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. 

Euroland updates

One interesting side-effect of Brexit has been the sharp drop in interest in the actual runnings of the EU. Now that the #FBPE crowd are all around, there can be no criticism of 'the project' to do so is to undermine everything.


And on the Brexiteers side, having sort of won the vote, the focus on just how rubbish aspects of the EU are has fallen away - sadly in favour of infighting and mass navel gazing.


Two current issues demand some attention. The first is economic, as we approach the top of the cycle (sadly for much of Europe as EU members have stagnated for over a decade, shame), members need to get their act together. Italy is the key concern - it has a debt to GDP ration of 130% and increasing. The new populist Government is trying tax cuts to remedy the austerity which has not worked for them for 10 years. The jury is out as to whether it will work, but abandoning the policy chosen by the Bundesbank EU Central bank is not going down well. There are real threats of fines as well as much hand-wringing. Longer-term, France owns a third of Italy's debt - should Italy go the way of Greece we will have 2011 Euro run part two, run harder!


Then there is the result of the EU elections - without going into the huge detail here is an excellent article on Politico.


My main takeaways from that are the EU is entirely made up of smoke-filled rooms and driven by the whimsy of Merkel and Macron - but only at a distance. The likely EU President of Guy Verhofstadt should be enough to even make Remainers take a sharp breath - the guy is a maniacal integrationst zealot. The democratic will of the EU - increasing the share of anti-EU parties in Parliament only to see the most pro-integration President ever get elected in the back room deals - seems to be a winding river indeed.


Remaining will be such fun!

How long will China last?

Even I can't write about Brexit everyday - the newspapers seem less reticent. Surely Brexit insomnia will set in soon?


However, on a wider note, I have been considering recently how much longer China's debt bubble can last. As with all markets, accurate prediction is the key, without that there is no chance of making money. With China, being a communist controlled state, they have a lot more levers to pull when it comes to juicing their finances than most countries. Plus as the largest economy in the world they can also rely on everyone else to play the extend and pretend game in order to keep the party going.


The chart above shows the path that Japan and Korea both pursued during their own debt fuelled booms. As can be seen, China is on a huge tear currently that will out-shoot even Japan.


Japan has never really recovered from its debt-binge in terms of economic growth and development, sure they have nice stuff there and a high standard of living, but real growth is near impossible due to the debt burden and demographics. China will be in that boat too in short order.


The chart though is quite long-term, so I can see China having another 5 years or so of debt fuelled 5%+ growth before the big crunch. Perhaps this will then coincide with Brexit and the collapse of the Euro - who knows the domino effect.


One thing we can be sure of, this will happen as sure as eggs are eggs. In our own way in the UK, we know all too well the consequences of a debt binge - the China scale is around double the problem in relative terms that we had in 2008;

The biggest question about Greece that nobody will ask or answer

Given how much I go on about Greece and have done for many yeas,  have been trying my best to leave it this week.

For Greece, there are only two choices; penury under European hegemony or an exit from the Euro, with chaos and confusion before eventual renewal. Neither of these are very palatable dishes.

However, the really interesting news this week is to watch the reaction of those who know...the 'CEO' of Europe, Jean-Claude Junker, is saying Greeks will commit suicide by leaving the Euro. He is a dangerous man in his own right and it was right for the UK to oppose his Presidency - with his one-eyedness that will lead to huge future problems for the EU as it pushes up against integration issues across all states.

Further more the biggest story of all is not being covered.

Where has all the money gone? Since 2000 when the Greece was admitted to the Euro over €300 billion has been borrowed and spent. So the key question is, who borrowed it and who spent it?

We all know the Olympics 'cost' more than the London Olympics ($15B versus $14B) and resulted in a loss of $14 billion. Property developers and building contractors made huge money out of this venture - all of it now likely residing in Switzerland.

Equally, we know that few people have paid tax in Greece for a long time - so their lifestyles have been above what they have been earning. But still I doubt this would cover the loss. German exports to Greece are now €4 billion a year, down from double that in 2008 -but still its net trade is a €3 billion positive in Germany's favour. It sends over tourists and BMW's and which don't really balance each other out.

Hence German businesses, as well as French, are keen to hold onto their Greek market. Of course, behind German thinking too is that a Grexit in the long-term will enhance the value of the Euro - anathema to a Country based on a mercantilist policy.

Also, Greece has not really repaid much of its debt, payments have been made until today at a steady €7 billion a quarter, but this barley covers interest in the main and thus the total stock of debt has kept exploding upwards. More debt has been issued to cover the increasing debt repayments to avoid default - so in effect more debt is being accrued to pay the European owners of the original debt. I can see this amounts to over 60% of the total money Greece has borrowed

But I don't really know where the other money went, but it is interesting that this is not a topic of discussion at all by either side - the Europeans are refusing to admit they are in effect bailing out their own banks and taxpayers by forcing Greece to endue austerity in extremis whilst paying themselves back. The Greeks are not up for admitting the huge corruption that must underlie the initial uptick in debt to pay for the Olympics and other such projects such as the Egnatia highway and railway upgrades which have been ( and still are) both expensive and often contracted out to European major corporates.

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

OK, maybe we can have an Italy crisis in July.

FTSE-100


AAL -74.50 ABF -15.00 ADM -35.00 AGK -33.00

AMEC -29.00 ANTO -39.00 ARM -28.50 AU. -52.00

AV. -14.30 AZN -47.50 BA. -7.00 BARC -9.70

BATS -28.00 BG. -41.50 BLND -8.00 BLT -64.17

BP. -7.10 BRBY -41.00 BSY -13.50 BT.A -3.70

CCL -72.00 CNA -5.90 CNE -12.00 CPG -10.50

CPI -11.50 CSCG -6.30 DGE -19.00 EMG -11.40

ENRC -24.50 ESSR -7.00 EXPN -17.50 FRES -19.00

GFS -4.60 GKN -9.50 GLEN -9.35 GSK -6.50

HL. -16.50 HMSO -3.20 HSBA -11.00 IAG -10.20

IAP -13.70 IHG -37.00 III -8.70 IMI -27.00

IMT -32.00 INVP -12.90 IPR -5.50 ISAT -10.50

ITRK -39.00 ITV -2.25 JMAT -33.00 KAZ -40.00

KGF -5.50 LAND -9.00 LGEN -3.20 LLOY -1.92

LMI -45.00 MKS -5.70 MRW -4.60 NG. -9.00

NXT -38.00 OML -4.00 PFC -47.00 PRU -22.50

PSON -20.00 RB. -43.00 RBS -1.14 RDSA -57.00

RDSB -54.50 REL -9.50 REX -9.20 RIO -130.00

RR. -15.00 RRS -60.00 RSA -1.60 RSL -7.80

SAB -36.00 SBRY -5.00 SDR -23.00 SDRC -18.00

SGE -5.80 SHP -14.00 SL. -4.90 SMIN -20.00

SN. -12.50 SRP -8.00 SSE -25.20 STAN -36.50

SVT -30.00 TATE -17.50 TLW -45.15 TSCO -5.40

ULVR -40.00 UU. -8.50 VED -52.00 VOD -2.05

WEIR -46.00 WG. -21.00 WOS -58.00 WPP -15.00

WTB -60.00 XTA -48.00

Winners 102 Losers

That is a really nasty wake-up call, the Italian Bourse is down 4.5% this morning. That is even worse.

The Euro 'Elite' really need to get going or else there is big trouble Don;t they remember just two weeks ago uncle Wen visited to say he would help out - did anyone write down his phone number?

Also I am changing my opinion on can-kicking, that Greek rally did not last very long did it? This is in itself a bad sign that there is no long term confidence. Without that, there can be no market led recovery. Either more QE is needed to flush the system with inflation or the banks need to be killed as debt is written off - a nice terrible or disastrous set of options. I wonder what Oil Rehn is thinking today...

Saving Money

Normally I avoid too much personal finance on the blog. However, having been recognised by The Times as one of the top Personal Finance blogs, I guess I had better do something.

Then as it happens I see this in the Sunday Papers. HSBC writing to people to say overpay your mortgage as your rate drops and save yourself a fortune in the long-term.

Is this a good idea?

On the plus side, saving rates are low so that is wasted, also who wants over £50,000 in a bank account anymore?
Secondly, if you have not lost your job then by keeping mortgage payments the same as before you won't have really altered your monthly budget.
Thirdly, investing in wold markets is a good way to lose your money as the moment as I am proving strongly in the early weeks of this year.

On the other hand there are some rather large elephants lurking int he corner. Firstly, HSBC needs to improve its capital ratios, pulling in more money is clearly in its best interests- hence the advice.

Perhaps even bigger though is that all the money thrown into the system is going to cause some big inflation in years to come. The price of Gold spiked to all time highs in pounds last week. If there is inflation to come then the last thing you want to do is pay debt, as that will inflate away quite quickly (could be painful if interest rates shoot up though...).

On balance I would not take HSBC's advice myself. Much better for me to pay off overdrafts, personal loans and credit cards if you have money available rather than a stable long-term mortgage.

What would you do?

Debt collectors preparing to call on us all....

I spotted an excellent article in the under-rated The Business magazine. Here is the first paragraph:

"THE government’s private finance initiative (PFI) liabilities have rocketed 14.5% to £181bn ($368bn, E260bn) over the past 10 months, according to information buried in the pre-Budget report (PBR)."

That is a huge jump for an economy expanding at 3% per annum at best.

Add this to the the £1,363 billion in personal debt and the £574 billion in Government debt.

This brings it to a grand total of £2,118 billion of total debt.

This translates to £84,720 of debt per household (the best measure as it approximates net taxpayers best of all).

This is a huge amount, the interest on this alone must be something in the order of £6000 per year or £500 a month!

No surprise then that the graph above shows a rapid rise in insolvencies.

Of course some of this is long-term debt and mortgages account for half of this burden.

Nonetheless we are in a difficult position debt wise and the boom of the last few years has clearly been financed by both increased mortgage borrowing of up to £200 billion and Government spending of another £200 billion.

There is no way to finance us out of a recession now; so I bet Brown and Darling are praying somehow that we avoid one