Yesterday was a day which appeared to be dominated by the minutes of the latest meeting of the US Federal Reserve as investors digested its implications. We saw strong rallies in equity markets with the Dow Jones Industrial Average rallying 75 points to 11,096 , and the UK Ftse rose 85 points to 5747 also but the best performer was the German Dax which surged some 130 points or 2.06% to 6434. There is something of an irony in the surge by the Dax as the speech I reported on by Germany’s Bundesbank President Axel Weber was calling for an exit strategy rather than more monetary easing! For once the Japanese Nikkei 225 equity index has put on a better performance and rallied 180 points to 9583 narrowing the spread between it and the Dow to 1513 points.
Gold price rally’s
Another instrument which benefits when rumours and speculation about more monetary easing rises is the gold price. When you consider that this means investors here are motivated by some combination of inflation and fears for the stability of fiat money you may think that this sits very oddly with the rallies in equities, and in my opinion you would be right. The gold price as measured by the front month futures contract rose by US $17.1 yesterday per ounce and has risen a further US $11.1 per ounce to US $1383 per troy ounce this morning. Those who follow such trends in the media may be interested in the interview given by Mr. T of the A-Team to Bloomberg television which in some respects is a little bizarre but on the other hand he was always weighted down by gold chains (he claims he doesn’t wear more than 45 pounds of chains at a time!).
I note that the Vampire Squid aka Goldman Sachs has recently gone very bullish on gold as it feels that real interest rates will go further negative as we get more monetary easing. I agree that we are likely to get lower or more negative real interest rates but Goldman’s recent record on forecasting has been somewhat patchy and putting people like Mr. T on television is as likely to be a sign of a top as it is for further increases. One thing is for sure Gordon Brown’s sale of around 400 tonnes of the UK’s gold reserves looks a dreadful trading decision right now even allowing for the fact that the bonds invested in may have rallied. He was not alone in doing this and it is a constant frustration to me that our so-called elite never seem to have to answer for their failures and errors.
Oil Price Rises
Moving up too on the news was the oil price. Those who remember my updates will know that it had been recovering recently anyway from the near-term low of US $71.32 for a barrel of West Texas intermediate crude oil on the 24th of August. Well yesterday the price of such a barrel rose by US $1.55 per barrel followed by a rise of US $0.94 per barrel today leaving it at US $83.95 per barrel. This is a rise of 17.7% since the 24th August and will be having an inflationary influence. Although at this time the fall in the US dollar will be offsetting this to some extent for everyone who does not use the US dollar as currency.
The US dollar continues to fall
The trend for US dollar weakness is something else which has gathered strength over the past 24 hours. Yesterday I wrote this.
In early June the dollar index was 88.71 and it is now 77.02 for a fall of 13.2%. It appears that currency depreciation is as much a tool of US economic policy as are asset purchases and it is also true that the two moves are interrelated.
Today the dollar index has fallen to 76.32 making the fall 14% since early June. One interesting corollary is that for now the rise in the oil price I was discussing above is being offset as it is priced in US dollars but it is always dangerous to rely on such a thing as they can turn on a sixpence!
The impact of this move is that some thresholds are being crossed. For example the Euro has risen above 1.40 to the US dollar and the UK pound has risen above 1.60 which may attract some interest from the media, after all they were very interested when the pound fell through 1.50. Some of the rise in the Euro may be attributed to Axel Weber’s speech yesterday and if we consider the recent rise in the Euro I am again reminded of the effect this must have on the peripheral Euro zone nations as one of their problems is a lack of economic competitiveness. On a busy day he also gave a speech to the Foreign Policy Association and said this.
This issue should not be confused with the debate on global imbalances, since the current account of the euro area is roughly balanced. Intra-EMU imbalances in current account positions, however, are not a new phenomenon. In fact, they have existed since the beginning of monetary union. Some member states, such as Germany, Austria or the Netherlands, consistently post current account surpluses. Other countries, such as Portugal, Spain, Greece or Ireland, persistently record current account deficits.
It may well be fine for Germany to be happy with the fact that the Euro zone as a whole is not imbalanced as Germany has managed high exchange rates in the past quite successfully but it is slightly disingenuous to imply that the deficit countries will not have difficulties. I like the order he names them in which avoids the porcine reference!
As for the Bank of Japan well the weakness in the US dollar is making a bad situation worse. The Yen/Dollar exchange rate is at 81.03 which in Yen terms is a long way above the 83 level at which the Bank of Japan intervened on the 15th September. Many will be wondering what “appropriate action” and “bold action” meant as the exchange rate markets tempt and punish the Bank of Japan. I am reminded again of my thoughts on the 15th September.
Over time I expect the foreign currency markets to challenge the willingness of the Bank of Japan to weaken its own currency…….Indeed my personal view is that currency intervention at the present time is only likely to succeed in the short-term as the size of markets is so large and at this time with so much economic uncertainty abounding they are likely to be volatile too.
I guess what foreign exchange markets are saying is over to you Bank of Japan…..
UK unemployment and employment
These figures have held up much better than one might have expected considering the scale of the recession seen in the UK. However we have seen trends such as the rise in part-time working which have offset this. The figures for September which came out yesterday had some of these trends in them.
If we look at the numbers then the headline claimant count rose by 5,300 to 1.47 million and this is the second month in a row it has risen. However if you use the Labour Force Survey statistics then unemployment dropped by 20,000 to 2.45 million, pushing the unemployment rate down from 7.8% to 7.7%. Although the Labour Force survey did show a reduction in the rate of fall of unemployment.
If you look at the headline employment data the news looks initially good as employment rose by 178,000 in the three months to August, pushing the employment rate up from 70.5% to 70.7%. However of this rise some 143,000 was for part-time workers which takes a lot of the gloss off these figures and leaves me wishing that we had a real equivalent to the U-6 unemployment rate which exists in the United States which allows for this sort of thing. Vacancies also fell by 30,000 in the three months to September.
So there is an impression that the improvement in the jobs figures may be ending particularly if one allows for the fact that there is a lot of public-sector retrenchment to come but at least for now we are employing more people even if they are mostly part-time.
UK pension policy is now a shambles
There has been an announcement on this subject this morning and it does have implication much wider than for those immediately affected. A reduction in the annual allowance to £50,000 per annum and in the lifetime allowance to £1.5 million will not bother many and some may smile at the thought of financial pain for “fat cats.” But there are wider implications.
UK pension policy was changed in 2006 as a result of what was labelled as the A-day changes or pension simplification and a new set of rules were put in place. Whilst not perfect they did have strengths. However today’s changes which when added to the fact that there were promises that the lifetime allowance would be increased by the Treasury from 2010 onwards which the last government welshed on leaves the situation yet again exposing a massive moral hazard.
1. How in an investment which requires long-term planning can rules which were set only in 2006 be welshed upon by one government and then actually moved in a negative direction by the next?
2. An investor looking ahead 20 30 or 40 years can plainly have no faith in policy which cannot even last 5 years. What else might change?
3. At the time of the A-day changes some pension holders had to make choices about what to do and there were two choices one was enhanced protection and one was primary protection. The choice involved trust in our rulers as the mathematics of the choice involved increases in the lifetime allowance as time went by. So some who made such a choice will benefit and some will lose from this change. I can see no reason to favour one group over the other. Indeed we are choosing to punish the group which selected further pension provision.
4. From the point of view of someone advising a customer how can he or she do this when rules are changed and as I have explained above the impact is in effect retrospective? Could an adviser now be sued because of this?
5. Those who feel that such moves will only affect the wealthy might want to consider the fact that for lower sized pension funds the limit for what is called “triviality” is 1% of the lifetime allowance so it will drop from £18,000 to £15,000. NB update 18/10/2010 this will now stay at £18,000 so whilst it will not grow as expected it will not actually shrink and so I have added this note.
6. I always thought one of the strengths of the annual allowance rules was that the higher limits gave a lot of flexibility to the self-employed who could in a good year or perhaps in a year they sold their business pay in a large lump sum if they had done well. Some of this flexibility is now gone. Because of the nature of the system those in more middle-ranking jobs with final salary schemes but with long service may also be caught.
7. Those in real positions of power sadly will find ways around this. For example several years before I started this blog I wrote many times to my Member of Parliament about the improvements in the pension scheme for MPs. By my maths for an extra annual payment of around 3% they got an increase in benefits of more like 30%! Who wouldn’t sign up for that? After a lot of waffle from my MP Martin Linton and the Leader of the House of Commons who was Harriet Harman at that time which went on for several years, I noticed that this supposedly self-financing scheme had received a bailout from the taxpayer. Later on it received further payments from the taxpayer.