The Bank of England intervenes in support of Tottenham Hotspur

We have been provided with some more insights into the thinking of the Bank of England via a speech from Executive Director Andrew Hauser. We open with a curious accident of timing.

I have always had a funny feeling about Friday the 13th – and 13 March 2020, Mark Carney’s last day in the
office as Governor of the Bank of England, was no exception.

Actually he had various leaving dates as one might expect from an unreliable boyfriend. Then the speech shows it is being given by a central banker because we are told this.

But this is no time for self-congratulation.

But then it apparently is.

Hailed globally as a shining example of how monetary, fiscal and regulatory policies
could work together to reinforce one another, the combination of interest rate cuts, government spending,
cheap funding and capital easing measures seemed sure to stabilise markets and restore some muchneeded confidence to households and businesses.

Can you applaud yourself whilst also slapping yourself on the back, but avoid self-congratulation?

Policies

We get a confirmation of one of my points.

The dollar swap lines may be the most important part of the international financial stability safety net that few
have ever heard of.

In essence the US Federal Reserve was effectively operating as the world’s central bank.

QE

The events are described thus.

This was by far the largest and fastest single programme ever launched: equivalent to around a tenth of UK GDP, or 50% of the MPC’s existing holdings, and more than twice as rapid as the opening salvo of purchases in 2009.

The impact is described in glowing terms.

The impact was immediate, and decisive. Gilt yields fell back sharply as confidence returned, and market
functioning measures began to normalise . Purchase operations have since taken place
smoothly, with good participation and tight pricing.

There are issues with this though as we find ourselves noting that “as confidence returned” actually means that the Bank of England buys vast numbers of Gilts ( bonds). In fact the present rate of purchases at £13.5 billion per week means that few others need “confidence” as the UK has sold around £13.3 billion of new Gilts this week. So this week nobody else needed any confidence at all! Next is the yield issue where the Bank of England buying has driven short-dated Gilts into negative territory. I looked at the detail of the purchases on Tuesday and Wednesday and over 90% of the short-dated auction so around £2.9 billion was driving prices into negative yields which is apparently “tight pricing”. Also if I was being offered profits and in some cases enormous profits like this I think you might see “good participation” from me too.

Covid Corporate Credit Facility (CCFF)

Let me thank Andrew Hauser for reminding me of this issue and it led me down an unusual road. So in the style of children’s TV let me say to Arsenal fans are you sitting comfortably? First the details of the scheme and it is another bad day for those claiming the Bank of England is independent.

Given the credit risks involved, financial exposures and
eligibility decisions would be owned by the Treasury, but the scheme – to be known as the Covid Corporate
Credit Facility (CCFF) – would be designed and run by the Bank, and funded through the issuance of
reserves, with the MPC’s agreement.

What has it amounted to?

So far, over 140 firms have signed up for the scheme, and have borrowed over £20bn in total,
some of which has already matured. Firms’ borrowing capacity in the scheme is more than three times that
level , helping to underpin confidence – and complementing the Government-run schemes, including the Coronavirus Business Interruption and Bounce Back Loan (BBL) Schemes, which together have lent a further £31bn.

This is a tidy sum indeed and the independence crew take another punch to the solar plexus as we note that he is linking Bank of England work with HM Treasury.

Whilst the help is no doubt welcome yet again we see a central banker unable to see the wood for the trees.

First, CP issuance under the scheme has been at least three times
larger than the size of the pre-Covid-19 sterling CP market – and nearly three quarters of CCFF firms have
set up a CP programme since applying. So the CCFF has helped to deepen the CP market, with potentially
lasting benefits.

The Threadneedle Street Whale is in the market buying it all up! Who would not want to offer debt cheaply? Small and medium-sized businesses must be looking on with envy. It also gives us an addition to my financial lexicon for these times.

“the normalisation of conditions in core markets, ” means the Bank of England is buying.

Meanwhile

 

 

Term Funding Scheme

This is reviewed in dare I say it? Self-congratulatory terms.

In addition to the CCFF, the Bank also opened the borrowing window for the new Term Funding Scheme
with additional incentives for Small and Medium Sized Enterprises (TFSME) on 15 April………There has already been £12bn of lending from the scheme – a far more rapid pace than the previous TFS.

Actually I would have expected more but of course the mortgage market is not yet properly open.

It does this by providing banks with cheap funding over
a four-year term (rising to six years for loans guaranteed under the BBL scheme).

So another one in 4 years as we note there is still £107 billion under the previous scheme?

Ways and Means

I looked at this on April 9th and concluded it was a minor factor which you might recall was very different to the mainstream media view.

The Ways and Means account has not been used since the financial crisis, and is normally worth £400m. But outside experts say that this will increase by billions, perhaps tens of billions to help the government manage a sharp increase in immediate spending,

I would suggest that Faisal Islam of the BBC needs some new “outside experts” as it has remained at £370 million and has therefore not been used.

Comment

We get some perspective from the scale of the interventions by the Bank of England which is described thus.

a balance sheet that has expanded by almost a third in three months, and will reach nearly 40% of annual UK GDP by
mid-year. To deliver that, we are doing more than ten times the number of weekly operations than in the
pre-Covid19 period.

He calculates it as £769 billion and as the pace continues I think it is more like £789 billion now.

Next is something that he rues but I am more hopeful about as the lack of groups may reduce the group-think.

Face-to face meetings – the lifeblood of central banking, sadly – have been seamlessly replaced with audio and
video calls.

Andrew Hauser clearly thinks about the situation but there is an elephant missing in his room which is how do we reverse all the central banking intervention and also deal with the side-effects? Have you noticed hoe the issue of the impact on longer-term saving ( pensions and insurance companies) has seen a type of radio blackout? Here are his suggestions.

First, do we understand why intermediaries struggled to make effective markets in core government
bond, money and foreign exchange instruments at crucial moments during the crisis?

Second, are we comfortable with the central role played by highly-leveraged but thinly-capitalised
non-banks in arbitraging between key financial markets, if the unwinding of those trades can amplify
instability so starkly?

Third, how do we deal with the risks posed to financial stability by the structural tendency for Money
Market and some other open-ended funds to be prone to runs, without having to commit scarce
public money to costly support facilities?

And, fourth, how can we ensure timely transition away from LIBOR, whose weaknesses were
highlighted so starkly by the crisis?

Still according to the Halifax Building Society house prices are (somehow) 2.6% higher than last May.

 

 

 

18 thoughts on “The Bank of England intervenes in support of Tottenham Hotspur

  1. Hello Shaun,

    re: “He calculates it as £769 billion and as the pace continues I think it is more like £789 billion now.”

    hah! , that’s just a rounding error for what is needed !

    Forbin

    • Hi Forbin

      Well they are in the case a bit like this lyric from the Kaiser Chiefs.

      “Come back stronger than a powered-up Pac man”

      Although some of it leaks away like the purchases of the corporate bonds of Maersk and of all companies Apple.

      “The U.S tech giant has £153.47 billion cash on hand versus £164.85 billion at the end of Q1.” ( invezz )

  2. Re: “Still according to the Halifax Building Society house prices are (somehow) 2.6% higher than last May.”

    musical link Bucks Fizz – The Land of Make Believe

    • There has always been so far as I can remember a significant difference between Halifax and Nationwide house price index.

      This could be down to numerous factors, borrowing rations or different mix of properties, but it needs further analysis.

      House prices may be up but it seems the trend is down.

      What will affect house prices however is consumer confidence which was reported on today and has fallen to 2009 levels and unemployment.

      As to the latter Reed the UK biggest recruitment company thinks unemployment could reach a staggering 5 million and equate to 15%, this would indeed cause a house price shock and fall in double digits imo.

      https://www.bbc.co.uk/news/business-52932962

  3. The obvious question has been asked before in many places, and on here, but what on earth can their endgame be? What is their out?(There isn’t one) Meanwhile “investors” are happy to buy literally anything in the anticipation central banks will buy it off them for more than they paid for it.

    Their Mr Micawber strategy of repeating the same failed policies until “something turns up” to kickstart the economy sometime in the future will lead to the eventual state control of all assets and companies if the elusive recovery fails to materialise( since QE and negative rates have proven to be deflationary – a fact yet to be acknowledged by central bankers) it can only lead to the economic collapse that results in full blown state control and communism, meanwhile if they decide to come to their collective senses and reverse course, the devastation would be catastrophic since the resulting deflation, losses from derivatives, bankruptcies caused by the rising interest rates and the bursting of the many asset bubbles and insolvencies resulting would be on a scale no one could comprehend, so kick the can it is. If anyone wants to know what life is going to be like under our banking overlords in the future I would suggest a little bedtime reading in the form of A Day In The Life of Ivan Denisovitch by Alexander Solzhenitsyn.

    Meanwhile Davehmba must be devastated to learn of the passing of Steve Priest yesterday, so here is one from the past for him

    • Shaun and I exchanged tweets on this last night. I expect the rock and roll lifestyle caught up with him, but what a great performance – which let’s face it, cannot be said of the BoE! RIP Steve.

    • Kevin, I read Ivan Denisovitch in translation. It’s a masterpiece. Do you really think the future is going to be that bleak, though?

  4. Hello Shaun,

    Re: “have been seamlessly replaced with audio and video calls.”

    no they haven’t , there have been many issues with connections but there is one great advantage that HMG are using – you can cut people off and blame the tech !

    oh yes !

    Forbin

    • forbin,

      This seems to be happening on the daily press briefings on TV

      BBC: “Do you think Cummins should be sent to the Tower of London due to him breaching lockdown?”

      Borris Johnson “this matter has now been debated a number of times and Mr. Cummins has had his own press briefings, and moreover the police are to take no action” !

      As the video call terminates Borris Johnson then moves on to Sky News.

      Video conference is a great way of maintaining control in some circumstances, particularly when the public are asking questions.

      ” Thank you for your question” regardless if whether its answered-“next question please we will now move to ***** at the Mirror!.

      What a great technology!

    • Funnily enough, I went to school with a chap called Knowles and he finished up quite senior in banking. He was of course known as Cyril after the Tottenham record ‘Nice one Cyril’.Of course, former MPC member David Blanchflower is known as Danny! Obviously their influence extends widely.

  5. Well, I did say a few days ago that they were channeling the spirit of Steve and now indeed they can.

    “seemed sure to stabilise markets and restore some muchneeded confidence to households and businesses.” Translates as ramped up asset prices to ensure no RBS issues while buying all sorts of old rubbish off anyone at an increased price. I am not surprised there are lots of highly leveraged institutions arbitraging bonds – if you can buy at a low price and make a profit from the mugs at the BoE using someone else’s money, then why not? Risk has effectively been nationalised.

    Then they semi-nationalised jobs, although the money for that has obviously run out pretty quickly and a group of senior Treasury ministers from the period have now predicted unemployment on an 80s scale. I presume this is the early 80s recession as the Lawson bust is 90s really, but it is down to the same thing really – fake jobs sustained by subsidies where productivity has gone to Hell in a handcart. So, sense is now going to prevail in the labour market and that put downward pressure on house prices, magnified by reduced multiples, higher deposits etc.

    But where do they go? All the talk not so long ago was of raising rates to give the central banks some room to cut in a downturn, which everyone knew was coming (well, except the rather wacky Jim Cramer, who says that US employment figures show the stock markets called it correctly ….🤦‍♂️). If the denominator on the standard share valuation formula turns negative, how do you price anything? Constantly intervening to create a disconnect with reality that at least one CFA could not spot shows that there is a disconnect dependent on central bank intervention, not inherent strength in the market.

    Amidst all these money-printing schemes – which even the papers have spotted, are being used to keep paying divis to keep the share valuation numerator up – at least they are backing pub chain and brewing company Fullers going.

    • Hi Dave

      One of the things I look forwards too is a pint or 2 at the pub so I too support the money for Fullers.

      As to the US numbers well it was a bit of a disaster for the forecasters even by their low standards. From the Washington Post.

      “Economists predicted the official U.S. unemployment rate would hit 20 percent — or really close to it — in May. Instead, the world learned Friday morning that the official rate is actually 13.3 percent, an improvement from 14.7 percent in April.

      It was, as economist Chris Rupkey emailed, the “biggest forecast miss of our life.”

  6. OT but a real sign of the inflation beginning to burst onto the consumer when he is least able to afford it, pack of Duracell AA rechargeables b4 lockdown £8.29 then out of stock during lockdown, now back in stock at £9.99, a mere 20% increase in one go.
    They are going to get there inflation, and plenty of it.But as incomes are going to be static/falling for those lucky enough to have retained their job, their disposable income is going to be destroyed completely.

    • Hi Kevin

      I have noticed it in places where there used to be deals. For example I like fruit fools for dessert but the 2 for a £1 offer has gone, so it is now 65p times two or a 30% rise. A bottle of Apple juice is 10p more and so on…..

      So yes there are signs of it about.

  7. From the BBC site: “The biggest single loan was handed to German company BASF, which is the world’s largest chemicals producer, although it only employs around 850 people in the UK.”

    Germans getting their revenge then….

  8. Great blog as usual, Shaun.
    On an unrelated topic (not closely related anyway) I found out myself from searching the Bank of Canada website the answer to my question about negative interest rates. The Bank of Canada ceased operating with a 50-basis-point operating band around the overnight rate on March 23, when the overnight rate was still 0.75%. The operating band was reduced to 25 basis points with the bank rate still 25 basis points above the overnight rate at 1.0%, but the deposit rate now set at the overnight rate, not 25 basis points below it. So it would seem there is no reason why, when the overnight rate was taken to 0.25% on March 27, this would be considered the effective lower bound. The deposit rate would also be positive at 0.25%. There is no reason the overnight rate could not be taken to 0.10% as some members of the CDHI Monetary Policy Council recommended in advance of the Bank of Canada interest rate announcement on June 3, or to 0.05% for that matter, at least not one that related to avoiding negative interest rates.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.