Central Banks have found in 2014 that you can’t always get what you want

As we reach Christmas Eve and my last scheduled blog of the year let us take a moment to consider the trends of 2014. Before I do so let me point out that the reason I typed scheduled is that Japan is particular likes from time to time to release significant news whilst us gaijin are otherwise occupied. To that list we can add China these days. So I will have one if not both eyes open! Returning to the trends well let us open with one for the central planners who increasingly regard equity and bond markets as a policy tool. They hope that higher equity and bond prices will generate wealth effects across the wider real economy.

Equity Markets

This morning has seen the Nikkei 225 rally to 17,854 as what we in the western world call the Santa Rally gathers pace. Of course Japan remains open this week as we close so it still has an opportunity to rise to a year’s high but as we stand it is up some 12% in 2014. Congratulations therefore to equity investors who have lasted the course but care is needed here as I mean domestic investors. You see the fall of the Yen against the UK Pound (10%) chops heavily into any gains and the fall against the US Dollar (15%) wipes them out.

If we move to the United States we see that the central planners can make a jump for joy. Let me use the cheerleaders for this sort of thing CNBC.

The Dow broke through and closed above 18,000 for the first time Tuesday, and the S&P 500 closed at a record 2,082, just 18 points shy of 2,100.

They are course are predicting 2100 in short order as we observe that many US equity indices are at all-time highs with the major exception being the NASDAQ.

The UK position is not so strong as the FTSE 100 is 1% lower than a year ago as I type this as the rally to above 6600 as has failed to reach new highs. Quite a contrast with the performance of the UK economy in 2014 even after yesterday’s downward revisions as we mull the consequences of it being called not entirely in jest the FTSE 100 miners and oil companies index! Not entirely the best strategy in a year of commodity and oil price falls.

Europe has intriguingly done better overall with the Eurofirst 300 index up some 5% on a year ago at 1375. Of course this hides some wide divergences some of which are shown up by this figures produced by RANsquawk.

Worst performing stock indices Year To Date – Russia (-44%), Ukraine (-43%), Athens (-35%) & Portugal’s PSI 20 (-33%) – not out the woods yet!

If there is a surprise in their list it is Portugal where the official theme is one of recovery.

But let me end this list with the central planner on the largest scale which is China. Whilst there was a drop overnight the Shanghai SE Composite is at 2973  some 42% higher than a year ago. That is one in the eye for the evil capitalist imperialists…..

Bond Markets

In many places 2014 was the year of the (government) bond as prices surged and yields plummeted. We saw the rise and rise of the German government bond or bund market with the ten-year yield opening the year just shy of 2% and then falling pretty much in a straight line to just shy of 0.6%. A much stronger rally than I expected and one which would have provided profits which are very unbondlike if I may put it like that. Perhaps an even more remarkable surge has come from the bond market of Portugal where the ten-year yield has plummeted from over 6.1% to 2.7% now. The hedge funds who got into these bonds must be having quite a Christmas party right now. Or to be more specific those who have got in and then out as there is a sword of Damocles called a likely default in the offing. In my opinion the same applies to Italy. There are quite a few investors right now relying on being able to take their profits via bond-buying or sovereign QE from the European Central Bank. Is it a role of central banks now to provide profits for investors and hedge funds?

Even in economies which have found 2014 to be better in economic growth terms have seen a good 2014 for their bond markets. I wrote only yesterday about the improvement in the UK Gilt market so today let us look at the world’s largest market which is US Treasury Bonds. The ten-year Treasury Note opened the year with a yield above 3% and in spite of rises in the last few days has fallen over the year to 2.26%. So we have some food for thought here as we see profits for bond market investors in an economy which only yesterday we were told is growing at an annual rate of 5%! The clear question is in what scenarios can bond investors now (be allowed to) lose money? Or is it a one-way bet?

Maybe this is a slight overstatement as real crises have seen bond markets fall and yields rise in Russia and Greece in the latter part of 2014. Also prices have fallen and yields risen at the shorter maturity end of the US Treasury market but the overall picture remains clear.


I wanted to cover this issue as it is plain to me that central banks switched their modus operandi from interest-rates to asset markets a while ago. This of course is something of an irony as it is usually their job to prevent the sort of market manipulation they themselves are undertaking! Gamekeeper turned poacher? The adjective illegal needs to go into my financial lexicon for these times.

If we use the line “what is it good for?” from the song War we begin to see problems. Investors and hedge funds will be happy with the strategy as it provides profits for them but what about the real economy? There the links are much weaker. After all if the US economy is as strong as the last two quarterly readings why does it also need the US Treasury market to be at the wrong level? Also if these measures are required in places like Germany what does that mean for the rest of us? As yields approach zero what extra benefit is being obtained and why have we not seen it from the existing yield falls?

So let me wish you all a very Merry Christmas and a Happy New Year and leave you with the words of Johnny Nash.

There are more questions than answers
Pictures in my mind that will not show
There are more questions than answers
And the more I find out the less I know
Yeah, the more I find out the less I know


21 thoughts on “Central Banks have found in 2014 that you can’t always get what you want

  1. Shaun,
    Wishing you all the best for the festive break and many thanks for your insights and conversations in your blog.

    Regarding today’s message, I don’t get all of the technical detail but surmise that the Governments are propping themselves up and those markets with returns promised from the future and increasing taxation revenue of their proletariats’. This process is made “invisible” through the giving out and handing back of instruments and printed money that tricks the masses that it is for their own good….

    The only rule appears to be that the process must be slow enough for people to forget it was better before and also quite unclear who exactly is to be blamed. I hope for more transparency in 2015…

    regards Paul

    • Hi Paul C and thnak you.

      We are being persuaded that we are wealthier than we previously thought we were. Having markets at the wrong levels is all part of the game and of course questions the longevity of the recovery at least for the nations which have had some recovery.

  2. Shaun, you are not the only one working on Xmas eve! Ofgem are hard at work looking after our interests on Xmas eve as well. I received the following reply to my e mail to Ofgem asking why they were not chasing the energy companies to pass lower input prices.:

    Thank you for your email.

    Please see attached link to our factsheet regarding Ofgem’s role.


    Ofgem’s role does not extend to setting energy prices; our role is to ensure that the market works in the interests of energy consumers. Energy prices are determined by the suppliers themselves based on their assessment of the wholesale and retail markets. It is up to energy companies themselves to explain their prices changes and profits to their customers.


    Liz Chester
    Consumer & Social Affairs Manager
    Consumer Policy and Insight
    9 Millbank
    SW1P 3GE

    I have emailed back to say that I fully understand Ofgems role however I would have expected them to be putting pressure on the energy companies to pass on savings on input costs and to be holding them up to public scrutiny. Should the energy companies once again report record profits them Ofgem will have failed its primary mandate. I also commented that Ofgem appears to be the dog that barks but does not bite.

    We will see if I get another brush off!

    Apologies for going off topic but this annoys me!

    Look forward to reading your columns in the new year. Have a great Xmas.

  3. Hi Shaun,

    Thank you for another year’s worth of insights and explanations. I doubt if we’ll see too much in the way of change in the coming year, what with the apparent ability of the Barrosos and Lagardes of this world to spin sugar from shit but who knows … maybe this ‘ll be the year??

    i shall try to pick up a tumbril or two in the January sales – one for perfidious personnel and one for popcorn.

    Merry Xmas to all.

  4. Merry Xmas to one and all – lets hope we get the truth next year ( yes we can handle it ! )

    It’s Beginning to Look a Lot Like a Recession

    (sung to the tune of It’s Beginning to Look
    a Lot Like Christmas )

    It’s beginning to look a lot like a Recession
    Ev’rywhere you go;
    Take a look in the five-and-ten, that pub is empty again
    With riots and city centres aglow.

    It’s beginning to look a lot like a Recession,
    uemployed in ev’ry town,
    But the prettiest sight to see is the ugly tramp that will be
    On your own front door.

    A pair of full size bailouts and a depression that never ends
    Is the haunt of Obama and Ben;
    Money that will talk and will even go for a walk
    Is the hope of Lagarde and Yellen;
    And Repubs and Dems can hardly wait for economy to start again.

    It’s beginning to look a lot like a Recession
    Ev’rywhere you go;
    There’s empty streets in London town, the market has gone down again,
    The sturdy kind of run that doesn’t want to slow.

    It’s beginning to look a lot like a Recession;
    Soon the apocalypse bells will start,
    And the thing that will make them ring is the Ballouts that make you cringe
    With having to sell everything close to your heart.

    ( ok not too good on the rhymes )


    Merry Christmas everyone and Happy Easter !

  5. Shaun,

    Merry xmas and thanks for the excellent blogs.

    In regards to bond market profits and market manipulation. I’d suggest the central bankers attempts to suppress bad news from markets (rising bond yields) cannot succeed indefinitely and worse still is likely to result in violent swings if/when the bond market vigilantes wake up.

    Portfolios full of bonds look good today, but they also looked good before Black Monday …

  6. …and today’s presidential vote result in Greece, is precisely what the ECB would not have wanted for Christmas.

    As Lance-corporal Jones would have put it, “Don’t panic! DON’T PANIC!”

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