The UK employment situation is disturbing whilst our treatment of our loan to Ireland is financially illiterate

Yesterday was a quiet day in western equity markets as the “Santa Rally” appeared for a day at least to have run out of steam. However most of these markets are at or near to their highs for 2010 so unless there is a fundamental change before the year-end equity investors will have had a good year particularly for those in shares which pay reasonable dividends as well. Even in Europe with all the scares over solvency in various countries the Eurofirst 300 equity index has risen some 8.2% in 2010. A particularly good performer has been the German Dax equity index which has risen just under 18% so far this year.

However eastern equity markets have had a much worse year which rather goes against the investment convention that they would be the best areas to be in which was prevalent in late 2009 and early 2010. If we look here we see that the Nikkei 225 equity index in Japan is down 2.23% so far this year. If you had taken China to be the growth story so to speak, well the Shanghai Composite Index is some 11.6% lower than the level at which it opened the year. Of course both areas have had troubles of their own as Japan has struggled for much of the year with an overvalued Yen exchange rate which has improved a little recently but is still a problem. China has been suffering from increasing inflationary pressure as I reported on the 13th of December and the 11th of November which has weighed on her equity markets. On this subject yesterday saw a rise in China’s 7 day repo rate which settled at 3.63% which was quite a rise on the previous days 3.29%, however I would remind readers that it is still well below China’s consumer price inflation rate of 5.1%. So sooner or later official Chinese interest rates are likely to rise.

If one reviews equity markets overall and observes that some markets in areas with economic problems have done well then I am reminded of a description I was given of this scenario many years ago. It was that equity markets can “climb a wall of worry”. I have observed it on several occasions since then but have never really got a full grip on a causal relationship as it appears to defy logic. If I ever figure it out I will let you know!

US interest-rates and her mortgage market

The situation here continues to develop as yet again longer-term interest rates rose in America yesterday. Her ten-year bond yield closed at 3.53% and her thirty-year long bond closed at 4.6%. As markets tend to have reversals in even the strongest moves one must be likely soon but for now the move continues. This is in spite of the fact that the US central bank continues to purchase US government bonds as part of its so-called QE2 asset purchase programme. For example it bought some US $6.8 billion of bonds of between 4 and 6 year maturities yesterday which you might have thought would have provided at least some support for the ten-year maturity. However it did not even support the five-year benchmark as prices fell here and the yield rose from 2.04% to 2.11%. So even where the Federal Reserve was buying prices fell and yields rose. Perhaps they put in a call to the European Central Bank to share worries!

The main impact of this at least initially will be on the housing market which is seeing increases in mortgage interest-rates as I have been reporting over the last fortnight. These higher rates are likely to affect the housing market adversely and have wider implications for the rest of the economy. We saw some evidence on this front yesterday from the Mortgage Bankers Association.

The Market Composite Index, a measure of mortgage loan application volume, decreased 2.3 percent on a seasonally adjusted basis from one week earlier……The average contract interest rate for 30-year fixed-rate mortgages increased to 4.84 percent from 4.66 percent……This is the highest 30-year fixed-rate observed in the survey since the beginning of May 2010. .

The average contract interest rate for 15-year fixed-rate mortgages increased to 4.21 percent from 3.98 percent…… This is the highest 15-year fixed-rate observed in the survey since the beginning of June 2010.

Now at this time of year one weeks mortgage figure applications may be misleading but the interest-rate rises are not and remember they are lagged figures there are more rises to come. The foreclosuregate scandal is beginning to develop again with Bank of America now planning to discuss some sort of settlement with mortgage investors. However as their total claims cover assets of some US $47 billion there could be quite a bill to pay. In terms of actual foreclosures or repossessions then the impact of this crisis is that November 2010 saw the lowest level of repossessions since the credit crunch began which does not fit at all well with other signals on the US housing market. I will leave you to draw your own conclusions. If you are facing repossession there may be a silver lining for you as it may be a while before the lender gathers the courage to actually enforce it.

UK unemployment rises and employment falls

We received figures yesterday which indicated that the beginning of job losses in the public-sector in the UK may lead to a sustained increase in unemployment and a sustained fall in employment. Now there is some confusion on these numbers as we appear to get several sets of inconsistent data. In fact we get two sets so if we start with the quarterly labour force survey we got.

The employment rate for those aged from 16 to 64 for the three months to October 2010 was 70.6 per cent, down 0.1 on the quarter……….The unemployment rate for the three months to October 2010 was 7.9 per cent, up 0.1 on the quarter. This is the first quarterly increase in the unemployment rate since the three months to April 2010.

The confusion comes because we also get monthly figures for registered unemployment which do not always go in the same direction. This is for two reasons. One is that it covers a different time period and the other is that it covers registered unemployed i.e those who sign on at the unemployment office. So those who do not sign on for whatever reason are not counted ( for those unaware of the UK this will often include those who were self-employed for example as they receive no job seekers allowance). This means that there can be wide variations between the two measures and in my opinion makes the labour force survey more reliable as a measure. However in this instance they went in the same direction at least.

The number of people claiming Jobseeker’s Allowance (the claimant count) fell by 1,200 between October and November 2010 to reach 1.46 million, although the number of people claiming for up to six months increased by 11,600 to reach 954,900.

Just to ram the point home of differences between the two measures the labour force survey records unemployment of 2,500,000 so over a million people more.

Comment

The figures appear to indicate that falling public-sector employment was the main cause of  the rise in unemployment and the fall in employment this month which is something we may well see over the next few months. However tucked away in the figures were two trends which have been prevalent throughout the recession and are reported much less.

1. Part-time employment rose by 26,000 to reach 7.96 million. Furthermore of this we saw an increase in people working part-time because they cannot get a full-time job of 46,000 to 1.16 million which is the highest number since this series began being recorded in 1992. The corollary of this is that full-time employment fell by 58,000 on the quarter which is more than the 33,000 fall in employment. Accordingly the numbers are worse than they appear at first and we need something like the American U-6 measure to address this. For those unaware this not only measures those unemployed but also measures reduced hours of work.

2. Inactivity rose to with some 22,000 people leaving the labour force mostly through what is recorded as early retirement.

This switch to part-time employment and rises in inactivity have been prevalent throughout the recession and have various implications. Firstly they undermine our measures of unemployment which do not fully include them. Secondly part-time work often is on worse terms than full-time work. Thirdly it means that the UK and US appear to be having similar experiences in this regard.

A Question on public-sector employment

Whilst it is the convention that public-sector employment is falling I use part of my local councils facilities which appear recently to have taken on staff. As a reader of the excellent Yes Prime Minister books I am aware of the Sir Humphrey Appleby view that this is the way you make cuts. For example his suggestion was that you took ten people on so that you could then cut ten jobs but of course you only announce the cuts! Has anybody else in contact with the UK public-sector been wondering if they are seeing evidence of this philosophy?

The UK’s loan to Ireland

I have spotted that the UK Chancellor has suggested that we will make some £440 million from this loan and some sections of the media are reporting this verbatim. Unfortunately there are several flaws in this logic which goes as follows,if we borrow at 3.25% and lend at 5.9% we make a profit. If you think about it this is exactly the type of flawed logic which helped create the credit crunch as it ignores credit risk and emphasises the profit and loss account with no reference to the balance sheet of the UK. In some respects this is rather shocking.

1. Ireland is in a rather parlous situation so may not be able to repay the money. We may get none of it back but more likely perhaps is the fact that she will be unable to fully repay the sum advanced.

2. As the full state of Ireland’s banking system remains unknown it is not even clear to me that we can assume we will get the annual interest payments.

3. What do we do if Ireland defaults in some form?

4. In a burst of financial dissembling we will declare the interest as a reduction in our fiscal deficit each year ( assuming it is paid) but the loan will not add to our national debt “because it will be fully repaid”. This is accountancy of the mad house and the Chancellor should be ashamed of himself.

In essence we may have the worst of all worlds here. If we wished to really help Ireland we could have loaned the money to her at cost which might have given her a chance of avoiding insolvency. Instead we are loaning it to her at an interest-rate likely to contribute to insolvency and then we assume insolvency will not happen. Did we learn nothing from the lessons of the period before the credit-crunch?

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16 thoughts on “The UK employment situation is disturbing whilst our treatment of our loan to Ireland is financially illiterate

  1. ‘A Question on public-sector employment.’
    I am seeing evidence of a quick fix in our area. Due to enhanced packages pre April this year our council lost a lot of middle and senior managers, this on top of rationalising 6 district councils into one unitary council and the associated redundant positions. Remaining staff have been moved around, moved up and given new responsibilities leaving staff shortages in their previous roles. These look to have been filled by ‘gap year’ university students, maybe ones who are willing to work a year to pay for their next year’s tuition? So we see gaps in the 25-40K salary brackets now being filled by 12K/pa students. The stated intent is to offer these students positions once they have completed their degrees but can anyone else see a problem just a little down the road?

    • This is the situation in the UK indeed. When Greek public servants are complaining about the salary cuts I remind them that there have been no dismissals in the public sector and there are no plans for such moves. When I describe what is hapening in the UK, the usual reply is disbelief and an open mouth. How sustainable is this for Greece I do not know but cuurent situation is not as bad as one thinks. The future is of course uncertain.

  2. Hi Shaun.. did you see the Spanish bond auction this morning ? Ouch.
    It seems that slowly but surely the “bond vigilantes” are testing EU defenses and so far those defenses have been found wanting. At this rate, with no other savior mechanisms, by spring we’ll be in the midst of another Euro crisis. Can you opine ?
    Thanks and as always your blog is the most level headed and informative I’ve found on the web re: EU matters and have recommended it to many others here on this side of the pond.

    • Hi Mr.K
      Unless they say or do something really silly at the current meeting of European ministers they can probably get into the New Year fairly unscathed. My basic assumption on this is that the officials at the Securities Markets Programme are not given time off for some Christmas shopping! Partly I feel this because trading rooms tend to operate less at this time of year. Once we get into 2011 however new problems arise. If the ECB is to carry on with the SMP and circumstances remain the same then not only will it face trading rooms looking to start making money again but January has a lot of planned bond issuance in Europe including guess where….
      So in my opinion January will be a real test.

    • The profit will go less far. However, I would be more worried about the predictions that the pound will be the strongest currency next year and the price of the Euro will collapse.

  3. Can anyone tell me how the ONS calculates the employment (not unemployment) figure and the economically inactive? Or how they calculate how many people are in part-time employment? Because I’ve never been asked either of the above, and today, I went to the payroll dept and asked them if they’ve ever been sent a survey, and they too have never received one. So I’m curious where the figures come from.

    It’s a bit like the surveys which say that a 1000 people were interviewed, and that somehow represents the entire country!

  4. Irish loan : is our bilateral loan subordinated to the IMF and the EU loan parcels, are we at the bottom of the pile for our £3.25bn as creditors with Denmark and Sweden? Mr Osborne didnt seem to know the answer when answering the Treasury committee the day before yesterday

    • Hi Shireblogger
      My understanding is that we are definitely subordinated to the IMF. I was of the belief that we might also be subordinated to the EFSF and EU funds. However the Parliamentary Loans to Ireland Bill states.

      In the event of default, the UK is seeking a similar level of ‘seniority’ as the EU components of the package; that is, if Ireland is unable to repay loans provided under the support package, the IMF will be paid first, and any remaining funds will be distributed proportionately between the EU funds and the UK.

      This is where it gets complicated as some of the IMF money is theoretically ours, so we are subordinated to ourselves in a manner of speaking! I will check as time goes by that we get the same status as EU money as not all sources agree on this.

  5. Shaun

    Off topic a little, but with European countries runnig budget deficits in high signle or even double digits, and that gapeing chasm of a US deficit, … where is all this money going to come from? By casual reconing we’re probably looking at needing several £trillion of new borrowing.

    Will we see a situation where there are too many countries chasing a dwindling pot of savings? Or will the banks just create ever more money, with the resulting risk that entails?

    • Hi Russell and welcome to my blog
      To quantify your question is virtually impossible as what needs to be borrowed even in 2011 is subject to quite a few variables. However sovereign nations will be borrowers on a very large scale that is for sure and the world’s banking system also has a fair bit of financing to do. Just looking at the UK I wrote an article on one instrument the Special Liquidity Scheme where the Bank of England (wisely in its view,unwisely in mine) is in effect asking for £110 billion back from our UK banks by January 2012. This is just one scheme!
      Against this we see central banks buying debt and assets with the US Federal Reserve buying some US $75 billion of debt per month as we stand, The ECB buying an amount even it does not know and the Bank of Japan buying assets. So they are creating money/liquidity on an unprecedented scale if you add it to the previous Federal Reserve purchases and the Bank of England’s QE but still on a far smaller scale that debt which will come up next year.

      Will the world run out of money? Probably not. But in any market you have price as well as quantity and I wonder what interest rate will have to be paid. Also we are more vulnerable to shocks with the world’s financial system extended and stretched like it is. Anything new would leave the world’s financial system looking strained maybe towards breaking point.

  6. Shaun, With regards to the stock market, I think it is simple. Cash savings will be worthless in a few years, so people are gambling on having a stake in a company that they hope might grow. As it happens shares have done tremendously THIS year. Apple is up some 50% on the year. Of course, “future share movements cannot be predicted from the past, the value of your investment can go down as well as up…blah blah.”

  7. Shaun, have you read yesterday by Posen. There is nothing new, however, but as I know you are one for footballing economic analogies.

    He talks about predicting the position of Newcastle, Bolton and Liverpool by performances earlier in the season. This is where I am meant to comment that Americans know nothing about football or even the league positions of the clubs.

    My take would be this:

    The Established theory would have it that Newcastle will always struggle and Liverpool will always at least make Europe. Looking at the start of the season(Highlights being Liverpool nearly going bankrupt, Newcastle beating Aston villa 6-0) it was clear something had dramatically changed ergo find a new theory.

    Newcastle to win(0-2) and Liverpool to lose this weekend(1-2).

    For what is worth if you disagree with Posen you are no better than a climate change denier.

  8. Shaun,
    I have a question…….a while ago we discussed the meaning of wealth and taking a fiscal view isn’t what we are seeing about the transfer of that wealth from basically west to east, in the same way and probably as a result of, the transfer of manufacturing and outsourcing. We could still be ‘rich’ and consume an unequal share of finite resources as long as the major population areas were classed as the under-developed world. Now with their progress and natural ambition to consume their own share of the same finite resources we are in a position of being undercut and outbid at the same time. (I know people are beginning to talk about clean water supplies but I think food staples will be the first to come under pressure soon.)
    Compounding this was our laziness or inability to see what was clearly written on the walls in the not too distant future. Relying on a single £10 note being passed around financial institutions each taking a commission every time they handled it and the Government more than happy to tax that commission could only lead to the real worth or even the nominal value of that £10 being eroded. We then see more esoteric trading done so that note didn’t really have to exist at all, yet still real money was paid out, and tax collected, on the transactions. At some point that £10 note had to cover £1000’s which left no other option than to print ever increasingly worthless paper to cover that position. With any elected Governments natural reticence to tell their electorate what was really going on and probably their own inability to provide real leadership their only hope of prolonging the illusion of wealth is to rely on quite narrow sectors of the economy which had been, up until recently, providing that cloak.
    Clearly I am no economist and no doubt people will tell me where I am going wrong but these are some of the reasons I believe we urgently need ‘unconventional economic theories’ and not only economic ones but social ones too.
    To mention the capitalism v socialism argument for a minute I find the presumption that pure capitalism can provide the answers we need quite extraordinary, seeing as the very cornerstone of that system, private banking, has had to be bailed out by national (in the social context) governments.

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