Banking Crisis - again ...

Commodities down on banking stress

Here at C@W we pride ourselves on having spotted the "2008" banking crisis in the summer of 2007, when two German banks went down, followed by Northern Rock - all three being canaries in the dank, dirty coalmine of culpably fatuous and irresponsible banking strategies being practised deep underground, that turned out to be systemic.

So what's happening now?  It doesn't look good.

• Silicon Valley and Signature
• Deutsche Bank (again) and Credit Suisse
• risk to economic recovery due to reduced bank lending
• likely response of the authorities: back to QE! (interest rates coming off already ...)

Thus far, the current banking woes have been accompanied by a pronounced downtick in commodity prices.  If, on the basis of economic contraction, that persists then maybe inflation doesn't just take off again with QE ... and people are forever pronouncing on the Chinese property market ... but I'm no good at predicting these macro phenomena.  (What's more, I don't know who is.)  Are you out there, CU?!

ND

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!

Interest Rate Up, Sterling Down

Open thread.

Right at this minute (13:10), Sterling is lower against both USD and EUR.  Discuss!

ND 

[Personal interest:  I am long both Sterling and USD.  And, of course, heavily exposed to the UK economy in general.]

UK Inflation falls again

Back down to 2.5% today.


I wrote last week of the challenge the Bank of England will have in normalising the economy and this is yet another example of this trend.


Historically, to maintain a 2.5% inflation rate you would have expected interest rates to be at around 4% to 5%. But now, after the financial crash, this just is not the case. Debt loads, both public and private are much higher (excluding the Banks whose balance sheets are around 50% smaller). This higher debt load means we are far more sensitive to interest rate changes than pre-2008.


The oft use quote is "this time its different" - but in many ways this time it really is, the macro-economy seems very resilient inspite of the underlying monetary failure of the State. Unemployment is very low by any historical standard, inflation  - even including house prices - remains low. The Government is glacially eating into the deficit. Even the Pound has recovered, which is a shame in many ways as it was such a boost to the sluggish economy of 2017. Abroad the Trump stimulus will help the US a while and the EU is climbing out of its decade long crash - albeit with some major challenges ahead in Countries like Italy that avoided fixing the banking systems.


As a backgound the, how can the Bank of England continue to raise rates in anything other than a tiny and anemic way? Also, more worryingly, is should anything go wrong with the current goldilocks scenario we are facing prolonged deflation with very few tools left to counter it.


Amazing really the Government, for all its evident crapness of people and policy, has still managed to oversee a good economy amongst the madness its manifest failings elsewhere.

Tide Going Out: Nude Bathers At Risk

Nothing quite brings home the end of cheap money like noticing that I am now getting 4.12%  -  tax-free and "risk-free"  -  on my NS&I index-linked certificates.  Has anyone been talking about this? 

In my business sector (energy) there are a heap of players - renewables, small suppliers - who have only been in existence in the era of cheap money.  Boy, are they going to come unstuck soon.  Elsewhere on the horizon, John McDonnell's plans might come in a bit pricier than he was anticipating.

And then there's all those leveraged B-T-L players, often the subject of our btl commenters.

Where do we think the serious chaos will start first?

ND

Still no news on Brexit or interest rate rises...

It is both surprising and unsurprising that there is no movement on Brexit.


It is not in the EU interest to concede having set the field of battle on their terms, the longer they play hardball the harder the battle for the British to win.


Having said that, it is amazing that the Government is still struggling with strategy and tactics having taken to the field over 6 months ago. Everything that has happened was utterly predictable, indeed, the EU have simply stuck to their announced position.


The only two ways out are a capitulation by the UK on money and ECJ (read immigration) that leads to a Brexit in Name Only deal - really a lot of effort for no reward or a real move towards a 'no deal' type scenario where we just focus on stuff like how customs borders are going to work and how we keep the planes flying etc.


I don't see the civil service or the MP's/Lords allowing the latter so BINO it is at the moment. Which will amount to the most colossal waste of time ever!


Meanwhile, the Bank of England observes inflation at 3%. Thank the Lord it must be saying, after all no one in Government is planning to start living within our means anytime soon to inflating away the value of all those non-indexed UK Gilts is all part of the plan. The fact that wages are still shrinking is just a side benefit. Oh, and the oldies will do better again with higher interest rates than the young-uns with mortgages - what a blinder of a play. best leave them on hold for now, no point rocking the boat then...

So no rate rises in 2015 after all then

It is quite a thing the Zombie economy created by the crash of 2008 and the crazed Blair government of the early naughties.

On the one hand we seem to have £100 billion in excessive government spending on welfare and the NHS which seems unbridgeable with much lower growth baked into the economy along with long-terms constraints on pay due to productivity being lower and immigration meaning there is an over-supply of labour.

Then there is the impact on the monetary economy. When the Banks were short of liquidity - and the economy to, the UK splurged £350 billion in quantitative easing and dropped interest rates to 0.5%. This should have driven up inflation, but the sheer destruction of money caused by the losses on financial assets seems to have prevented this.

So, with oil prices and commodity prices falling there is every chance the UK may experience deflation early next year rather than inflation.

Since 2010 analysts have always said the first inflation rises are six months away. Typical analysts really when it comes to forecasting the future, all agreeing about some fuzzy movable point in the future.

At the end of 2014, fully 4 years after rates were to have risen and indeed 'normalised', we are further away than ever from rates going up. In fact, it is hard to make any case at all to raise rates next year - potentially to cool a housing bubble, but that would be a very blunt tool for that job.

It seems there will be no interest rate before or indeed after the election. We will have record low rates for the meantime with all the benefits and problems that it causes. The Zombie economy will continue as the UK follows the 1990's and early 2000's path of Japan to a pancake economy with ever rising public debt.

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.

BOE: Lost and without paddle, boat leaking

The notes from the last BOE meeting are out today. They make grim reading. In short as I see it, they say they had little idea of what was going to happen to Lehman's or post Lehman's.

great - they have no foresight, by admission. Historically interest rate adjustments have been use to control the economy over the next 2 years. So a lack of foresight is rather a problem.

Then they go on to note that rates will come down further as inflation falls below target. This is all well and good for the next 6 months. then what?

I fail to see how inflation can remain low when all the deleverage has occured. The £ will be low and imports will cause inflation, the closing of factories will mean less suppliers. less suppliers eqauls infaltion in time as demand picks up again.

Given that commodities et al are markets I fully expect them to over-shoot on the downside. Hence we will have inflation, especially if the dollar tanks too as is likely at some point next year. G20 Global fiscal stimulus is inflationary too in the medium term.

Yet the bank sees maybe 0% interest rates next year. maybe so, but I hope not for long. otherwise the doomsday scenario o f borrowers being killed by deflation and then savers by inflation will come to pass and we will all be immeasurably poorer for it.

Does LIBOR matter?

Robert Peston has blogged today about the issue in the Interbank market. Peston is doing a good job in these difficult times to trying to keep up with events and explain them to 'the rest of us.'

In this case though, the malaise is much worse than he implies. Effectively it looks like banks won't lend to each other at all. All the current interbank lending is from governments to banks. In fact there should be a huge super-liquidity issue and the LIBOR rate should be low.

But it is not, and why is this?

- Possibly banks do not want to lend as the risk of default or nationalisation has become to high.
- Possibly because now they have more of a handle on their CDS exposure they have voluntarily raised their effective capital ratios.
- Possibly because their internal estimates of bad loans etc are in fact much worse than they are letting on and so the banks need to be prepared for further, bigger writedowns than have been announced thus far. Lehmans went bust with $646 billion of (gross) debt, not the $85 billion (net) it was telling everyone the week before.

None of these are good situations to be in.

Will the BOE cut rates?

Logic would suggest, that faced with a collapse in the credit markets and also in the money markets the right decision to be made would be to cut interest rates. Maybe not by 1% at once, but certainly by a 0.5% by the year end.

Yet in Mervyn King's letter to Alistair Darling today, it appears that the Bank of England has become more hawkish about inflation. Hedging its bet by saying that inflation will soon peak at 5%, but also noting how high above target this is.

There seems to be a determination to keep inflation down, even as we enter a recession. Good news for savers, less good for borrowers. A high risk move, but I do trust the BOE members intelligence and integrity; let's hope they are lucky too.

EU really mad; Official

There is a lot of discussion about weirdo's and madness on the internet today, so perhaps I can join in....


The US Dollar fell from its six month highs today (phew, fingers crossed for me as I am going to NYC in a couple of weeks), but get this - here is why:

"The U.S. dollar tumbled from six-month peaks against the euro on Wednesday, as comments by a European Central bank official rekindled speculation about an interest rate increase in the euro zone to quell persistent inflation pressure."

Just for fun, go read Ambrose Evans-Pritchard in today's Telegrpah discussing the economic situation across Europe. Collapse everywhere, even Germany hurt by the strong currency, and the idea is to raise interest rates?

This 'inflation' we are suffering will end in tears for us all. As oil has dropped 20% in a month and money supply has dried up it is not so hard to predict a sharp drop in inflation - it is a lagging indicator in any event.

If the EU raise interest rates it will utterly wreck Spain, Denmark, the Baltics and Italy. Why would they do this unless they wanted to ruin the eurozone. They can't possibly want to do this, so the 'EU Official' who said this must be mad.

UPDATE: From a Bank of England MPC member today in the Guardian...

Blanchflower described the BoE's forecast earlier this month of the economy standing still over the next year as "wishful thinking" and said things could be easily a lot worse.

"We are going to see much more dramatic drops in output," Blanchflower said. "The way to get out of it is to act, by interest rate cuts and fiscal stimulus and other things to try help people who are hurt through this."

"Sitting by doing nothing is not going to get us out of this and hoping that a knight in shining armour will come and lift us out of this is optimistic in the extreme."

And he said that an expected boost to exports from a weaker pound was unlikely to prove the "great rescuer" of the economy.