![]() Sales of domestic safes are booming in Germany according to Phil Aldrick in the Times today. Fears of negative interest rates are leading to cash withdrawals from the banking system. Too risky to store under the bed, the Teutons are investing in old technology to hoard cash. Just hope the Germans are not wheeling the cash home in a wheelbarrow. Memories of the Weimar Republic still haunt with rampant inflation and currency depreciation the norm. Maybe that’s why UK narrow money is growing by 8%. The velocity of circulation slows on Planet ZIRP - as we approach the NIRP crevasse. No signs of rampant inflation in the UK just yet but oil prices will provide pressure into the final quarter of the year. By the first quarter of 2017, the year on year sterling denominated Brent Crude will be up by 70%. Pressure will feed into the CPI just in time for the pay round! No signs of rampant inflation but a new “plastic fiver” sold on eBay for £200 quid this week. It’s all about the serial number. The Governor dipped his fiver into a curry this month. Great use of a first edition. Central Bankers don't know what they are doing ... Central bankers don’t know what they are doing, is the summary judgement of Jason Cummins, Chief Economist at hedge fund Brevan Howard. “The public is fed up with the output of the Frankenstein lab of monetary policy”., he told a US conference last week. Quite right too! The ground swell of opinion is moving against academic policy advice from a group of PhDs sitting around hypothesising about implications of the moribund Taylor rule. Cummins draws a parallel with central bank meetings and the Court of Versailles before the French Revolution. Insular and incestuous, at least in thought. “Let them eat cake” the solution for the starving of Paris. “Abolish cash” the solution for savers. MPC’s Kristin Forbes argued against a further rate cut this week. The economy had been “less stormy than many expected” following the referendum result. Forbes is not inclined to vote to cut interest rates still further later this year, citing the better than expected performance of the economy in the wake of the Brexit vote. Mark Carney admitted he could do little more passing the buck to the Chancellor and the Autumn statement. He could do more. Raise rates back to 50 basis points when the Fed moves in December, abandon the Corporate Bond purchase programme and reserve the QE spend ring fenced for Hammond’s Infrastructure Bonds to be announced in November. Yes the time is right to increase borrowing. All will be revealed in November … Speculation increases about the tenure of the governor’s future. Will he stay through the Brexit adjustment period, with an eye to late retirement presumably. It could take that long! Or will he serve just the original five year plan. Forward guidance suggests he will stay on. Come dancing, Bake Off and Get Me Out of Here, on hold for now ... Public Sector Borrowing August ... Public Sector Borrowing fell by £0.9 billion in August to £10.5 billion compared to £11.5 billion last year. For the year to date, borrowing was £33.8 billion, down by just under five billion compared to prior year. Borrowing is on track to fall in the current financial year to around £65 billion. Strong revenue growth from VAT and other taxes (almost 4%) were a reflection of the strong post Brexit performance of the economy. Austerity rules held spending in check producing growth of less than 1%. Public sector net debt was £1,621 trillion that’s almost 84% of GDP. What’s another £100 billion on infrastructure bonds over the next few years. Why fix the roof when the roads need repairing will be the new mantra. Infrastructure bonds will be issued in the Autumn statement. The Old Lady is a willing buyer. They may even be classified by Treasury as outside the formal classification of Public Sector Borrowing, just like the £300 billion bank debt. Money for nothing, gilts for free and excluded from the total debt figures, a perfect start for Hammond. In other news … the OECD .. The OECD released their forecasts for the UK this week. Weak trade growth and financial distortions are exacerbating slow global economic growth. Exceptionally low – and in some cases negative – interest rates are distorting financial markets and raising risks across the financial system, it said. The UK is projected to grow by 1.8 percent in 2016 and 1 percent in 2017, well below the pace in recent years. Most forecasters are now revising up their forecasts for the current year towards 2% growth. There is no reason to expect a significant slow down next year, especially if Theresa May takes George Osborne’s advice and waits until the Autumn next year to trigger Article 50. Business as usual will remain the mantra into 2017. So what happened to Markets? Markets, were up - The Dow closed at 18,320 from 18,085. The FTSE closed up at 6,909 from 6,710. Sterling moved down against the Dollar to $1.297 from $1.303 and moved down against the Euro at €1.155 from €1.168. The Euro moved up down the Dollar to 1.123 from 1.116. Oil Price Brent Crude closed at $45.99 from $45.79. The average price in September last year was $46.52. Gilts - yields moved down. UK Ten year gilt yields closed at 0.73 from 0.87. US Treasury yields moved to 1.620 from 1.690. Gold closed at $1,340 from $1,314. That's all for this week ... if you enjoy The Saturday Economist .. JOIN THE SATURDAY ECONOMIST CLUB as an INDIVIDUAL or CORPORATE member. Check out the link for lots of options to get involved. Special reports, Survey Results and the Quarterly Economic Outlook are made available to members and sponsors. 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![]() My childhood nickname was carnage ... let's hope it's not his legacy ... 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. 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. 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. 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!# 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 That's all for this week ... if you enjoy The Saturday Economist .. JOIN THE SATURDAY ECONOMIST CLUB as an INDIVIDUAL or CORPORATE member. Check out the link for lots of options to get involved. Special reports, Survey Results and the Quarterly Economic Outlook are made available to members and sponsors. Plus priority booking for the quarterly events and discounts on the Economics Conference! Join and Save! Don't miss the Economics Conference in October. Sign up for the Saturday Economist Club save £25 on the ticket price .. with more deals through the year! Join The Saturday Economist Club as an Individual or Corporate Member ... © 2016 John Ashcroft and Company, Economics, Strategy and Social Media, experience worth sharing. ______________________________________________________________________________________________________________ The material is based upon information which we consider to be reliable but we do not represent that it is accurate or complete and it should not be relied upon as such. We accept no liability for errors, or omissions of opinion or fact. In particular, no reliance should be placed on the comments on trends in financial markets. The receipt of this email should not be construed as the giving of advice relating to finance or investment.. ______________________________________________________________________________________________________________ _____________________________________________________________________________ For details of our Privacy Policy and our Terms and Conditions check out our main web site. John Ashcroft and Company.com _______________________________________________________________________________________________________________ Copyright © 2016 The Saturday Economist, All rights reserved. ![]() Dr Fox has diagnosed the problem ... Dr Fox is off to a great start as Champion of business. Fat, lazy and too interested in playing golf on a Friday afternoon, the criticism of UK business executives. “What’s the point of going out looking for new markets, if we don’t have the exporters to fill those markets” said Liam Fox, to the Conservative Way Forward group this week. It’s a fair point from an ex GP politician with no experience of business, exporting, sales and marketing. Always best to find the markets for which we do have products and manufacturers as a general rule. “Companies were not ready to take advantage of the trade deals he was planning to negotiate.” he added. No need to rush. It’s going to take ten years to get the deals in place. Lot’s of time for a few more holes yet. Charm offensive continues ... The Fox charm offensive continued with the attack on the Foreign Office this week. “My world view is better that yours, Fox told the Foreign Office”. Too interested in politics and diplomacy at the expense of trade, the criticism. Fox is evidently prepared to cede diplomacy to the foreign office. Obviously not his strong point! Trade missions abroad should fall within his remit and his alone. History tells us diplomacy and trade are intertwined. “Trade Follows the Flag”. Or rather, traders advanced under the protection of the British Army and “Gun Boat Diplomacy”. Oh for the glory days. Civis Brittanicus Sum, how Palmerston must weep to see the days of glore long past. Dr Fox is now on the case. “Companies should start thinking of exporting as a duty” … excellent. Governor and the Treasury Select Committee … Duty called for the Mark Carney this week. The Bank of England gave evidence to the Treasury Select Committee. It promised to be a great grilling. The MPC had clearly mistimed the move to cut rates, expand QE and begin the corporate bond buying programme. Surely Jacob Rees-Mogg or Chairman Andrew Tyrie would give the Governor a tough time? It was not to be. Being savaged by a dead sheep was the cruel retort from Dennis Healey on criticism from Geoffrey Howe in 1978. The two hour session on Wednesday had a similar feel. Was the Governor ruffled? Not at at all. “In light of all the events since the referendum I am absolutely serene about the decisions which were taken.” Absolutely serene … calm, peaceful, and untroubled, the full meaning. It was a great escape undertaken at a strolling pace! Good news continues ... PMI Markit Service Sector ... The MPI Markit survey for the construction industry was released this week. activity bounced back in August. The index climbed to 52.9 in July from 47.4 in July. A rise in activity and new orders suggests the July data was a blip. The bank acted too quickly to make the move in response. Are we on the brink of recession? Of course not ... Car Sales August ... New car sales increased by over 3% in August. It’s a low month for sales ahead of the September rush. Fleet sales up by 7% were the main factor in the increase. Car sales up 3% year to date, September registrations will be critical in assessing momentum into the final quarter. Manufacturing Output ... Manufacturing output in July increased by 0.8% year on year. Total production increased by just over 2%. We expect the total year out turn (manufacturing) to be 0.7% for the year as a whole following revisions and our latest forecast projections. Construction output … Construction output fell by 1.5% year on year in July. Public sector cuts in housing and infrastructure largely to blame. Strong growth in private sector housing and commercial activity was partially offset by a fall in industrial activity. For the year as a whole we expect construction output to be flat at best. Infrastructure and housing spending are expected to feature in the Autumn statement, following the Hammond review. Trade in July ... Trade received a boost in July according to the latest figures from the ONS. The deficit trade in goods fell to $4.5 billion in July compared to the £5.6 billion reported prior month. One month does not mean much! For the year as a whole we expect the trade deficit to increase to £138 billion, up from £126 billion last year. Despite a boost to tourist activity in recent months, the service sector surplus of £88 billion will be flat year in the year. The overall trade deficit, goods and services will increase to £50 billion compared to £39 billion last year. The deficit at -2.6% of GDP is incompatible with base rates on the floor. The madness of life on Planet ZIRP continues. Nothing serene about that! So what happened in the U.S.A. Markets became convinced late week, the next move in rates would be up. Despite the soft US jobs data in July, the ECB decision to keep rates on hold, suggested central bankers were running out of options. Equity markets edged lower, bond yields increased as reality dawns ... So what happened to Markets? Markets, were mixed - The Dow closed at 18,182 from 18,016. The FTSE closed down at 6,776 from 6,894. Sterling moved down against the Dollar to $1.326 from $1.330 and moved down against the Euro at €1.181 from €1.192. The Euro moved up against the Dollar to 1.122 from 1.116. Oil Price Brent Crude closed at $48.00 from $46.91. The average price in September last year was $46.52. Gilts - yields moved up. UK Ten year gilt yields closed at 0.86 from 0.75. US Treasury yields moved to 1.672 from 1.62. Gold closed at $1,330 from $1,321. John That's all for this week ... if you enjoy The Saturday Economist .. JOIN THE SATURDAY ECONOMIST CLUB as an INDIVIDUAL or CORPORATE member. Check out the link for lots of options to get involved. Special reports, Survey Results and the Quarterly Economic Outlook are made available to members and sponsors. Plus priority booking for the quarterly events and discounts on the Economics Conference! Join and Save! Don't miss the Economics Conference in October. We are proud to announce Dr Sun Dali China Consul General will speak at the event. Sign up for the Saturday Economist Club! The material is based upon information which we consider to be reliable but we do not represent that it is accurate or complete and it should not be relied upon as such. We accept no liability for errors, or omissions of opinion or fact. In particular, no reliance should be placed on the comments on trends in financial markets. The receipt of this email should not be construed as the giving of advice relating to finance or investment.. ![]() Business as usual … Status Quo Ante Referendum … Fears the Brexit vote would cause an immediate downturn in the economy were diminished this week. The UK economy is performing much better than expected two months after the vote. For readers of the Saturday Economist, the data should come as no surprise. The move to leave the EU will create problems for the UK economy but not for some years yet. Cabinet met this week to formulate the definition of "Brexit means Brexit" and the terms by which we shall leave the EU. The task to square the circle, La Quadrature du Cercle, Das Quadratur des Kreises continues. It is a tough challenge in any language. It is, as we shall realise, for others within the EU to determine that which may be achieved. History explains the retreat from Dunkirk is not the time to review the terms of surrender of the German Army. The Tories will tear themselves apart in the process. Boris Johnson has broken ranks this week. So much for collective cabinet responsibility and the uniform view within government. Meanwhile … PMI Markit Series Manufacturing and Construction … In the UK the latest information from the PMI Markit series for August confirms the July data was a wobble. The UK manufacturing index hit a ten month high in the month. The index climbed to 53.3 as output and orders increased significantly. The PMI Markit construction index jumped to 49.2 from the prior month low of 45.9 as activity in housing and commercial property rallied. Consumer Confidence … Consumer confidence increased according to the latest data from GfK in August. Consumers are more inclined to spend than save. Overall confidence in the economy over the next twelve months increased by 11 points. House Prices Nationwide … House prices increased by 5.6% in August up from 5.2% prior month according to Nationwide. Housebuilding shares rallied as Persimmon followed Taylor Wimpey and Bovis Homes confirming sales were unaffected by the referendum result. The volume of activity remains low as buyers digest the impact of stamp duty and conflicting signals from the Bank of England. Property better than pensions … The Governor warned last month, house prices were likely to fall in the near future. Andy Haldane Chief Economist at the Bank gave the market a boost this week, suggesting individuals should invest “in property rather than pensions”. Property offers a better return than savings. Especially since “we have blown the biggest bond bubble in history” he should have added. It is clear the Bank of England moved too soon to cut rates and to increase the QE purchase programme. It is hard to understand why the Bank of England embarked on Corporate bond purchases. There is neither liquidity nor funding problem. The search for Alpha is difficult enough. Corporate bond yields offer attractive returns compared to government gilts. State induced buying programmes will diminish rather than enhance returns to investors and pension funds. The move to the zero bound and QE is mispricing capital in a capitalist system. It is a huge mistake. Mis priced capital is destroying the gilt curve, pushing ten year yields below 1%. The move hits savers and exacerbates pension fund deficits. The move to negative yields will force banks to penalise deposits so essential to maintain lending levels. Stock markets have benefited from the rise in investment volumes in the search for yields and dividends. But dividends are at risk from the continued programme of Central Bank intervention. Distress calls on Planet ZIRP ... A distress call was heard on Planet ZIRP this week. Dividends will be at risk from pension fund deficits. Phil Aldrick writing in the Times this week reviewed the position of Carclo. Carclo a plastics manufacturer has had to scrap it’s dividend. Under UK law, companies are not allowed to pay dividends if they have no distributable reserves. Accounting rules state that pension deficits, count against the reserves. Despite cash in the balance sheet, the company was legally restricted from making the shareholder payout because of the long term pension fund deficit. Others may have to follow suit. The combined deficit of the UK’s pension funds has risen to £710 billion according to PwC’s SkyVal Index. Around the world, $13 trillion of global and corporate bonds have negative rates. Denmark mortgages carry negative rates Japan is committed to buying 6 Trillion yen this year of further bonds. When something cannot go on forever, it will stop. Low rates in perpetuity or unhealthy and unsustainable. The bond market looks like a speculative bubble set to pop. If dividends are slashed as a result of QE what then of stock markets set to move to new highs in the UK and the U.S. No talk of this in Jackson Hole last week. Central bankers seem to believe QE and FG will be the salvation of any future crisis. More of the same is not the real game. Collective co-ordinated action amongst the G20 is required to escape from Planet ZIRP. The locomotive theory of monetary policy is required to effect the “Great Escape”. Central bankers must move together to hike rates if the crisis is to be avoided. So what happened in the U.S.A. Soft jobs data in August suggests the next rate rise in the U.S. will have to wait until December at best. Non farm payrolls increased by 151,000 in the month. The Fed is inclined to hike rates. The unemployment rate remained at 4.9%. Latest job data and weak growth in Q2 will mean the escape from Planet ZIRP is on hold for the moment. So what happened to Markets? Markets, were mixed - The Dow closed at 18,016 from 18,541. The FTSE closed up at 6,894 from 6,845. Sterling moved up against the Dollar to $1.330 from $1.3201 and moved up against the Euro at €1.192 from €1.170. The Euro moved down against the Dollar to 1.116 from 1.128. Oil Price Brent Crude closed at $46.91 from $48.56. The average price in September last year was $46.52. Gilts - yields moved up. UK Ten year gilt yields closed at 0.75 from 0.55. US Treasury yields moved to 1.62 from 1.56. Gold closed at $1,321 from $1,347. John That's all for this week ... if you enjoy The Saturday Economist .. JOIN THE SATURDAY ECONOMIST CLUB as an INDIVIDUAL or CORPORATE member. Check out the link for lots of options to get involved. Special reports, Survey Results and the Quarterly Economic Outlook are made available to members and sponsors. Plus priority booking for the quarterly events and discounts on the Economics Conference! Join and Save! Join The Saturday Economist Club as an Individual or Corporate Member ... © 2016 John Ashcroft and Company, Economics, Strategy and Social Media, experience worth sharing. ______________________________________________________________________________________________________________ The material is based upon information which we consider to be reliable but we do not represent that it is accurate or complete and it should not be relied upon as such. We accept no liability for errors, or omissions of opinion or fact. In particular, no reliance should be placed on the comments on trends in financial markets. The receipt of this email should not be construed as the giving of advice relating to finance or investment.. ___________ |
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