I have long-held reservations about these banking 'stress tests':  they are rarely stressful enough; and technically, stress-tests should involve a scenario that is a shock to the system, not an ongoing pressure like 'prolonged deflation'.  However, doing something like a stress test is better than doing nothing.

The BoE has reached some conclusions, the headline being rather complacent airy: "The stress-test results suggest that the banking system is capitalised to support the real economy in a severe global stress scenario, which adversely affects the United Kingdom".  Well let's hope they are right. 

But there is a line-item detail that may, just may, cause them to act; namely the easy terms on which buy-to-let mortgages are available (once again). 

While it did not take immediate action to cool this sector - where lending has risen 10% in the first nine months of the year - it said it was reviewing the lending criteria adopted by firms and stands “ready to take action.” It will also be watching the impact of the extra 3% stamp duty announced last week by George Osborne in his autumn statement.

This might, then, be an actual British 'counter-cyclical prudential intervention'.   Correct me if I am wrong, but I think that would be a first -  the relatively new-fangled Prudential Regulation Authority hasn't really done anything at all along these lines as far as I know.

Of course, other countries act in this way from time to time as a matter of course, and were doing so before the crisis.  Our 'PRA' is a belated effort to catch up a bit.  Will they or won't they?

ND

0% chance of UK rate rise this year

Bank of England Interest Rate since 2009

That is not much of a prediction now, but one that would have seemed unlikely 6 months ago. It is now 7 years since interest rates were rapidly reduced to near zero.

It was an emergency measure. As a rule of thumb, interest rates have become a good guide as to how messed up our economy is. Here we are seven years late and still stuck in 'emergency measures.'

And there is little sign of this changing, with Share prices having dipped 10% in the last few months and commodity prices continuing to fall, there is no external inflation to impact the UK. China has devalued too, meaning our imports will cost less for Christmas.

There are some inflationary worries, construction has started to drop off as prices of labour have gone up 20% as a lack of supply of key skills starts to bite; but even here this is cyclical industry that is always hit when growth comes as they are the first to lay off everyone in weaker times.

Meanwhile, the deficit and national debt get harder to reduce, as does private indebtedness, as many debts are not eroded away by inflation over time. Real things, like UK House prices, become more expensive than ever as their real terms increase in price is larger than it ever use to be.

Sustaining growth in a deflationary world will be a very difficult task for the economies of the West; just as they have found in Japan.

When will inflation return? That is an even harder prediction. Wage inflation has been so limited by immigration and automation over recent years. Perhaps an unintended consequence of the Government's decision to increase minimum wages will be to push some inflation into wages over the next 2 years. Equally, commodity markets must be entering the final down phase by now - indices' are all at decade lows or worse. With commodity falls coming out of the picture and domestic demand slowly picking up then inflationary pressures will growl; but it looks like a slow rise from here if most external shock are likely to be deflationary rather than inflationary.

Perhaps rates will still be at 0.5% this time next year? Who would have thought that in 2009.

Only a fool would raise rates now...so that is what the Bank of England are thinking about!

I have seen a lot of counter-deflation stories written as UK official inflation falls to 0.5% and the Eurozone teeters on deflation.

Deflation is not a great situation for the Country when we have such high public and personal debts; it means we have to pay them back. And in reality, no one likes to do that - they would rather have them inflate away over time. The net change is the same, but that's humanity for you as Hobbes nearly said.

Some commentators, including a chump called Ian Mcafferty who is on the Bank of England (BOE)Monetary policy committee, are trying to say raise interest rates now.

After all goes the argument, we have a zombie economy and people are too used to low, artificial, rates. Raising now they could cope with and we could put our economy onto a more sustainable footing plus ward off problems caused by wage inflation now that unemployment is a lot lower.

Oh dear, why can't economists ever change from their deeply held views when the facts change. When inflation for 4% and interest rates 1%, they had a point. When inflation is dropping and likely to fall further they world is a different place. There has a a huge inflation negative external shock from the drop in oil and other commodity prices.

There will be no inflation for months, maybe the whole year. Wage inflation is low, because companies are not doing well as demand has not recovered from the 2008 bubble pop. Neither exports or consumer demand is getting better. Debt is starting to rise because it is cheap and this is helping boost the economy a bit.

Raising rates now would stop the only growth there is dead, the EU could easily end up back in recession at the end of 2015. This will pull the UK down further and to below trend rate growth. Also we already have QE, we could try to unwind some of that first anyway which the BOE conveniently ignore, hoping it will be forgotten by everyone and then monetised at some distant point in the future.

I really hope the BOE improves under Mark Carney as the place was a totally car crash after Eddie George handed over Mervyn King who oversaw the worst ever crisis in 300 years, whilst never taking any of the blame at all! There is much to do though as they can't even seem to do basic analysis properly from their Ivory towers.

Bank of England to not really restrict mortgage lending

This Mark Carney character is not having a good time of it. Firstly his attempts at 'guidance' show that he knows no more on the future of the UK economy than the rest of us. Now today the Bank has released guidelines limiting mortgage lending.

The key measures is to restrict Banks lending to 15% of book for loans at more than 4.5x income. Big deal, Lloyds and RBS - nearly 50% of market of lenders- have already reduced their criteria to 4x.

So the Bank, instead of leading the way, is playing catch-up. Plus there is no way nationally of preventing a London bubble.

The way to stop a London bubble would be through local taxes on occupation to stop foreign money pouring in, or tax breaks for new building and a relaxation of planning laws. None of these are the remit of the Bank of England.

Also in the real world in London, restricting access to mortgages of the UK populace potentially gives even more of an advantage to those in say China who are either cash buyers or are armed with loans from foreign countries, not under the FCA auspices. People like, er, the Canadian house hunter Mark Carney.

Interest rate rise instead of unwinding QE

Quantitative Easing, that was a good topic for a long time here and in the UK generally. The magic money tree come to save us from a dearth of credit. It is hard in any meaningful way to say it has work, clearly there are reports from the Bank of England saying it has added over 1% to GDP growth, but they are not really an independent source.

Now though, with the economy growing strongly, the time approaches when interest rates will have to rise and Mark Carney is going to speak today with a view to saying they may indeed start to rise this year.

What is interesting is that there is no discussion of unwinding of QE first. After all, the net effect of QE is to reduce interest rates below zero - therefore surely this emergency source of monetary funding should be the first to be unwound?

Interestingly, the Bank of England and its fellow travellers say not. They say that QE is not inflationary as it has not provided direct capital to Banks after all - they can still create their own reserves to book against loans as needed. As such, raising rates will have a larger impact than reducing QE.

This is all very well and all very technical. But as you raise interest rates, then the price of Bonds will fall. This means the Bank will be losing money on its investments, the more rates rise the worse it gets.

So what? Well if you are not going to reduce QE then perhaps you monetise the debt? or Perhaps the losses do not matter as no one knows who owns the Bank of England and its debts anyway?

But this is too clever by half in my view, people in the Country will see that money is being created and destroyed at will and it undermines the concept of fiat money altogether which would be a bad thing.

Worse is to leave QE and experience the high losses, as any taking of these losses were they ever to sit with Government would cause a huge political problem for the Government of the day.

I can't see how keeping QE is good in the medium term, it should be unwound before the Bank starts to raise interest rates.

No rate rise in 2014 says Bank of England

How has it come to this? the Bank of England has a new obsession with 'forward guidance' - which as Terry Smith writes in the Telegraph today is a ridiculous statement, as if there is backward guidance!

But now Spencer Dale has decided to tell everyone that he does not think the economy will be in good enough shape to raise rates in 2014. We are only just into Q4 of 2013, but the sages of finance can see well into the distance.

Well, this tells me a few things:

1 - Clearly the economic recovery is not going to be very good, perhaps even dropping off from here on in. If growth continues at 0.5% per quarter, how can rates not adjust to what we would see a normal growth? therefore, the BOE must believe growth is going to be well below that next year, maybe 1.5% or so.

2 - Who cares about a housing bubble? Certainly not the Bank of England. As it happens, I don't think there is much of one either yet. But I do see an problem, not of 2007 proportions, in Commercial Real Estate. Yields are 5% and falling for prime buildings. Even in regional cities they are 7% for good properties. How these deals will make sense when rates rise I do not know.

3 - Long term huge damage is being done. people now in their mid-twenties do no know what a real interest rate rise feels like, except if they use Wonga perhaps. Debts on property are building up with people thinking 4 or 5 percent is a big mortgage. In the 1970's, 1980's and 1990's we had multiple periods of 10%+ rates and 15%+ mortgages. How are people going to adjust when normality returns? The longer the BOE leave it, the more conditioned to ultra low rates people become.

4 - Savings, what's the point? With super low rates but still mediocre inflation, money and saving have no value, getting into debt becomes the sane choice. It's a huge moral hazard, all taken it the name of defending the Banks and the deficit.

The Beginning of the End of the UK

Sorry to end the week on such a rum note, but as long-term readers will know the blog rather prides itself on havign predicted both thre credit crunch and the bounce back in 2011. Even the use of QE was discussed months before it happened. Overall the track record is pretty strong, although the last two years have been very hard with the eurozone crisis being politically driven making economic predictions hard.

But now the dark times are to arrive. We have put it off, but the total failure to make austerity work (i.e. to actually do it) means there is no escape...here's why:





Bank of England Implied Inflation Curve



Bank of England Implied Gilts Yield curve



The problem shown above is thus; inflation is expected to rise over the next few years to towards 4% by the markets. In a normal environment this would mean interest rates at 6%. The second grpah shows the yield curve of UK bonds. Again these are expected to rise sharply over the next ten years and very fast over the next five years.

This means that the Government, whatever the Bank of England rate maybe, will have to pay more and more debt interest on its borrowing. And our borrowing are now over £1.1 trillion. Debt interest in the current was a mere £43 billion (for 2012) or 16.% of Government spending.

This year the debt will have gone up 10%, so that cost will be at least £4.3 billion higher. But instead, with the Yield curve increasing, payments will start to increase. Now Britain has a very long-term debt profile, the longest of any country. So a doubling of rates does not double the payments as it would with one's own mortgage. However, it will add 1% or so to bill for each 100 basis point rise as a rule of thumb. So next year, in addition to the extra cost of borrowing due to the debt being higher, we can expect another £5.05 billion to be added to the cost of the debt with a 50 basis point rise which is what is predicted.

That is £9 billion, the 2016 Budget cuts are looking at try to cut £16 billion off the following years spending...We are not in 2016 yet. The cuts in budgets to just pay for the extra debt costs - let alone actually reduce the deficit or the nirvana of the total debt - are going to be impossible.

Then of course we know that private debt int he UK is the highest in the OECD, as is corporate debts due to our large banks and the Government does not allow for the debt commitments like pensions which it pays for out of its own funds.

With private consumption hit by the cost of rising rates and inflation and also by public expenditure cuts, the economic outcome is very gloomy.

Suffice to say, I am very bearish now. We had a chance to recover from 2008 by now and we have blown it. The UK finance don't stack up. The answer will be painful. Over the coming months we will need to explore what the Government will try to do such nationalise pensions, currency restrictions and big tax increases are on the cards as we know from the eurozone crisis. Potentially they could monetise the QE debt or embark on a drastic devaluation of the Pound. 3

National Grid: An Interesting Prospect

A few weeks ago there was one of those silly outbreaks of the bleedin' obvious whenMr Quango's colleagues on the Public Accounts Committee 'discovered' that developers of the infrastructure needed to implement the UK's mad energy policy - in this case, power grids for offshore wind-farms - are being heavily subsidised, underwritten, and given guaranteed returns:

"We are talking about returns that are exceeding PFI - and we thought that that was a licence to print money"

said an apparently surprised Jackie Doyle-Price (Cons, Thurrock)

Yes indeed - and it's not just these offshore developments, it's the whole panoply of state-mandated energy infrastructure investments.  Can we all join in, please ?

Well, maybe.  Some of these types of development are not always easy to invest in for the private punter: but National Grid is the biggest single listed UK company involved in the whole mad business, and Ofgem lets it - nay, forces it (kicking and protesting, I expect) - to invest huge amounts on these infrastructure projects ... at RPI-linked returns.

Now:  as of last week the BoE is famously going to, ahem, *tolerate* higher RPI for a while ... and NG borrows at a tad under RPI ... and most of its other costs don't rise with RPI (labour is only 10% of its cost-base) ... did someone say 'licence to print" ?

No investment advice here, naturally; you're on your own - and one cannot but observe that NG's fortunes are riddled with regulatory risk.  He who lives by the subsidy, etc etc.  But it's kinda interesting for all that.

ND  

 

Monetary defeat for the UK?

When the Bank of England is in such a terrible corner, mainly of its own making I may add, it is hard to know whether to laugh or cry.

For today, with ts Governor actively wringing his hands, the Bank announced that inflation will likely stay at over 3% for a year or two more. Not much we can do, says the Bank, the Pound is sinking and we can't raise rates as the economy won't be able to hack it.

What a disastrous situation to have ended in. Anyone who thinks we are nearly through the recession and the pain needs their head examining on this evidence. We are so anaemic in terms of GDP growth that even adding in nearly a year's worth of free GDP money in the form of QE has not revived much, if anything and in addition it has weakened the currency which is now sinking against the might QE powered Dollar and wasted Euro.

Any move to raise interest rates is considered insane, locking in further the zombie economy that we have now (and baking in the next financial scandal, when people got nuts as rates rise and they lose their houses in 2015-2017, this will be all the fault of rapacious bankers).

Is there another answer, it is hard to see now given the terrible position already created. Surely rates do start to need to rise a bit though, even if only 0.5% over the course of this year. Higher rates will mean better returns for investment which has been pathetic over the past few years. It will also spook bond buyers and push allocation of finance into more productive areas of the economy.

No chance of this though I fear, as the Bank accepts its defeat. The only hope is that Bank is always wrong, so we are in fact probably set for a nice period of deflation!

The Mighty, Fallen: Tales of Two Leaky Banks

1.  Leaking Information

So then, Robert Peston.  Live by the leak, die by the leak, eh ?  His epic fail on calling the new Bank Governor is surely the final nail in the coffin of his reputation.  All those reporting scoops in the heady days of '07/08 - but not proper scoops, just his being used as a privileged conduit by a couple of highly-placed leakers.  Except now, he gets fed garbage.

Everybody has his number.  Here's how C@W can scientifically assess his decline: back in 2008, if we got a link on his BBC blog, we'd get thousands of hits.  Two years later and this had dwindled to hundreds or less.  Nowadays we don't even notice.

"As it happens, I did not think Mr Carney was in the frame because a well-placed Treasury source told me - in terms - that the unknown fifth person on the short list 'was very unlikely to get the job'". Pathetic. And wasn't he subdued yesterday, interviewing Boy Osborne?  Hope his fat Beeb package is success-based.

2.  Leaking Money

UBS - what a shower. When Kweku Adoboli was being sent down, the news channels played extracts from tapes of calls between UBS Compliance and the talented trader, with such gems as:  

Financial Controller: "So you're going to confirm exactly which counterparties are involved, and the quantum of the exposure".  

Adoboli:  "OK, will do". 

WTF ?  I fell off my chair.  There shouldn't be a trading floor on the planet that doesn't have deal-capture systems, confirmation processes and risk metrics which make these issues 100% transparent and subject to checks by staff who are independent of the traders, by the end of each trading day at very least, but near-real-time is the standard.  It should be like trying to do a transaction on the web: a required field pops up, and if the entry doesn't compute perfectly, instantly, you can't progress to the next stage at all.  (Given that Adoboli was in a 'Delta One' outfit - deals with the simplest risk profile - there aren't even any complex sums to do.)  

Phantom counterparties ?  Trade books he 'set up himself' ?  And all this 3 years after the banking crisis.  So UBS indeed deserves to get it in the neck.

Gaol.  Only language they understand - and corporate fines be damned.

OK, not you Pesto - ignominy will suffice.

ND

"Pensioners The Biggest Winners" !?!

Property prices stirred up the comments in no uncertain terms  - so how about another incendiary topic:  the Bank of England thinks that pensioners are the biggest winners from QE.

Discuss, as they say.  Or, in the vernacular - WTF ?

I'll start the ball rolling with a modest kick.  At a basic level it is surely obvious that pensioners (and savers generally) have been, and will continue to be, afflicted by dreadful depredation as the can is booted ever further down the road.

However ... the fact is, pensioners as a class are generally the least-well placed to survive a serious outbreak of social breakdown. Imagine, for example, how granny will fare as she wheels her trolley out into the supermarket carpark when the anarchy really starts. Or when the shelves are actually bare ...

So - to the extent that pensions and savings are raided and raided again to keep the show on the road, rather than confront the Dreadful Truth in a decisive showdown (as some C@W commenters advocate) - perhaps it is in the old dears' best interest after all.  

What do we think ?

ND

Even More Of 'em !

The one one the left is not Michael McIntyre, it's Paul Tucker of the Bank, who seems to be as much a part of the hooh-hah as Bob.  Does this production-line of financial controversialists with puffy boat-races and dodgy barnets ever stop ? 

Do they all share the same bottle ?  Surgeon ? Harry, there may shortly be yet another opening for you.

ND

Quantitatively Uneasy

The Bank of England is addicted to Pringles -once you pop you can't stop. As was predicted here way back in 2009, QE is something once started that you find hard to end.

With the economy in reverse gear ever since the Financial Sector blew up, the Bank has just kept printing more money. Now nearly 50% of Gilts are owned by the Bank of England.

How will this ever be unwound. Back in April Andrew Tyrie, so well known after this week, as the BOE what preparations had been made - umm, none, came the message from the Debt Management Office - its too far off to bother.

One option is to hold these gilts to maturity, but this would mean a huge build up in debt as more are issued over time, before these all mature. Another way is to only offer long-term debt and make QE the short -term paper - that way it unwinds quickly, but the longer dated issues sink in value too.

Or you can try and dump it on eh market and see interest rates rocket and inflation fall back rapidly as liquidity is withdrawn. There is no good way to do this, although Japan did well in 2006 when it withdrew all its QE in just a few months, conditions were very benign, nothing compared to the cataclysm we have today.

It is not surprising there is no plan to unwind QE, but with more and more QE being done, it is worrying that yet again we have no plan. As usual in the UK, this will be a problem left to our children to sort out.

The lessons of the Baby Boomers - i.e. a boom for them and a bust for their children, are going to be repeated again.

(The picture is £500 shredded, how many bowls for £375 billion pounds - so only 750 million bowls needed of this then....)