August 17th, 2019
Harriet and Ken will form dream team ...
Ken Clarke returned from holiday this week to discover he is on the short list to become the next Prime Minister!
Corbyn's bid to be the "Brexit Broker" banished, the former Chancellor of the Exchequer is ready to step up if need be.
Clarke and Harriet Harman could be the dream ticket to form a cross party alliance to prevent the UK leaving the EU without a deal. Ken is ready to lead a government of national unity.
"If this was the only way, in which the House of Commons could find a way forward, then I wouldn't object." said Clarke in a BBC interview. Many others including Dominic Cummings might ...
Boris Johnson sidelined, the hard line "Brussels Bashers" are losing traction in the elected house. This all goes to show the dangers of going away on holiday even for a few days. The world is spinning out of control. A world in which the President of the United States is considering a contested bid for Greenland.
In economic news this week, the latest jobs figures suggested the economy is stalling. Unemployment ticked up slightly as vacancies fell. The unemployment rate increased slightly to 3.9%. Yet the number of people in employment increased to the highest levels since records began, such is the perversity of data in an economy at turning point.
Earnings excluding bonus payments increased to 3.9%, good news for households, the latest headline inflation was just 2.1% in July. Real earnings are rising. No wonder retail sales remain on track. Consumers enjoyed a shopping spree on line last month. Online sales increased by 13%, year on year, accounting for 20% of all retail transactions.
With food penetration as low as 5%, the impact on all other categories is to take almost one in three transactions away from the high street, a trend set to continue as age demographics accelerate the move on line ...
Yield Curve Inverting ...
Markets were in a flap this week. The yield curve is inverting. Ten year U.S. bond yields fell to 1.5% at one stage, below the two year short yield. The FRED chart [above] had markets moving lower. On average the inverted yield curve has been a reliable indicator of recession to follow with a lead time of around 22 months.
Should we worry about the inversion this time round? For many the evidence is convincing but this time may well be different. Janet Yellen former chair of the Federal Reserve, suggests "Historically it has been a pretty good signal of recession but I really would urge that on this occasion, it may be a less good signal. There are other factors pushing down long term yields".
Here is the main difference this time round. Recessions are flagged when central bankers begin to increase rates to "take away the punch bowl as the party gets going". Interests rates are hiked to subdue inflation or to modify a looming trade deficit. Short rates rise, as long rates hold to the "Fisher Rule". The yield curve inverts reflecting central bank policy, central bank policy designed to engineer a slow down in economic activity.
This time around the yield curve has been dislocated by life on Planet ZIRP and the introduction of QE. We model the relationship between the level of bond yields and the holdings of central banks. The higher the holdings of central banks, as a proportion of total bond debt, the lower the yields along the curve.
A combination of central banks committed to buy, financial institutions obligated to buy and speculators motivated to buy, pushes prices up and yields lower. Andy Haldane, Chief Economist at the Bank of England has suggested we have created the biggest bond bubble in history. That was six years ago!
A combination of cheap money and the search for "alpha" pushes prices to yet new highs. Already $15 trillion of sovereign debt, that's almost 25% of total world stock, is offering negative yield. Worryingly this week, Alan Greenspan suggested there is no barrier to negative yields in the US. "Zero has no meaning, it's just a certain level". Bond prices will move higher in search of the "Minsky Moment" when the madness finally stops ...
For Trump the message is clear "Crazy, inverted yield curve ... thank you clueless Jerome Powell and the Federal Reserve ... the Fed is holding us back but we will win!"
Trump's rally fading risks re-election hopes ...
The White House is beginning to worry the economic cycle is in danger of moving at odds with the election cycle. The dream of a second term in office will be at risk if the economy tanks and stock markets fall.
Farmers are worried about the impact of the trade war with China. Truckers are concerned about the loss of traffic as import activity slows. Retailers are nervous about rising prices. Confusion abounds over the second round of tariffs on $350 billion dollars of imports.
The direction of White House travel is confusing. Tax cuts and spending plans suggest the economy should be booming. The imposition of tariffs, valued at 0.5% of GDP will effectively create a consumption tax impacting on household spending and consumption.
Trump offers "a personal meeting" with President Xi, to resolve trade issues, then offers advice on how too deal with the problems in Hong Kong to assist with the process. The President demands China reinstate Soy bean purchases, then announces the sale of F35s to Taiwan.
The President announced the 10% tariff hike, against the advice of his closest advisors. The decision to denounce China as a "currency manipulator" was made against the counsel of Steven MnuchIn. The President has no understanding of trade policy, trade deficits and the impact of tariffs on U.S. and world trade. Confusion abounds about the lack of consistency of message.
On the reading list this week ... "The Dangerous Case of Donald Trump", 37 psychiatrists and mental health experts assess the President. This is the second edition of the original best seller. Ten more commentators have been added to support the proposition that anyone as mentally unstable as Trump should not be entrusted with the life and death powers of the White House.
It doesn't make for reassuring reading but on the other hand, does explain a lot .
That's all for this week, have a great weekend. We will be back with more news and updates next week!
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The Saturday Economist
John Ashcroft publishes the Saturday Economist. Join the mailing list for updates on the UK and World Economy.
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