Shouldn’t our banks be helping the economic recovery and not hindering it?

The last 8 years or so have seen the development of the symbiotic nature of the relationship between governments and banks. Much of this has come about by the way that central banks have set monetary policy to help banks more than the real economy. We may have seen an example of that this week from the Bank of Japan which is worried about the impact of a -0.1% interest-rate on the Japanese banks and so decided to not ease again. There we have a problem as of course they have never really recovered in the lost decade period. Another version of the symbiotic relationship is the amount of sovereign or national debt banks hold especially in the Euro area. What could go wrong with giving sovereign bonds a zero risk rating? You will not be surprised to see who is leading this particular pack. From Bloomberg.

In Europe, the issue is particularly important in Italy, where domestic state debt accounts for 10.5 percent of banks’ total assets, well above the euro-area average of 4.2 percent.

Royal Bank of Scotland

Another example of the symbiotic relationship between governments and banks has been demonstrated this morning in the interim statement by Royal Bank of Scotland or RBS.

An attributable loss of £968 million included payment of the final Dividend Access Share (DAS) dividend of £1,193 million to the UK Government.

So we see that RBS has done its best to help bail out the UK Public Finances as Chancellor Osborne finds himself able to trouser nearly £1.2 billion of extra revenue. he is probably singing Dionne Warwick.

That’s what friends are for
For good times and bad times
I’ll be on your side forever more
That’s what friends are for

Of course the UK taxpayer bailed out RBS in 2008 and ended up owning 78.3% of RBS. They were let down then because for that money they could have insisted on 100% ownership but the establishment preferred to be able to claim that the bank had not been nationalised. More recently some of the shareholding has been sold but for a loss. Currently the share price is at 243 pence compared to the 407 pence that the government claims is a break-even level. So RBS got a bailout and this year the figures of Chancellor Osborne have got one. But the taxpayer seems to be staring at losses which of course are the opposite of the profit promised back in the day. From the then Chancellor Alistair Darling.

The taxpayer, therefore, will be fully rewarded for that investment………ensuring that the taxpayer is appropriately rewarded…….

In the same statement “fully” had morphed into “appropriately” and it has been on that declining journey ever since.

The Outlook

The official view on RBS ever since this has been on the lines of the outlook is bright. If anyone has actually believe that then they must by now have been very disappointed as bad news has followed bad news! These days banks produce a litany of different profit figures an issue I raised earlier on Morning Money on Share Radio but the sentence below sums the state of play up best I think.

Adjusted operating profit(4) of £440 million in Q1 2016 was down from £1,355 million in Q1 2015 primarily due to Capital Resolution and the IFRS volatility charge.

You might reasonably think that as we are three years into a boom that banks would be doing well especially as that boom has centred on boosting mortgage lending and house prices. Indeed one might reasonably expect the numbers below to be up rather than down.

UK Personal & Business Banking (UK PBB) adjusted operating profit of £531 million was £54 million, or 9%, lower than in Q1 2015.

Still one area is booming.

Buy-to-let new mortgage lending was £1.5 billion compared with £0.8 billion in Q1 2015

If we look at the impact of RBS on the UK economy we open in troubled fashion as we note the growth of buy-to-let. But surely after all the help its has received and the UK economic recovery RBS is fit to help us back? Well not by boosting employment.

RBS remains on track to achieve an £800 million cost reduction in 2016 after achieving a £189 million reduction in the first quarter.

And this.

Capital Resolution remains on track to reduce RWAs to around £30 billion by the end of 2016 following a £1.4 billion reduction in Q1 2016.

All these years later we have job losses and deleveraging as opposed to the brave new world promised. Oh and there continues to be something of a sword of damocles hanging over it as this tweet sent to me earlier indicates.

I’m optimistic about Today we launch our action against them 4 funding/counsel in place ( @efgbricklayer )

RBS has remained what we might call accident prone as it was caught up in the Panama Papers problem and this morning this emerged as well. From the Guardian.

RBS said the Swiss regulator, the Swiss Financial Market Supervisory Authority, had “opened enforcement proceedings against Coutts & Co Ltd (Coutts), a member of the RBS Group incorporated in Switzerland, with regard to certain client accounts held with Coutts”.

It feels like a bottomless pit does it not?

Monetary data should be good for banks

Our Martian economist might reasonably expect it to be boom time as he/she peruses this morning’s data release from the Bank of England. Let us start with mortgage lending.

Lending secured on dwellings increased by £7.4 billion in March, compared to the average of £3.6 billion over the previous six months. The three-month annualised and twelve-month growth rates were 4.7% and 3.4% respectively.

Quite a surge as we presumably see the impact of the higher Stamp Duty charge on Buy To Let purchases which is now in place but was not then. But if you really want to see numbers which are motoring take a look at this.

Consumer credit increased by £1.9 billion in March, compared to the average of £1.4 billion over the previous six months. The three-month annualised and twelve-month growth rates were 11.6% and 9.7% respectively.

If our banks cannot make money out of this when can they? That is a little ominous as we note lower mortgage approvals on the month as the Buy To Let surge fades away.


It too seems to be failing to do its bit for the UK economy. From Bloomberg.

Following these disposals, which include the sell-down of its 62 percent stake in Barclays Africa Group, McFarlane said the bank expected group full-time employees to reduce by around 50,000 people, resulting in a total headcount of 80,000 – almost half the staff employed at its peak.

Oh and this bit could have come straight out of an episode of Yes Prime Minister.

McFarlane said he had “a lot of sympathy” with the issue of high levels of banker compensation but that Barclays was not among the highest payers in the industry and the payouts were necessary to retain top staff.


Back in 2009 the then Chancellor Alistair Darling was reported in Hansard as saying this.

They will mean strong and safer banks that are better able to support the recovery,

Actually the story of the credit crunch was that we continued to support the banks via less explicit moves that were still bailouts. For example Quantitative Easing offered them profits on government bonds and similar assets. Then the summer of 2012 saw the Funding for Lending Scheme which gave quite a subsidy to both their mortgage books and mortgage lending. So the theme of us helping them continued rather than us getting much back.

Also I note that back in 2008/09 many of the moves were badged as being to help UK businesses via bank lending. So if we add in the FLS above it should be booming right? I will let readers make up their own minds after perusing this morning’s numbers.

Net lending – defined as gross lending less repayments – to large businesses was -£1.9 billion in March. Net lending to SMEs was £0.1 billion.

We appear to have copied Japan and our version of kicking the can has left us with a banking sector which the Cranberries provide a theme song to.

Zombie, zombie, zombie
Hey, hey
What’s in your head, in your head
Zombie, zombie, zombie

Some of course seem to be even worse off. From the Financial Times

Contributions to Italy’s bank rescue fund undershoot

On The Radio


Has monetary policy now reached its limits?

The credit crunch era has been one where monetary policy has been bent twisted and expanded all at once. The opening move in the game of chess was to reduce interest-rates to what were considered to be extraordinary low levels back then. The next was to buy bonds mostly government bonds in what was called unconventional policy back then as Quantitative Easing looked to reduce bond yields. However as time went on and advocates QE sang along to this bit in The Sound of Silence “silence like a cancer grows” then it became well conventional. There were also lending support policies which of course were a critique of ultra-low interest-rates and QE as of course if those two had worked then other polices would not be needed! Obviously official communiques turned their blind eye to such thoughts and logic. We have more recently seen a new phase of interest-rate cuts as more and more central banks have moved interest-rates lower again into negative territory taking many bond yield with them. On that front the chart below is rather eloquent I think.

A negative yield for an oil company. What could go wrong?

As well as actual moves and action central bankers have increasingly deployed what I call Open Mouth Operations where they promise to do things. In spite of the long list of broken promises and failed forecasts they publicly continue with making Forward Guidance which in the UK is at around Mark fifteen as thresholds and dates come and go. In some ways the peak for this sort of thing was this from Mario Draghi of the ECB on the 21st of January.

There are no limits to how far we are willing to deploy our instruments within our mandate

Perhaps he was bopping away to the band 2 Unlimited in the 90s and their biggest hit is stuck in his mind.

The Yen and the Nikkei 225 

This morning has seen this in Japanese markets. From the Financial Times.

The yen surged 2 per cent and equities slumped……..Futures on the broad Topix stock index were trading down 42 points at 1,339. The yen surged 2 per cent to Y109.3 against the dollar.

Actually things went further than that as the Yen continued it surge and has risen through at 108 versus the US Dollar as I type this. Lots of countries and currencies have had an involuntary devaluation as for example the UK Pound £ now buys 158 rather than 162 Yen. If we look for some perspective the FT adds this.

The yen has risen from about Y120 against the dollar this year, despite a shock BoJ move to interest-rates of minus 0.1 per cent in January, hurting Japanese exporters and setting back the central bank’s effort to escape from two decades of on-and-off deflation.

There is obvious FT speak there via the use of “despite” rather than “because of” and the assumption against the evidence that Abenomics will work. That was true even before it became Japanese owned. But let us mark that and move onto equity markets which also continued their move with the Nikkei 225 closing some 3.6% lower at 16,666.

Now with such moves one might conclude that the Bank of Japan had acted and that the half-life of the subsequent equity market rally is now so short that it had fallen by the end of the day. But in fact the announcement was as below.

The Bank of Japan will conduct money market operations so that the monetary base will increase at an annual pace of about 80 trillion yen……The Bank decided, by a 7-2 majority vote, to continue applying a negative interest rate of minus 0.1 percent to the Policy-Rate Balances in current accounts held by financial institutions at the Bank

That was what the apochryphal civil servant Sir Humphrey Appleby would describe as “masterly inaction” as it was unchanged policy. So we note that if the Bank of Japan acts the Yen rises and the equity market falls and if it does not the same happens! The only difference is that acting gives a one day rally for the equity market. We get some perspective on today’s move from Reuters Jamie.

USD/JPY -3%. It’s lost more than 3% on only 5 days since 1998, and only 20 days since Bretton Woods collapse in 1971

There were reasons to act

The obvious one for an inflation targeting central bank was the inflation news this morning. From NHK.

Japan’s consumer price index for March was down 0.3 percent from a year earlier, for the first drop in five months…….Excluding all types of energy and food, the index was up 0.7 percent year-on-year, for a 30th straight month of growth.

As you can see not so good from the Abenomics point of view even if you can manage to live without energy and food. If you find someone like that please let me know! The Bank of Japan was downbeat in other areas.

Comparing the current projections through fiscal 2017 with the previous ones, GDP growth is somewhat lower, influenced mainly by weaker exports that reflect the slowdown in overseas economies. The projected rate of increase in the CPI for fiscal 2016 is lower, mainly reflecting downward revisions in projections for GDP growth and wage developments.

As you can see it is all apparently the fault of Johnny Foreigner or Gaijin and you may note something crushing to Bloomberg which has regularly reported better wage growth is around the corner.

Let us move on from the Bank of Japan which resembles the Titanic and I will leave it to readers to decide whether it is before or after it hit the iceberg.

Other central banks

There was a joint outbreak of “masterly inaction” as the US Federal Reserve, the central bank of Brazil and the Reserve Bank of New Zealand did nothing except put Yes Minister on You Tube. Is that a fluke?

Anyway for the US Federal Reserve it is an utter failure for “Forward Guidance” as in election year the scope for “between 3 to 5 interest-rate” hikes has done a bit more than faded I think.


We are often assured that central banks cannot run out of money yet it would appear that this economic basket case has in fact managed it. From Bloomberg.

In a tale that highlights the chaos of unbridled inflation, Venezuela is scrambling to print new bills fast enough to keep up with the torrid pace of price increases…….Venezuela, in other words, is now so broke that it may not have enough money to pay for its money.

Now let me add a little dose of sanity as the central bank could create the money to pay for those although of course this might push the exchange-rate even lower. However this is a scenario which many “experts” such as Paul Krugman would tell us is “unpossible” as hyper-inflation only exists according to them in the world of “inflation-nutters”.

Venezuela’s inflation, the world’s highest, is expected to rise this year to close to 500 percent, according to the International Monetary Fund.

This is deflationary hyper-inflation and I guess you are all waiting for the Weimar style wheel-barrow quote.

“It’s a very bad sign to see people running around with wheelbarrows full of money to buy a hot dog,”

Ah a poor diet too?


For the seven years or so central bankers and their media acolytes have been singing along to Paul Simon.

These are the days of miracle and wonder
And don’t cry baby, don’t cry
Don’t cry

However these boys in the bubble are finding it increasingly tough going as their Forward Guidance of better days ahead keeps turning into a disappointing reality. I do not know yet what the GDP number will be for the United States today but it will not be great I do know that. This keeps happening although the US and UK are of course doing better than Japan in this regard. They kicked the can into the future but their own actions delayed and stopped the reforms required to make the future strong enough to pick the can up. Still some have enjoyed it.

A loose affiliation of millionaires
And billionaires and baby


Before the Bank of Japan meeting I broadcast my thoughts on TipTV.



UK GDP is an example of the march of the services and not makers

Today gives us our first full insight into how the UK economy performed in the first three months of 2016. Let me open with a sector which was turbo- charged in that period. From the British Bankers Association or BBA.

Gross mortgage borrowing of £17.1 billion in March was 64% higher than a year ago and the highest borrowing since April 2008 following a reported sharp increase in purchase of buy-to-let and second homes, ahead of the increase in stamp duty on 1 April 2016.

As you can see the pedal had pushed nearer to the metal and if we look to the future we see that we can expect a follow-on effect in the second quarter of this year.

The number of mortgage approvals in March was 20% higher than a year ago, with remortgaging up 25% and house purchase up 14%.

So it was time for the Outhere Brothers in the quarter just gone.

I say, boom boom boom now let me hear you say wayoh

The BBA itself summed up the position as shown below.

A surge in buy-to-let and second home buying ahead of the new stamp duty surcharge in April led to a sharp rise in March’s gross mortgage borrowing as people brought transactions forward.

If we look back to yesterday’s article then one of the last things we need is buy-to-let buying driving house prices even lower and I note that even the BBA is unable to avoid pointing that out.

This has fuelled a hike in house price inflation in the first quarter of this year, with the ONS suggesting in its latest report that annualised increases in house prices were 6.1%. Indeed, the ONS House Price Index points to an even larger house price increases of 7.2%.

Unsecured Lending is rising fast too

Regular readers of this website will be aware that other forms of personal lending have been seeing a boom too. For instance we have tried to peer into the data to see if we can find our more about car loans. Here is the BBA view.

However, there is evidence of a stronger pick-up in lending elsewhere; as mortgage affordability rules have worked through the system, lending has shifted to personal loans and overdrafts as well as to credit cards. The difference between credit card lending and repayments shows that consumers are taking advantage of low interest rates and building their net borrowing . The same is the case for overdrafts and personal loans.

There is a clear issue here as pre credit crunch when mortgage lending was likely to be over the rules then borrowers were “helped” by being given personal loans and the like. It seems as though that might be happening all over again and is a powerful critique of macroprudential policies. In other words whilst the sky may be clear at the altitude of an Ivory Tower down at ground level reality is foggy.

We have seen evidence of this impacting on car sales and no doubt this has also been a factor in the UK’s strong period of retail sales growth. But here the boom theme starts to fade away as we note that by the end of the quarter monthly growth had gone negative and annual growth had slowed to 2.7%.

Business lending not so good

The Funding for Lending Scheme was supposed to be for lending to small and medium-sized businesses. But as I have explained so many times that was something of a red herring to allow them to push hard for more mortgage lending. They do not put it like that but even the BBA is in agreement.

This may be because lending to the private sector overall, including businesses, is less buoyant

This reminds us of an area which is much less buoyant itself to coin a phrase.

Total production output is estimated to have decreased by 0.5% in February 2016 compared with the same month a year ago, the largest fall since August 2013. The largest contribution to the fall came from manufacturing, which decreased by 1.8%.

We are not up to the end of the quarter with the numbers ( and perhaps GDP should wait for a fuller data set) but you can see that the “rebalancing” promised by Baron King of Lothbury and indeed the “march of the makers” by Chancellor Osborne seem to have gone missing.


This is a very troubled data series and should be taken with a lot more than the proverbial pinch of salt. But it too hints at a slowing.

In February 2016, output in the construction industry was estimated to have decreased by 0.3% compared with January 2016…..Compared with February 2015, output in the construction industry increased by 0.3%. All new work was flat while there was an increase of 0.8% in repair and maintenance.

I think that the position is better than that although I may be suffering from local bias as there are plenty of cranes for me to count as I cycle past Nine Elms.

The banks

You might think that with all the help they have received then bank profits would be surging and helping the recovery. But apparently not seems to be on repeat.

Barclays has reported a 25% drop in profits for the first quarter of the year, mainly due to a weak performance in its investment banking division.

Pre-tax profit for the first three months of the year was £793m, down from £1.1bn for the same period last year.

Although I am reliably informed that if you take out all the losses then the numbers are superb! Speaking of spinning, the BBC and GDP I am troubled by this from its economics editor.

It is likely – in fact probable I would say after speaking to those close to Mr Osborne – that the Chancellor will claim “referendum uncertainty” as one of the reasons for the stuttering economy.

You see this was published in the 24 hour purdah period when those who are close to the Chancellor may well be aware of the numbers as he certainly will have known them.


In the end it all comes down to what in gang terms is the Master G of UK GDP numbers these days. The official weights remain back in 2012 at 78.6% for this sector but it must be much more like 80% now. Anyway this morning’s update gives signs of a slowing here too.

The Index of Services is estimated to have increased by 2.5% in February 2016 compared with February 2015……The latest Index of Services estimates show that output increased by 0.1% between January 2016 and February 2016. This follows growth of 0.1% between December 2015 and January 2016, which is revised down 0.1 percentage points from the previous estimate.

If we continue at around 0.1% a month then the annual growth rate will halve. Also business services and finance only rose by 2% in the year to February but of course the latest mortgage numbers are not in there yet.

The Overall Numbers

Change in gross domestic product (GDP) is the main indicator of economic growth. GDP is estimated to have increased by 0.4% in Quarter 1 (Jan to Mar) 2016 compared with growth of 0.6% in Quarter 4 (Oct to Dec) 2015.

In annual terms this translates to.

GDP was 2.1% higher in Quarter 1 (Jan to Mar) 2016 compared with the same quarter a year ago.


It is good news that our economy continues to grow and in annual terms our performance will be solid relative to Europe. However the ying to that yang is of course the fear that the slowing of the growth will continue. Care is needed as the numbers are not in themselves accurate enough for us to be absolutely sure but of course other numbers have been consistent with a slower beating of the economic drums.

Also if we ignore the official hype then the “march of the services” goes on.

Services increased by 0.6%, contributing 0.50 percentage points to Quarter 1 (Jan to Mar) 2016 GDP growth

Yes you do read that correctly and yes other sectors did in fact shrink.

There was a downward contribution (0.05 percentage points) from the production industries; (mostly mining and quarrying but manufacturing fell 0.4% as well)……There was a downward contribution (0.05 percentage points) from construction;

Make what you will of the construction numbers as it is very unlikely that they are correct but you never know and indeed the ONS doesn’t either!

All of my past critiques of the use of GDP numbers apply here so as ever caution is the watchword and here is another thought. How do we define services? Has the definition somehow spread? I am reminded of the large exchange between it and construction around a year ago which of course was a much bigger deal for construction due to their relative sizes.



The Bank of England has squeezed disposable income by inflating housing costs

One of the features of that last 3 years or so in the UK has been the way that house prices have accelerated and left wage growth especially real wage growth way behind. The official view is that affordability is fine because mortgage rates have fallen although of course that is something of a trap as if the tactic of raising house prices is to continue then mortgage rates will have to continue to fall. That is not so easy from what are often particularly in the case of fixed-rate mortgages all time lows for rates. Also the idea that affordability is good is undermined by the fact that some much official “Help” is required via Help To Buy and other schemes. The truth is of course that first time buyers are very likely to be humming the words of John Lennon.

Help me if you can, I’m feeling down
And I do appreciate you being ’round
Help me get my feet back on the ground
Won’t you please, please help me

A Different Perspective

The Resolution Foundation has taken a look at some longer time patterns at they pose another challenge to the its okay crew.

The analysis, which forms part of the Foundation’s forthcoming housing audit, finds that the share of income spent on housing costs was stable for most of the 1990s and early 2000s at around 17 per cent. However, a wedge opened up in the mid-2000s as rising housing costs outstripped income growth. By the eve of the financial crash, the average working age household spent around a fifth of their income on housing.

A 3% income share may not seem much but if one considers where that 3% has to come from then it gets much more difficult for many if not most budgets. Actually the impact of the credit crunch or rather the Bank of England Bank Rate cuts handed it back for a while.

This housing affordability wedge then shrank in the wake of the crash as interest rates were cut to record lows and house prices fell. For many households this fall helped soften the post-crash living standards squeeze by reducing mortgage costs.

Ah house prices fell! What a chill that will send around officialdom and the Bank of England as departmental memos fly around to explain what a house price fall is. In true Question of Sport form you are all probably wondering what happened next?

However with rising housing costs once again outstripping income growth, the Foundation warns that housing risks being a major brake on the UK’s living standards recovery.

The Foundation notes that the extra share of income being spent on housing over the last 20 years – up from 17 per cent in 1995 to 21 per cent in 2015 – is equivalent to a 10p rise in the basic rate of tax (or £1,500 per year) for a typical dual-earning couple with a child.

So we see that in percentage of income terms we are now pretty much back to the 2008 peak which makes you think. It is eye-catching to note that this is equivalent to a 10 pence rise in the basic tax rate. This was 25% back then if we ignore the lower rate of 20% on £3000k or so of income) so we have been given a basic income tax rate  5% lower but house buyers have found twice as much taken away. Oh Well as Fleetwood Mac put it. Of course the personal allowance has changed but even so the theme is clear here.

The Squeezed Middle

Is looking rather squeezed to say the least.

The analysis shows that households on low and middle incomes have been most affected by housing costs growing faster than incomes. Among these households, the share of income spent on housing has increased by almost a half over the last 20 years, from 18 per cent to 26 per cent. A far smaller increase took place for higher income households (up from 14 to 18 per cent) and the poorest households (up from 21 to 25 per cent).

We can perhaps gain a little solace from the fact that at least the poorest have not been hardest hit. But of course that ignores what 25% of their income actually gets them as we mull the pictures of rooms that seem more like cupboards that have done the rounds.

Regional Inequality

Maybe it’s because I’m a Londoner that these figures resonate but Scots have been hit by a shift here as well. The emphasis is mine.

Londoners currently spend around 28 per cent of the income on housing costs, up a third since the mid-1990s (21 per cent). Recent increases in housing costs have caused typical London households to experience the biggest post-crash fall in disposable incomes anywhere in the UK.

Scotland has seen the second sharpest increase (up from 12 per cent to 18 per cent), followed closely by the North West (up from 15 per cent to 20 per cent).

So the recovery has yet to reach disposable incomes in London? it is something of an antidote to all the “hoorah for house price rises” headlines that the media so love, after all they will be liked by one of the main advertising sectors.

Some Are Even Worse Off

Averages of course give us only some idea of the distribution and can by got by different routs and roads so this helps to nail the picture on the wall.

The Foundation warns that these increases have pushed too many households into spending a perilously high share of their income on housing. Its analysis shows that around 3.3 million households spend at least a third of their income on housing costs – up from 1.6 million in the mid-1990s.

I note that the Resolution Foundation then hammer out a beat that has been familiar to readers of my work for some time to say the least.

The analysis published today shows that private renters spend a greater share of their income on housing (30 per cent) than mortgage owners (23 per cent) or social renters (20 per cent).

Whilst one needs to be careful about generics and stereotypes this is more of a problem for younger people than older ones as we mull the concept of a generational war.


There is much to consider here and let me open with the fact that this has been a deliberate policy driven by the Bank of England. In the summer of 2012 its Funding for Lending Scheme gave banks a subsidy ostensibly for small business lending but the real impact was via an initial impact of a 0.9% fall in mortgage rates. It’s own research suggests a total impact of 2% on mortgage rates. Whilst this did make houses more affordable for a while the subsequent surge in house prices first eroded and then according to the Resolution Foundation eliminated that on the road to making housing costs higher.

I would like to look at disposable income which is being squeezed according to this analysis by a consequence of Bank of England policy. If we go back to 2010/11 then real wages slumped in response to the Bank of England overlooking a rise in consumer inflation to over 5% per annum. Please remember that when the many “experts” tell you that such moves provided a strong stimulus as whilst it did up in the economic models to be found in Ivory Towers if we come back below the clouds it faded away.  If we put house prices in our inflation measures then some of the growth would disappear.

The situation was worse around the time of the Lawson boom in the late 1980s when around a quarter of disposable income went on housing but there are two catches. Firstly interest-rates were in double figures and on their way to a 15% peak if I recall correctly with apologies to younger readers for such a mind bending number. Secondly what happened next?




The Bank of Japan becomes The Tokyo Whale

Today has already seen some eye-catching and thought-provoking news from the land of the rising sun or Nihon. Fortunately its new stealth fighter has not been seen taking off from its aircraft carriers excuse me helicopter destroyers merely from a runway. But we have seen news on a subject I analysed on the 19th of this month with this question.

How many central banks will turn into hedge funds?

As you will see there have been many other questions posed by what has now taken place in Japan so let’s crack on.

The Tokyo Whale

Those of you who recall what happened when The London Whale scandal emerged you may already be troubled by that name. Here is a Bloomberg reminder.

The trader known as the London Whale lost at least $6.2 billion for JPMorgan Chase & Co. in 2012……..More importantly, it raised two worrisome questions: What if the banks are still addicted to risk? And what if regulators haven’t gotten better at spotting that?

For me there was a familiar issue.

In a sense, what Iksil and his colleagues did was the same old story — doubling down after a loss with bigger and bigger bets.

The doubling down issue is a clear theme for us to consider as we peruse the announcement from Bloomberg.

The Tokyo Whale Is Quietly Buying Up Huge Stakes in Japan Inc.

JP Morgan again or another bank considered too big to fail?

They may not realize it yet, but Japan Inc.’s executives are increasingly working for a shareholder unlike any other: the nation’s money-printing central bank.

Regular readers will have been aware of the reality of this but as we go on the scale of it comes home to roost.

It’s now a major owner of more Japanese blue-chips than both BlackRock Inc., the world’s largest money manager, and Vanguard Group, which oversees more than $3 trillion

Here it is in another form.

I am not so sure about his order of importance but that relates mostly to the time zone he is broadcasting too. As we look into the detail we see this.

The BOJ ranks as a top 10 holder in more than 200 of the Nikkei gauge’s 225 companies, effectively controlling about 9 percent of Fast Retailing Co., the operator of Uniqlo stores, and nearly 5 percent of soy sauce maker Kikkoman Corp. It has an estimated shareholder rank of No. 3 in both Yamaha Corp., one of the world’s largest makers of musical instruments, and Daiwa House Industry Co., Japan’s biggest homebuilder.

Something for shoppers at Uniqlo to consider as well as musicians and even me when I buy some more soy sauce! Another way of looking at the scale is shown below.

At an estimated 8.6 trillion yen as of March, the BOJ’s holdings amount to about 1.6 percent of the total capitalization of all companies listed in Japan. That compares with about 5 percent held by the nation’s Government Pension Investment Fund.

So it is a trillion Yen larger than the Bank of Japan numbers I posted last week and nearly a third of the size of what is considered an enormous player in Japanese markets the state pension fund. At the current rate of purchases it will not be long before it passes that benchmark as I pointed out on the 19th.

Second, it would purchase ETFs and J-REITs so that their amounts outstanding would increase at annual paces of about 3 trillion yen and about 90 billion yen, respectively.

The companies shown below by Francine will be increasingly influenced by this.

I will come to the waiting point later.


This is normally an issue for the military world and as I hinted at earlier there has been news on this front in an increasingly militarised Japan. From The Japan Times.

Japan on Friday became the fourth country to test-fly its own stealth jet….According to the Defense Ministry, the Advanced Technology Demonstrator, called X2, took off from Nagoya airport in Aichi Prefecture at 8:47 a.m. Friday morning.

I am not sure this bit of tub-thumping is entirely reassuring.

During World War II, Japan’s aerospace industry led the global competition with its Zero fighter.

The stealth theme does come into The Tokyo Whale story too.

While the Bank of Japan’s name is nowhere to be found in regulatory filings on major stock investors…….estimates can be gleaned from publicly available central bank records, regulatory filings by companies and ETF managers, and statistics from the Investment Trusts Association of Japan. The BOJ declined to comment on Bloomberg’s findings.

More stealthy than the jet? Anyway in terms of individual holdings it would appear that the Bank of Japan is none to keen on us knowing. Mind you it might be one way of ensuring that Japanese firms raise wages! Buy all the shares and send a nominee to the public meetings to vote.


There are quite a few here so lets us run through them.

1. Shareholders are supposed to have a role in the strategy of a company so how will the Bank of Japan deal with this?

2. How does price discovery in the Nikkei 225 and Topix indices work when the Bank of Japan buys and presumably pushes prices higher? This creates a danger of the sort of false market central banks are supposed to be guardian against.

3. On that road how will the Bank of Japan regulate itself as an equity investor? Also what about other Japanese regulatory authorities.

4. Abenomics was supposed to be a break from “pork barrel” politics as we consider the now pretty much mythical thrid arrow. As the quote below shows it is buying what might be regarded as big industry’s shares or the sort of favouring reminiscent of Abe’s previous government.

The central bank’s use of large-cap ETFs means its positions are concentrated

5. The elephant in the room is of course the issue of how much all this buying has driven the stock market and in particular Japan’s big businesses higher? Whilst acolytes may argue it is only 1.6% of the market remember that there has been substantial net buying which is continuing. Where would the Nikkei 225 equity index be without this.

6. The rises in the Japanese equity indices are likely therefore to be affected by the principles of Goodhart’s Law and indeed the Lucas Critique.

7. Should losses be made will the Bank of Japan just print the money required and who will explain the consequences to the Japanese taxpayer?


It was only on Friday that news leaked about the Bank of Japan considering offering negative interest-rates on loans. This had an immediate impact on the Yen which at 111.3 versus the US Dollar is much weaker than before the news. Indeed speculation about Bank of Japan moves at its policy meeting are apposite to today’s article. From Bloomberg.

If the BOJ accelerates its ETF purchases this week to an annual rate of 7 trillion yen — the pace predicted by Goldman Sachs Group Inc. — the central bank could become the No. 1 shareholder in about 40 of the Nikkei 225’s companies by the end of 2017, according to Bloomberg calculations that assume other major stakeholders keep their positions unchanged. It could hold the top ranking in about 90 firms using HSBC Holdings Plc’s estimate of 13 trillion yen.

Care is needed with any forecast from the Vampire Squid which is usually for its benefit but I note that HSBC’s effort exceeds it considerably. At such a pace the Bank of Japan would soon become large even for a whale. The risk of unintended consequences gets larger as it grows along the lines of this consequence of the UK National Living Wage.

Salami slicing? Zizzi responds to living wage by cutting free staff food to margherita pizza or a plate of spaghetti ( @sarahoconnor_ )

There is also the issue of what I call the exit strategy from this or how you ever reverse it? I have argued many times that central banks have charged into QE style efforts with no plan for either retreat or even the consequences of victory.

Also will we in a few years time be saying the same about the property market in Japan as it seems likely to seem more central banking buying?

I will leave you with Alphaville who back in 1984 were rather prescient about the Bank of Japan.

When you’re big in Japan, tonight
Big in Japan, be tight
Big in Japan, oo the Eastern sea’s so blue
Big in Japan, alright
Pay, then I’ll sleep by your side
Things are easy when you’re big in Japan
When you’re big in Japan




Banks rather than the real economy remain the main priority of central banks

The credit crunch era has seen a whole litany of policies to help and aid the banking and financial sector. The most obvious was all the bailouts which took place across the world. A sub-plot to this was the way that such large losses could be made without it apparently being anybody’s fault! This was particularly odd as of course these individuals were so highly paid due to claimed skills and talent. Or to put it another way we went from privatisation of profits to socialisation of losses.

Central banks then joined in by slashing official interest-rates and then by indulging in QE (Quantitative Easing) policies to reduce bond yields and mortgage rates as well. Along the way we got specific schemes to aid ( Special Liquidity Scheme in the UK) the banks and then later to subsidise lending ( Funding for Lending Scheme). These were often described as help for smaller business but of course mostly found their way into the mortgage market which was a double gain for the banks and financial institutions. Not only did they get cheap funding but the consequent lower mortgage rates boosted their asset book via higher house prices. As Hot Chocolate reminded us for the banks and economic policy.

Everyone’s a winner, baby, that’s no lie (yes, no lie)
You never fail to satisfy (satisfy)

Let’s do it again.

Negative Interest-Rates

These present several problems for the banking industry. There is quite an irony here as of course they are results of efforts to save and then boost the banking industry. It has mostly been forgotten but an early sign of fears of trouble came in the UK when the Bank of England cut its Bank Rate to 0.5%. The Cheltenham and Gloucester 4 year tracker mortgage at 0.52% below that focused minds. As the Ivory Tower occupants adjusted to higher oxygen levels at ground level they also had to adjust to the arthritic natures of the Information Technology systems of the UK banks which had remained in the era of where we had VHS and cassette tapes and so on. Ooops! Could they cope with this? I believe that this was the main reason the Bank of England did not cut Bank Rate below 0.5% back then and leading some ( Mark Carney) for instance to think of it as a lower bound.

There was a work around which others have repeated since where the negative interest-rate was bypassed via reducing the capital owed each year to compensate. Actually for those wondering I have seen this used elsewhere too making me wonder about IT there. Then we note the other potential problems which where would depositors simply leave as they received negative interest-rates? Also what would happen if borrowers could borrow at negative interest-rates would borrowing go to plagiarise myself from yesterday “To Infinity! And Beyond!” Even worse what would be the impact of the fact that when banks deposit at the central bank as they do in size they would have to pay for the privilege? A survey from the ECB this week had 81% of banks replying to say that negative interest-rates hurt their profits. As we mull whether 19% did not reply we know that the central banks will respond to this especially in a Euro area promising more of the same.

Draghi: We continue to expect rates to remain at present or lower levels for extended period of time; well past horizon of asset purchases

Oh and if you were wondering if banks were being hurt by this well we got an official denial of it and you know what that means!

Draghi: In the first full year of negative interest rates profitability of banks has gone up

Just to add to the problems there are further troubles for banks which either operate in or own businesses for the longer term as Mario Draghi admitted yesterday.

It’s pretty evident that pension funds and insurance companies and other actors are significantly affected by the low level of interest rates.

Actually he summed up the full state of play quite well here.

I think they are being affected by low rates, although one should keep in mind that they also realised substantial capital gains on the bonds that we are buying, because some of them are amongst the main sellers, the main counterparties in our asset purchase programme.

So Jam yesterday which is still around today but tomorrow looks somewhat jam free which of course will disappoint the White Queen for starters.

Bank of Japan

Today’s news is brought to us from Bloomberg.

The yen dropped the most in seven weeks after people familiar with the matter said that the Bank of Japan may consider helping financial institutions to lend by offering a negative rate on some loans.

There is a lot to cover here so let me start with the fact that over the “lost decade” period the Bank of Japan has had policy after policy to boost loans and if any of them had worked the “lost decade” would be over. How do you say “disintermediation” in Japanese? Also those who follow the currency will have noticed the plummet today to 110.5 to the US Dollar although of course we know to take care with knee-jerk reactions as the Euro taught is less than 24 hours ago.

Returning to the subject at hand this is intriguing as Japan’s baby step into negative interest-rates went to quite a lot of trouble to avoid affecting the banks. But seemingly we have seen yet another misfire over there. Thus another plan is mooted to help them. It seems to be ploughing a rather similar furrow to the ECB move in this area from the 11th of March.

Banks will pay the MRO rate at the time of bidding, so right now it’s zero. And they may even get a reduction on that rate which increases with the amount of loans they grant. So the maximum reduction will bring the rate on the TLTRO II to the level of the deposit facility rate at the time of bidding.

I guess many of you have the feeling that banks will invariably find that they qualify to borrow at -0.4%. Would it be impolite to wonder if the Italian banks might get there first? I note that the VOX website on the 15th of April so a month later caught up with my view on the likely impact.

This column argues that this ‘cash for loans’ scheme, which might cost up to €24 billion, is unlikely to affect the real economy greatly. This is because banks can easily window dress their loans to qualify.

There is a fair amount of circularity here. You see in Japan each deal for the banks to boost the economy has apparently worked but then turned out to be window dressing. So as to the ECB and the Bank of Japan the answer to who is trolling who seems to be both of them.


The relationship between central banks and the banking sector is a symbiotic one and one which for today’s musical theme could be in purple as they sing to each other.

I would die 4 u
I would die 4 u

It has been a Sign O’ The Times that the banks have taken the Cream whilst the real economy is left wondering where all the money went. That continues and yesterday luchtime I opened my view on the Riksbank on Share Radio with some lyrics which had deeper meanings as the bad news arrived. RIP Prince.

Dearly beloved
We are gathered here today
2 get through this thing called life


Transparency on our finances and behaviour is in the UK apparently only for plebs like us. From Naked Capitalism.

George Osborne has agreed to make MPs exempt from anti-money laundering checks under pressure from moaning Tory backbenchers……..Tory MP Charles Walker claimed MPs and their families were being treated like “African despots”……. MPs appear on automatic watch lists of “Politically Exposed Persons” (PEP), used by banks to prevent money being funnelled into criminal gangs or hidden in offshore tax havens.

Er they used to appear.

Will central banks forever cry “To Infinity! And Beyond!”

Some days pieces of news just leap off the screen at you and this morning has seen a strong example of that. One event has encapsulated many of the themes of this website already so let us crack on as I temporarily hand you over to the Riksbank of Sweden.

Riksbank to purchase government bonds for a further SEK (Swedish Kronor) 45 billion and repo rate held unchanged at -0.50 per cent.

This is a bit like one of those Russian dolls so let us open them up one by one. Firstly for newer readers the Riksbank has been operating in an icy Nordic world of negative interest-rates for over a year now and its deposit rate is the lowest of all at -1.25%.  It was relatively late to the policy of QE (Quantitative Easing ) starting it in February last year but has since expanded and expanded the effort from the original 10 billion Kronor toe in the water. Indeed there is a new front being opened today.

The purchases cover both nominal and real government bonds, corresponding to SEK 30 and SEK 15 billion, respectively.

I like the idea of inflation linked bonds being called “real” and the others? There is an additional risk here if you think about it as an exchange between the treasury and an “independent” central bank. Or if they are one and the same well what are they playing at? I will answer that later. But we are left with the thought that the Riksbank may have been running out of conventional or nominal bonds to buy.

As to the pace of purchases context is not easy. As you can see it is much faster than the plan from this time last year but also represents a slowing on the first half of 2016 so take your pick.

The Swedish economy

Students of economics are no doubt taught these days by those living in Ivory Towers that monetary easing is a response to economic difficulties so let us check that out.

Sweden’s GDP increased 1.3 percent in the fourth quarter of 2015, seasonally adjusted and compared to the third quarter of 2015. GDP increased 4.5 percent, working-day adjusted and compared to the fourth quarter of 2014.

Even the most casual observer will have to admit that this is an odd and indeed bizarre type of economic difficulty as the Swedish economy looks both turbo and super-charged. As to fears of the economy slowing, well the Riksbank raised its economic growth forecast for 2016 this morning to 3.7%. Now I do not know about you but there was a time when economic growth of 8% in only two years would have a central bank applying the brakes and raising interest-rates.

The excuse is low inflation and in particular it being below the 2%. Readers of this website will be aware that I think the trend has changed illustrated by the new theme for the price of crude oil. Some of this was evident in the latest Swedish inflation numbers.

The inflation rate was 0.8 percent in March, up from 0.4 percent in February. The Swedish Consumer Price Index (CPI) increased by 0.5 percent from February to March 2016.

Indeed if you exclude mortgage rates which have been driven lower by the Riksbank then the picture changes again.

The inflation rate according to CPIF was 1.5 percent in March 2016. CPIF increased by 0.5 percent from February to March 2016.

For those of you wondering where all the money has gone well you do not have to look too far for it.

 (House)Prices increased by almost 12 percent on an annual basis during the first quarter 2016, compared to the same period last year.

So the list of casualties in the QE wars has both first time buyers and those looking to trade up the property market in Sweden on it.

Oh and the list of winners starts with asset owners again a feature regularly denied by central bankers.

Meanwhile GDP per head may not be all you think it might be. From Sweden Statistics.

In the next few years the population in Sweden is expected to increase by about 1.5 percent per year.

Currency Wars

Todays policy action is explicitly described as such by the Riksbank.

With continued expansionary monetary policy abroad, there is a risk that the krona will appreciate earlier and faster than in the forecast…..The continued asset purchases will reduce the risk of the krona appreciating faster than in the forecast and of a break in the upturn in inflation.

Oh and just in case this does not work.

The Riksbank is also prepared to intervene on the foreign exchange market if the krona appreciates so quickly as to threaten the upturn in inflation.

Some of you may be wondering how did that work out for the Swiss National Bank ( and indeed the Bank of Japan)? Well according to market observers it opened fire itself last night.

as per usual the SNB busy buying EUR selling CHF ahead of the ECB tomorrow

The link and indeed casual factor here is the Euro. You may note that something which is regularly badged by supporters as an example of stability is clearly not for the surrounding nations. Some of this is caused by the monetary policy response to the lack of economic stability and growth within the Euro area to which other nations respond. Only a couple of weeks ago even Hungary joined the negative interest-rates club albeit only -0.05%. Mind you it always starts like that.

Of course another part of the Nordic region will be closely following events as the Nationalbanken which is presumably meeting right now in Copenhagen Denmark mulls how to respond to all of this. When you are pegged to the Euro you have no choice at all. After all with it expecting economic growth of 1.3% in 2016 it is in danger of being a “lenny lightweight” when it meets the Riksbank at international meetings.

An Inconvenient Truth

All this effort to weaken a currency and yet? Well Twitter does have its uses and takes up the story.

Robert Bergqvist Riksbank delivers more QE (SEK+45bn) but SEK is strengthening!

Katie Martin: Riksbank boosts QE to cool the krona. Krona jumps.

So the Riksbank joins the Swiss National Bank, ECB and Bank of Japan is seeing that monetary easing leads to a stronger rather than a weaker currency. Also the half-life of the  initial easing response has shortened dramatically to a few second now if that.

Oh and this sums it up although we are left wishing that his parents had called him Rick.

European Central Bank

The Euro and the monetary policy of the ECB are the main drivers of the events above. Muse sing about a “supermassive black hole” and the Euro has been like that for the interest-rates and currencies of its neighbours. Today Mario Draghi is on deck and we are left wondering whether he has been subject to some early morning economic policy trolling from the Riksbank!

Personally I think that the Riksbank was catching up from the last ECB move and whilst mice do upset elephants I am only expecting some minor policy changes if at all today. Along the lines of a definition change or two around for example the “assets” of Italian banks and similar.


By the time you read this many of you will know the ECB decision and if it sticks to rhetoric and Open Mouth Operations it will be mimicking the Bank of Japan.

BoJ Officials Are Said To Share Rising Concern About Yen’s Gain… (@livesquawk)

But we see that negative interest-rates and QE are a clear example of junkie culture where the central banking addict needs ever higher doses with ever more side-effects or unintended consequences. For a while now the main game has been trying to devalue or depreciate your currency which can also be called exporting deflation. Of course it is not going well as we see exactly the reverse often happening. Time for some Outkast.

I’m sorry Ms. Jackson (oh)
I am for real
Never meant to make your daughter cry
I apologize a trillion times.

In these inflated times a trillion seems a bit undercooked but as to how long this will last the duo do have an opinion.

Forever, forever, ever, forever, ever?