About notayesmanseconomics

I am an independent economist who studied at the London School of Economics. My speciality was (and remains) monetary economics. I worked in the City of London for several investment banks and then on my own account over a period of 15 years. After initially working in the government bond department at Phillips and Drew Ltd. I moved on into the derivatives arena with options of all types being a speciality. I never lost my specialisation in UK interest rates and also traded as a local on the London International Financial Futures Exchange where I mostly traded futures and options on future and present UK interest rates. So with my specialisations of monetary economics and knowledge of derivatives I have plenty of expertise to deploy on the financial and economic crisis which has unfolded in recent years. I have also worked in Tokyo Japan again in the derivatives sphere and the Japanese "lost decade" made me think about what I would do if it spread,which is very relevant now. My name is Shaun Richards and apart from the analysis on here you may have heard me on Share Radio where I regularly analyse economic events and developments, Bloomberg Radio or more recently on BBC Radio 4's Money Box. I also write economics reports for groups such as Woodford Investment Management. I can be contacted via the contact details on this website or on twitter via @notayesmansecon.

Of China, Bitcoin, football and innovative finance

This week was one when those who consider themselves to be the world’s elite wanted us to concentrate on events at the World Economic Forum in Davos. However this has gone rather wrong for them as the main news items this week turned out to be the Brexit speech given by Prime Minister May in the UK and of course the inauguration of Donald Trump as the new US President later today. These matters were referred to in Davos as George Soros explained how his profit and loss account would have been so much better except for those pesky voters in the UK and US. Bow down mortals, was the message there. The “open society” he proclaims seems to mean being open to agreeing with him.

China

We have found ourselves looking East quite a few times in 2017 and this morning we saw another instance of a thought-provoking action. From Ioan Smith.

| has cut RRR 1% at Big 5 banks HAS CUT RRR BY 1% temporarily to ease “seasonal liquidity pressure” – source

So the People’s Bank of China has eased pressure in the monetary system by reducing the amount of reserves the big banks need to hold. Reuters has given us more detail on this.

The People’s Bank of China (PBOC) has cut the reserve requirement ratio (RRR) for the banks by one percentage point, taking the ratio down to 16 percent.It will restore their RRR to the normal level at an appropriate time after the holiday, according to sources……….The five biggest lenders are Industrial and Commercial Bank of China Ltd (ICBC), China Construction Bank Corp (CCB), Bank of China, Bank of Communications Co (BoCom) and Agricultural Bank of China.

 

This adds to other moves on the monetary system as I explained on the 5th of this month.

China’s efforts to choke capital outflows are beginning to pay off, with the offshore yuan surging the most on record as traders scrambled for a currency that’s becoming increasingly scarce outside the nation’s borders.

We have seen signs of this in two areas since. The first was the collapse in the price of Bitcoin as China applied capital controls. There has been more news about this in the last 24 hours. From the Wall Street Journal.

Chinese banking regulators said two bitcoin exchanges in Beijing improperly engaged in margin financing and failed to impose controls to prevent money laundering, a development that could hurt trading of the virtual currency in its biggest market.

The action by China’s central bank signals heightened government scrutiny of bitcoin trading on the mainland, which has been allowed to expand largely unfettered since 2013.

This chart of Bitcoin volumes is quite something.

As ever there is debate about the exact numbers but I think we get the idea.

Also we have seen it in the world of football where after two extraordinary trades where £60 million was supposedly paid for Oscar and Carlos Tevez is being paid around £1 per second. Yet suddenly limits on foreign players suddenly were tightened and as a Chelsea fan I was very grateful for that! Plenty of food for thought there for Roman Abramovich as in essence football was how he got plenty of money outside Russia.

GDP

This morning the Financial Times tells us this.

China’s gross domestic product, the world’s second-largest in nominal terms but already the largest at purchasing power parity, grew 6.7 per cent for the full year and at an annual rate of 6.8 per cent in the fourth quarter in real terms, down from 6.9 per cent in 2015. It was the slowest full-year growth figure since 1990 but comfortably within the government’s target range of 6.5-7 per cent. The fourth-quarter performance topped economists’ expectations of 6.7 per cent, according to a Reuters poll.

It is extraordinary how quickly they come up with their GDP numbers, it is almost as if they make them up. This of course is a counterpoint to headlines of the number being a “beat”. I also note that China seems to have learned something from the western capitalist imperialists.

But housing was a bright spot. Property sales grew 22.5 per cent in floor-area terms, the fastest pace in seven-years, while prices in major cities soared, prompting warnings of a bubble. Analysts expect the housing market to slow in 2016, as the government moves to cap runaway house prices that are a source of popular anger.

That is an issue that has caused plenty of trouble in western countries. Also I see one economist has had a bad day.

“The excess money supply in 2016 created problems with bubbles. Going forward, more deleveraging will be necessary. Monetary policy can’t be loosened further,” said Zhang Yiping, economist at China Merchants Securities in Beijing.

Industrial Production and Retail Sales

The first was extraordinary and yet also represents a slow down. From Investing.com.

In a report, National Bureau of Statistics of China said that Chinese Industrial Production fell to 6.0%, from 6.2% in the preceding month.

Many countries would give their right arm for industrial production growth like that but for China the noticeable fact is that it is now less than GDP growth. Meanwhile the economy seems to have shifted towards consumption

In a report, National Bureau of Statistics of China said that Chinese Retail Sales rose to an annual rate of 10.9%, from 10.8% in the preceding month.

The rest of the world would quite like China to make such a switch as it would reduce its trade surplus but can it manage it?

Financial Innovation

We have come to be very nervous of the word innovation after its use by Irish financiers. But take a look at this from the South China Morning Post last week.

Step one: Pledge a mainland asset with a mainland bank for a standby letter of credit (SBLC) which is a promise by the bank to pay. Use the SBLC to get a HK$8.8 billion loan in Hong Kong.

Since it’s a deal to pay off a piece of land publicly auctioned by the Hong Kong government, approval from the mainland regulators will be easy.

Step two: Pledge the Kai Tak land with the banks in Hong Kong. Many may find the bid – 70 per cent above market estimate – rather risky. Yet, it won’t be too difficult to find banks to provide a HK$3 billion loan which is only 40 per cent of the land cost.

Step three: Pledge the HK$3 billion cash with a bank in Hong Kong for a SBLC.

Step four: Use the second SBLC as security at a mainland financial institution to purchase debentures and bonds with annual returns of over 6 per cent or above.

Step five: Pledge the HK$3 billion worth of debentures with mainland banks for another SBLC. Given a routine discount of 30 per cent for financial products, the bank will issue a promise to pay HK$2 billion.

Step six: Use the third SBLC as collateral and get a HK$2 billion loan in Hong Kong. Repeat step three to five and so on so forth.

These steps may sound a bit complicated. But in many cases, these steps are all done among the mainland and Hong Kong branches of the same bank, though occasionally several banks are involved to dodge regulatory hurdles.

By the end of it you can “have” up to 25 billion Hong Kong Dollars of which 14 billion have left China.

Comment

As you can see there is much to mull about China as for example we have a wry smile at this week’s claim at Davos that it is all for free trade. On the surface we are told that everything is fine yet beneath it there is ever more debt and a rush to send money abroad. Later this year the Yuan is likely to fall again and the whole cycle will begin again.

Later we will find out a little of what President Trump plans so it could be quite a day. We already seem to have moved from fiscal stimulus to cuts as we await some concrete policies.

 

Central banks face an inflation inspired policy exit dilemma

Later today the ECB ( European Central Bank) will announce it latest policy decisions on interest-rates and extraordinary monetary policy such as QE ( Quantitative Easing) asset purchases. I am not expecting any grand announcement of change as this came last time if you recall.

As regards non-standard monetary policy measures, we will continue to make purchases under the asset purchase programme (APP) at the current monthly pace of €80 billion until the end of March 2017. From April 2017, our net asset purchases are intended to continue at a monthly pace of €60 billion until the end of December 2017, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim.

Ever since then they have been keen to tell us this is not a taper and the formal minutes showed quite a bit of debate on the matter.

either to continue purchases at the current monthly pace of €80 billion for an additional six months, or to extend the programme by nine months to the end of December 2017 at a monthly pace of €60 billion. In both cases, purchases would be made alongside the forthcoming reinvestments starting in March 2017.

I think they made the right choice to reduce the size of the monthly purchases but do not see why they guaranteed it to the end of the year apart from them being afraid of markets getting withdrawal symptoms.

What are these policies supposed to do?

Back in 2015 the ECB issued a working paper on how it thought QE worked.

First, via the direct pass-through channel, the non-standard measures are expected to ease borrowing conditions in the private non-financial sector by easing banks’ refinancing conditions, thereby encouraging borrowing and expenditure for investment and consumption.

Actually this is a generic explanation of the claimed benefits of extraordinary policies and applies in some ways more directly to the TLTROs (Targeted longer-term refinancing operations) . As ever it is the “precious” which is considered to be the main beneficiary.

this encourages banks to increase their supply of loans that can be securitised, which tends to lower bank lending rates.

Of course this can have plenty of effects and let us remind ourselves that house prices in Portugal are rising at an annual rate of 7.6% which is the “highest price increase ever observed” as I analysed on Monday. Let us then move on by noting that officially this will be recorded as a “wealth effect” and will benefit the mortgage books of the troubled Portuguese banking sector whereas for first-time buyers and those looking to move up the property ladder it is inflation. Although the Euro area measure of inflation ignores this entirely.

In December 2016, the annual rate of change was 0.9% (0.5% in the previous month)

We note that even so it is rising and move on.

Next we have this effect.

Second, via the portfolio rebalancing channel, yields on a broad range of assets are lowered. Asset purchases by the central bank result in an increase in the liquidity holdings of the sellers of these assets. If the liquidity received is not considered a perfect substitute for the assets sold, the asset swap can lead to a rebalancing of portfolios towards other assets.

This is how the 0.1% and indeed the 0.01% benefit as they of course by definition have plenty of assets overall. It is also part of the road where 8 people have as much wealth as the bottom half of the world’s population.

There is supposed to be a third announcement effect but it is hard not to have a wry smile at the claims made for Forward Guidance when you read this.

It has been found to be muted in the United Kingdom, moderate in the euro area and highly uncertain in the United States,

Inflation Target

Here we have the definition of it.

The primary objective of the ECB’s monetary policy is to maintain price stability…….The ECB has defined price stability as a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2%.

There is clear abuse of language here as the Euro area his in fact had price stability with inflation ~0% in recent times but the ECB does not want this. Back in the day a past ECB President ( Trichet) gave us a rather precise definition of 1.97% in his valedictory speech.

Where are we now?

Yesterday there was something of a change.

Euro area annual inflation was 1.1% in December 2016, up from 0.6% in November. In December 2015 the rate was 0.2%.

So the broad sweep of higher inflation in December around Europe continued as we saw quite a jump. Some of that may unwind but 2017 is likely to see a higher and higher theme as we note transport for fuel rising at an annual rate of 6% and vegetables at 5.2% so exactly the wrong sort of inflation for consumers and workers. There is only one country now with disinflation which is Ireland but more than a few clustering around 2% including Germany at 1.7%. It makes you think if we move to today’s house price update how statisticians in Ireland can report disinflation with house prices rising at an annual rate of 7.1%. Also we seem set to see a phase of more general inflation worries from Germany which has house price inflation of 6.2%.

Exit strategies

Back in December 2009 my old tutor at the LSE Willem Buiter wrote this.

The large-scale ex-ante and ex-post quasi-fiscal subsidies handed out by the Fed and to a lesser extent by the other leading central banks, and the sheer magnitude of the redistribution of wealth and income among private agents that the central banks have engaged in could (and in my view should) cause a political storm.

He was not aware then of the scale of what he calls fiscal subsidies which have been handed out by the Bank of England, Bank of Japan and the ECB since amongst others. But here is his crucial conclusion.

Delay in the dropping of the veil is therefore likely.

The prediction that they will delay exiting from monetary policies such as QE is spot on in my view and is where we are now. We have seen a PR campaign for example by Bank of England Governor Mark Carney as he sings along to Shaggy on distributional issues concerning wealth and also income.

She saw the marks on my shoulder (It wasn’t me)
Heard the words that I told her (It wasn’t me)
Heard the scream get louder (It wasn’t me)

However I disagree with Willem completely here.

There are few if any technical problems involved in reversing the unconventional monetary policies – quantitative easing, credit easing and enhanced credit support – implemented by central banks around the world as short-term nominal interest rates became constrained by the zero lower bound.

I was never entirely convinced by this line of argument but of course to be fair to Willem the situation now concerning QE is completely different in terms of scale.  Many bond purchases look to be permanent and the UK for example has bought Gilts which mature in the 2060s.

Comment

If we look at the overall picture we see that 2017 poses quite a few issues for central banks as they approach the stage which the brightest always feared. If you come off it will the economy go “cold turkey” or merely have some withdrawal systems? What if the future they have borrowed from emerges and is worse than otherwise? We learn a little from what the US Federal Reserve has done but maybe not as much as we might think for two reasons. Firstly whilst it stopped new QE purchases it continues to reinvest maturing purchases from the past. Secondly in terms of the international picture it did so whilst so many others were on the “More.More,More” road as it got a type of first mover advantage.

The Bank of England is in a particularly bad place as it applied more when in fact there were arguments for less ( likely higher inflation) followed by the Bank of Japan which is buying assets so quickly. Accordingly I wait to see if we get any hints of future moves from the ECB today.

Oh and do you note that the official rationale for QE type policies never seems to involve confessing you would like a lower value for your currency?

Me on TipTV Finance

 

http://tiptv.co.uk/inflamed-inflation-not-yes-man-economics/

UK real wage growth is even worse if you factor in house price growth

After yesterday’s higher inflation data and it was across the board as the annual rate of hose price inflation increased as well we move to the labour market today and in particular wages. Unless we see a surge in wage growth in the UK real wages are set to fade and then go into decline this year but before we get to them we have another source of comparison. Something which immediately has us on alert as it will cheer the Bank of England.

Wealth

This is what the Bank of England would call this from the Financial Times today.

The value of all the homes in the UK has reached a record £6.8tn, nearly one-and-a-half times the value of all the companies on the London Stock Exchange. A rapid rise in the value of the housing stock, which has increased by £1.5tn in the past three years, has created an unprecedented store of wealth for Londoners, over-50s and landlords, according to an analysis by Savills, the estate agency group.

It will be slapping itself on the back for the success of its Funding for (Mortgage) Lending Scheme or FLS which officially was supposed to boost bank lending to smaller businesses but of course was in reality to subsidise bank property lending.  The FLS does not get much publicity now but there is still some £61 billion of it around as of the last quarterly update, since when some has no doubt been rolled into the new Term Funding Scheme. Oh yes there is always a new bank subsidy scheme on the cards.

Whilst the Bank of England will continue to like the next bit those with any sort of independent mind will start to think “hang on”.

As well as rising sharply in nominal terms, housing wealth has grown in relation to the size of the economy: it was equivalent to 1.6 times Britain’s gross domestic product in 2001, rising to 3.3 times in 2007 and 3.7 times in 2016.

Only on Tuesday night Governor Carney was lauded for his work on “distributional issues” but here is a case of something he and the Bank of England have contributed to which is a transfer from first time buyers and those climbing the property ladder to those who own property.

If we move to wages then the UK average is still around 6% below the previous peak which poses a question immediately for the wealth gains claimed above. Indeed last November the Institute for Fiscal Studies suggested this.

Britons face more than a decade of lost wage growth and will earn no more by 2021 than they did in 2008 ( Financial Times).

There has been an enormous divergence here where claimed housing wealth has soared whilst real wages have in fact fallen. That is not healthy especially as the main age group which has gained has benefited in other areas as well.

The income of those aged 60 and over was 11 per cent higher in 2014 than in 2007. In contrast, the income of households aged 22-30 in 2014 was still 7 per cent below its 2007 level. The average income of households aged 31-59 was the same in 2014 as in 2007.

As an aside some of the property numbers are really rather extraordinary.

The value of homes in London and south-east England has topped £3tn for the first time, meaning almost half the total is accounted for by a quarter of UK dwellings. This concentration of wealth is most evident in the richest London boroughs, Westminster and Kensington & Chelsea, where housing stock adds up to £232bn, more than all of the homes in Wales, according to analysis based on official data.

Another shift was something I noted yesterday which was the fall in house prices seen in Northern Ireland where wealth under this measure has declined sharply. Has that influenced its political problems? However you look at it there has been a regional switch with London and the South-East gaining. Also there is a worrying sign for UK cricketer Jimmy Anderson or the “Burnley Lara”.

Likewise, homes in Burnley, Lancashire, declined in value over five years, even as most of the UK market boomed.

One area where care is needed with these wealth numbers is that a marginal price ( the last sale for example) is used to value a whole stock which is unrealistic.Before I move on there is another distributional effect at play although the effect here is on incomes rather than wages as Paul Lewis reminds us.

As inflation rises to 1.6%/2.5% the policy of freezing working age benefits for four years becomes less and less sustainable.

Before we move on the Resolution Foundation has provided us with a chart of the nominal as in not adjusted for inflation figures.

 

Today’s Data

The crucial number showed a welcome sign of improvement.

Average weekly earnings for employees in Great Britain in nominal terms (that is, not adjusted for price inflation) increased by 2.8% including bonuses and by 2.7% excluding bonuses compared with a year earlier……average total pay (including bonuses) for employees in Great Britain was £509 per week before tax and other deductions from pay, up from £495 per week for a year earlier

So a pick-up on the period before of 0.2% and at we retain some real wage growth which helps to explain the persistently strong retail sales data.

Comparing the 3 months to November 2016 with the same period in 2015, real AWE (total pay) grew by 1.8%, which was 0.1 percentage points larger than the growth seen in the 3 months to October. Nominal AWE (total pay) grew by 2.8% in the 3 months to November 2016, while the CPI increased by 1.2% in the year to November.

There is obviously some rounding in the numbers above and the inflation measure used is around 1% lower than the RPI these days.

If we move to the detail we see that average earning also rose by 2.8% annually in the year to the month of November alone and the areas driving it were construction (5%) and wholesale and retail (4.2%). Sadly the construction numbers look like they might be fading as they were 8.8% but the UK overall has just seen tow strong months with 2.9% overall wage growth in October being followed by 2.8% in November.

Employment and Unemployment

The quantity numbers continue their strong trend.

There were 31.80 million people in work, little changed compared with June to August 2016 but 294,000 more than for a year earlier…….There were 1.60 million unemployed people (people not in work but seeking and available to work), 52,000 fewer than for June to August 2016 and 81,000 fewer than for a year earlier.

The next number might be good or bad.

Total hours worked per week were 1.02 billion for September to November 2016. This was 1.2 million fewer than for June to August 2016 but 4.8 million more than for a year earlier.

The fall may be troubling but as the economy grew over this period ( if the signals we have are accurate) might represent an improvement in productivity.

It is nice that the claimant count fell in December “10,100 fewer than for November 2016” but I am unsure as to what that really tells us.

Comment

We have seen today some good news which is a pick-up in the UK official wages data. This will help real wages although sadly seems likely to be small relative to the inflation rise which is on its way. However if we widen our definition of real wages we see that the credit crunch era has brought quite a problem. This is that the claimed “wealth effects” from much higher house prices make them look ever higher in real terms as we return to the argument as to how much of the rise is economic growth and how much inflation.

My view is that much of this is inflationary and that once we allow for this then we start to wonder how much of an economic recovery we have seen in reality as opposed to the official pronouncements.

Also we have my regular monthly reminder that the wages figures exclude the self-employed and indeed smaller businesses.

Mark Carney plans to do nothing about rising UK inflation

Today is inflation day in the UK where we receive the full raft of data from producer to consumer inflation topped off with the official house price index. We already know that December saw gains elsewhere in the world such as Chinese producer prices and consumer inflation in the Czech Republic and some German provinces so we advance with a little trepidation. That of course is the theme we were expecting for the UK anyway as the oil price was unlikely to repeat the falls of late 2015 ( in fact it rose) and this has been added to by the fall in the value of the UK Pound £ after the EU leave vote last June.

The Bank of England

Governor Mark Carney updated us in a speech yesterday about how he intends to deal with rising inflation. But first of course we need to cover his Bank Rate cut and £70 billion of extra QE ( Quantitative Easing) including Corporate Bond purchases from August as tucked away in the speech was a confession of yet another Forward Guidance failure.

Over the autumn, demand growth remained more resilient than had been expected, particularly consumer spending.

Yet at the same time we were expected to believe that by being wrong the Bank of England was in fact a combination of Superman and Wonder Woman as look what it achieved.

but an output gap of some 1½%, implying around 1/4 million lost jobs

So Mark why did you not cut Bank Rate by a further 1.5% and do an extra £350 billion of QE because then you would have pretty much eliminated unemployment? If only life were that simple! For a start it is rather poor to see a theory (the output gap) which I pointed out was failing in 2010 and did fail in 2011 having a rave from a well deserved grave. I guess any port is  welcome when you are in a storm of your own mistakes.

As to his intention to deal with inflation I summarised that last night as he spoke at the LSE.

Here is the Mark Carney speech explaining how and why he will miss his inflation target http://www.bankofengland.co.uk/publications/Pages/speeches/2017/954.aspx 

It was nice to get a mention on the BBC putting the other side of the debate.

http://bbc.in/2jsktij

You see with his discussion of algebra and “lambda,lambda,lambda” we are given an impression of intellectual rigour but the real message was here.

the UK’s monetary policy framework is grounded in society’s choice of the desired end.

What is that Mark?

monetary policymaking will at times involve striking short-term trade-offs between stabilising inflation and supporting growth and employment

As you see we are being shuffled away from inflation targeting as we wonder how long the “short-term” can last? As we do we see a familiar friend from my financial lexicon for these times.

inflation may deviate temporarily from the
target on account of shocks

So “temporarily” is back and a change in the remit will allow him to extend his definition of it towards the end of time if necessary.

Since 2013, the remit has explicitly recognised that in these
circumstances, bringing inflation back to target too rapidly could cause volatility in output and employment
that is undesirable.

Of course with his Forward Guidance being wrong on pretty much a permanent basis Governor Carney can claim to be in a state of shock nearly always. A point of note is that this is a policy set by the previous Chancellor George Osborne not the current one.

The fundamental problem is that as inflation rises it will reduce real wages ( although maybe not in the Ivory Tower simulations) and thereby act as a brake on the economy just like in did in 2011/12.

Today’s data

We are not surprised on here although I see many messages online saying they were.

The all items CPI annual rate is 1.6%, up from 1.2% in November.

In terms of detail the rise was driven by these factors.

Within transport, the largest upward effect came from air fares, with prices rising by 49% between November and December 2016, compared with a smaller rise of 46% a year earlier.

So a sign of how air travellers get singed at Christmas and also this.

Food and non-alcoholic beverages, where prices overall, increased by 0.8% between November and December 2016, having fallen by 0.2% last year

So Mark Carney and the central banking ilk will be pleased as if we throw in motor fuel rises the inflation is in food and fuel or what they call “non-core”. Of course the rest of us will note that it is essential items which are driving the inflation rise.

Target alert

I have been pointing out over the past year or so the divergence between our old inflation target and the current one. Well take a look at this.

The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs) index, is 2.7%, up from 2.5% last month.

It is above target and whilst there are dangers in using one month’s data we see that this month implies that our inflation target was loosened in 2002/03 by around 0.6%. Good job nothing went wrong later……Oh hang on.

What happens next?

We get a strong clue from the producer prices numbers which tell us this.

Factory gate prices (output prices) rose 2.7% on the year to December 2016 and 0.1% on the month,

As you see they are pulling inflation higher and if we look further upstream then the heat is on.

Prices for materials and fuels paid by UK manufacturers for processing (input prices) rose 15.8% on the year to December 2016 and 1.8% on the month.

The relationship between these numbers and consumer inflation is of the order of the one in ten sung about by the bank UB40 so our rule of thumb looks at CPI inflation doubling at least.

House Prices

What we see is something to make Mark Carney cheer but first time buyers shiver.

Average house prices in the UK have increased by 6.7% in the year to November 2016 (up from 6.4% in the year to October 2016), continuing the strong growth seen since the end of 2013.

So whilst I expect a slow down in 2017 the surge continues or at least it did in November. Surely this will have been picked up by the UK’s new inflation measure which we are told includes owner-occupied housing costs?

The all items CPIH annual rate is 1.7%, up from 1.4% in November……The OOH component annual rate is 2.6%, unchanged from last month.

So no as we see a flightless bird try to fly and just simply crash. That is what happens when you use Imputed Rent methodology which after all is there to convince us we have economic growth and therefore needs a low inflation reading.

As an aside we got an idea of the boom and then bust in Northern Ireland as the average house price rose to £225,000 pre credit crunch but is now only £124,000. Is that a factor in its current crisis?

Comment

Last night saw a real toadying introduction to the speech by Mark Carney at the LSE.

He is someone who thinks very deeply about the big responsibilities he has, and he has that very rare talent of being able to think and act at the same time

The introducer must exist in different circles to me as I know lot’s of people like that and of course the last time Governor Carney acted the thinking was wrong. I did have a wry smile as this definition of the distributional problems that the extra QE has and will create.

He has been thinking very hard about distributional issues

What we actually got was a restatement of Bank of England policy which involves talking about the inflation target as if they mean it and then shifting like sand to in fact giving the reasons why they will in fact look the other way. Last time they did this the growth trajectory of the UK economy fell ( with real wages) rather than rose as claimed. The only ch-ch-changes in the meantime are that the current inflation remit will make it even easier to do.

 

 

 

 

Portugal is struggling to escape from its economic woes

Late on Friday (at least for those of us mere mortals who do not get the 24 hour warning) came the news that the ratings agency DBRS had reduced Italy to a BBB rating. These things do not cause the panic they once did for two reasons the first is that the ECB is providing a back stop for Euro area bonds with its QE purchases and the second is that the agencies themselves have been discredited. However there is an immediate impact on the banks of Italy as the Bank of Italy has already pointed out.

Italy’s DBRS downgrade: a manageable increase in funding costs…..Haircuts on collateral posted by Italian banks: the value of the government bonds collateral pool alone would increase by ~8bn. ( h/t @fwred )

However this also makes me think of another country which is terms of economics is something of a twin of Italy and that is Portugal.

When we do so we see that Portugal has also struggled to sustain economic growth and even in the good years it has rarely pushed above 1% per annum. There have also been problems with the banking system which has been exposed as not only wobbly but prone to corruption. Also there is a high level of the national debt which is being subsidised by the QE purchases of the ECB as otherwise there is a danger that it would quickly begin to look rather insolvent. In spite of the ECB purchases the Portuguese ten-year yield is at 3.93% or some 2% higher than that of Italy which suggests it is perceived to be a larger risk. Also more cynically perhaps investors think that little Portugal can be treated more harshly than its much larger Euro colleague.

The state of play

This has been highlighted by the December Economic Bulletin of the Bank of Portugal.

Over the projection horizon, the Portuguese economy is expected to maintain the moderate recovery trajectory that has characterised recent years . Thus, following 1.2 per cent growth in 2016, gross domestic product (GDP) is projected to accelerate to 1.4 per cent in 2017, stabilising its growth rate at 1.5 per cent for the following years.

So it is expecting growth but when you consider the -0.4% deposit rate of the ECB, its ongoing QE programme and the lower value of the Euro you might have hoped for better than this. Or to put it another way not far off normal service for Portugal. Also even such better news means that Portugal will have suffered from its own lost decade.

This implies that at the end of the projection horizon, GDP will reach a level identical to that recorded in 2008.

This is taken further as we are told this.

In the period 2017-19, GDP growth is expected to be close to, albeit lower than, that projected for the euro area, not reverting the negative differential accumulated between 2010 and 2013

You see after the recession and indeed depression that has hit Portugal you might reasonably have expected a strong growth spurt afterwards like its neighbour Spain. Instead of that sort of “V” shaped recovery we are seeing what is called an “L” shaped one and the official reasons for this are given below.

This lack of real convergence with the euro area reflects persisting structural constraints to the growth of the Portuguese economy, in which high levels of public and private sector indebtedness, unfavourable demographic developments and persisting inefficiencies in the employment and product markets play an important role, requiring the deepening of the structural reform process.

After an economic growth rate of 0.8% in the third quarter of 2016 you might have expected a little more official optimism as they in fact knew them but say their cut-off date was beforehand, but I guess they are also looking at numbers like this.

According to EUROSTAT, the Portuguese volume index of GDP per-capita (GDP-Pc), expressed in purchasing power parities represented 76.8% the EU average (EU28=100) in 2015, a value similar to the observed in 2014.

It is at the level of the Baltic Republics, oh and someone needs to take a look at the extraordinary numbers and variation in the measures of Luxembourg!

House Prices

Here we see some numbers to cheer any central banker’s heart.

In the third quarter of 2016, the House Price Index (HPI) increased by 7.6% when compared to the same period of 2015 (6.3% in the previous quarter). This was the highest price increase ever observed and the third consecutive quarter in which the HPI recorded an annual rate of change above the 6%. When compared to the second quarter, the HPI rose by 1.3% from July to September 2016, 1.8 percentage points (p.p.) lower than in the previous period.

What is interesting is the similarity to the position in the UK in some respects as we see that house price growth went positive in 2013 although until now it has been a fair bit lower than in the UK. Of course whilst central bankers may be happy the ordinary Portuguese buyer will not be so pleased as we see yet another country where house price rises are way above economic performance. Indeed a problem with “pump it up” economic theory in Portugal is the existing level of indebtedness.

the high level of indebtedness of the different economic sectors – households, non-financial corporations and public sector – ( Bank of Portugal )

The debt situation

In terms of numbers Portuguese households have been deleveraging but by the end of the third quarter of last year the total was 78.6% of GDP, whilst the corporate non banking sector owed some 110.8% of GDP. At the same time the situation for the public-sector using the Eurostat method was 133.2 % of GDP.

Going forwards Portugal needs new funding for businesses but seems more set to see property lending recover if what has happened elsewhere after house price rises is any guide. Also the state is supposed to be reducing its debt position but we keep being told that.

The banks

It always comes down to this sector doesn’t it? Portugal has had lots of banking woe summarised by The Portugal News here just before Christmas.

The Portuguese state provided €14.348 billion in support to the banking sector between 2008 and 2015, according to a written opinion submitted by the country’s audit commission, the Tribunal de Contas, last year and made public on Tuesday.

That’s a tidy sum in a relatively small country and we see that the banking sector shrunk in size by some 3.4% in asset terms in the year to the end of the third quarter of 2016. In terms of bad debts then we are told that “credit impairments” are some 8.2% of the total although the recent Italian experience has reminded us again that such numbers should be treated as a minimum.

Last week the Financial Times reminded us that the price of past troubles was still being paid.

Shares in Millennium BCP fell by more than 13 per cent in early trading on Tuesday after Portugal’s largest listed lender approved a capital increase of up to €1.33bn in which China’s Fosun will seek to lift its stake from 16.7 per cent to 30 per cent.

Oh and this bit is very revealing I think.

The rights issue, which is bigger than BCP’s market value,

Comment

Let us start with some better news which is from the labour market in Portugal.

The provisional unemployment rate estimate for November 2016 was 10.5%

This represents a solid improvement on the 12.3% of 2015 although as so often these days unemployment decreases comes with this.

These developments in productivity against a background of economic recovery fall well short of those seen in previous cycles……. Following a slight reduction in 2016, annual labour productivity growth is projected to be approximately 0.5 per cent over the projection horizon.

Also there is the issue of demographics and an ageing population which the Bank of Portugal puts like this.

the evolution of the resident population,
which has presented a downward trend,

I like Portugal and its people so let us hope that The Portugal News is right about this.

Portugal has been named as the cheapest holiday destination in the world for Britons this year. The country’s Algarve region came top in the Post Office’s annual Holiday Costs Barometer, which takes into account the average price of eight essential purchases, including an evening meal for two, a beer, a coffee and a bottle of suncream, in 44 popular holiday spot around the world.

That’s an interesting list of essential purchases isn’t it? But more tourism would help Portugal although the woes of the UK Pound seem set to limit it from the UK.

 

 

 

 

The economic problem that is Italy continues

Today brings the economic situation in Italy into focus as it readies itself for a ratings review. Friday the 13th may not be the most auspicious of days for that! However I should be more precise in my language as the Italian government will know as they get told 24 hours before. So as we live in a world where things leak, today will be a day where some traders will be more equal than others so take care. But there are plenty of worries around due to the fact that one of the central themes of this website which is Italy’s inability to maintain any solid rate of economic growth continues. To be more specific even in the good times it struggled to have GDP (Gross Domestic Product) growth of more than 1% per annum. This it was particularly ill-equipped to deal with the credit crunch and was left with weak economic foundations such as its banks.

Some better news

This was to be found in yesterday’s production numbers.

In November 2016 the seasonally adjusted industrial production index increased by 0.7% compared with the previous month. The percentage change of the average of the last three months with respect to the previous three months was +0.9.

The calendar adjusted industrial production index increased by 3.2% compared with November 2015

As you can see these were good numbers although not so good for economists whose expectations so often misfire. As the Financial Times pointed out there was a positive change in response to this.

Economists at Barclays have doubled their projected fourth quarter growth forecast for the eurozone’s third largest economy to…0.2 per cent…….. GDP growth is now expected to clock in at 0.2 per cent from an earlier projection of 0.1 per cent in the three months to December,

If you really want to big this up then you can say that the expected growth rate has doubled! Of course the issue is that it is so low and that even this would be a reduction on the 0.3% achieved in the third quarter of 2016. For a little more perspective imagine the outcry if a post EU vote UK had grown like that, twitter would have been broken.

The Labour Market

The data here is far from positive however as on Monday we were told this.

In November 2016, 22.775 million persons were employed, +0.1% compared with October. Unemployed were 3.089 million, +1.9% over the previous month……..unemployment rate was 11.9%, +0.2 percentage points in a month and inactivity rate was 34.8%, -0.2 percentage points over the previous month.

This is the Italian equivalent of a Achilles Heel and separates it from the general Euro area performance where the unemployment rate has been falling and is now at 9.8%. In fact it was one of only four European Union states to see an annual rise in its unemployment rate and we should make a mental note that Cyprus was another as this does not coincide with the message that the bailout was a triumph. Returning to Italy there was more bad news in the detail of the numbers.

Youth unemployment rate (aged 15-24) was 39.4%, +1.8 percentage points over October and youth unemployment ratio in the same age group was 10.6%, +0.7 percentage points in a month.

I hope these sort of numbers do not lose their ability to shock us and also note that time matters here as Italy is in danger of seeing a lost generation as well as a lost decade. So many must have no experience of what it is like to work.

Consumer Inflation

The last week or so has seen quite a few nations recording a pick-up in inflation in December so we see yet another area where Italy is different.

In December 2016, according to preliminary estimates, the Italian harmonized index of consumer prices (HICP) increased by 0.4% with respect to the previous month and by 0.5% with respect to December 2015 (from +0.1% in November 2016).

Yes there was a rise but to a much lower level and in terms of Italy’s own CPI prices fell in 2016 overall albeit by only 0.1%. So as we observe low rates of economic growth we see that Italy is in fact quite near to deflation which for me would be signaled by falling output and prices.

Italian consumers are unlikely to be keen on the rising inflation level such as it is because it was mostly fuel and food driven.

House Prices

Here is another difference as you might think that an official interest-rate of -0.4% and 1.5 trillion Euros or so of bond purchases in the Euro area would lead to house price rises. That is of course true in quite a few places but not in Italy.

In the third quarter of 2016: – the House Price Index (see Italian IPAB) increased by 0.1% compared to the previous quarter and decreased by 0.9% in comparison to the same quarter of the previous year (slightly down from -0.8 registered in the second quarter of 2016);

So not much action at all and in fact Italy has been seeing house price disinflation. The official index has done this after being set at 100 in 2010. It has gone 102.4 (2013), 100.1 (2014), 98.6 (2015) and 97.4 in the third quarter of last year.

So good for first time buyers and in many ways I think more welcome than the UK situation but surely not what the Italian President of the ECB Mario Draghi had planned.

The banks

This is a regular theme as well and I covered the Monte Paschi bailout on the 30th of December and apart from a debate as to how bad the bad loans are there is little change here. Yes the same bad loans which we were told were such great value only a couple of months or so ago. Also Unicredit is continuing with its 13 billion Euro capital raise confirming the view I expressed on Sky Business News just over 5 years ago. Eeek! Where did the time go?

http://www.mindfulmoney.co.uk/mindful-news/unicredit-collapse-the-invasion-of-zombie-banks/

We do have some news on this subject and it does raise kind of a wry smile.

UBI Banca, Italy’s fifth-largest bank by assets, has been cleared to buy for €1 the rump of three lenders rescued by the state in the latest step in Italian bank consolidation. UBI made the offer for Marche, Etruria and Carichieti to the state bank resolution fund on the condition the so-called good banks are stripped of €2.2bn in bad loans. ( Financial Times).

Oh and 1 Euro may turn out to be very expensive if you read my 30th of December post and the relationship of Finance Minister Padoan with reality and honesty.

Pier Carlo Padoan, finance minister, told lawmakers in Rome he was “convinced” the deal was good for the bank in question and confidence in the Italian banking system.

The discussion these days turns a lot to those bad loan ratios and how much of them have been dealt with. As ever there appears to be some slip-sliding-away going on.

Comment

The simplest way of looking at Italian economic performance this century is to look at economic growth and then growth per head. Sadly we see that GDP of 1555.5 billion Euros in 2000 ( 2010 prices) was replaced by a lower 1553.9 billion in Euros in 2015. But the per head or per capita performance was much worse as the population rose from 57.46 million in 2000 to 60.66 million at the end of 2015.

It is that economic reality which has weakened the banks (albeit with not a little corruption thrown in) and also led to the problems with the national debt about which we have also learned more today.

Italian General Government Debt (EUR) Nov: 2229.4B (prev 2223.8B) ( h/t @LiveSquawk )

The bond vigilante wolf is being kept from the door by the amount of bond purchases being made by the ECB.

What hope is there? Perhaps that the unofficial or unregulated economy is larger than we think. Let us hope so as Italy is a lovely country. But in contrast to Germany which I analysed on Monday the level of the Euro looks too high for Italy.

 

 

 

When will the Riksbank of Sweden cross it’s own Rubicon?

This week is posing more than a few questions for the pattern of world monetary policy and it is only Thursday morning. It is hard not to have a wry smile at my own country where the Governor of the Bank of England Mark Carney was busy talking the UK Pound £ down yesterday as well as performing a hand brake U-Turn and I believe a hand stand only to be well,Trumped later! We will have to see how that settles down as those selling the Pound ( Morgan Stanley and Deutsche Bank) have seen their stops fired off this morning and the Financial Times twitter feeds have stopped its regular mentions of its level.

However we are going to continue on what might be called our grand tour to Europe and pop over to the Kingdom of Sweden which of course is a familiar stopping point for me. The reason for that is the extraordinary monetary experiment which is taking place there which is approaching the zone where there should be ch-ch-changes. This morning they have updated us with their monetary policy minutes so let us take a look.

Riksbank

Policy is summarised below.

All of the Executive Board members assessed that it was now appropriate to hold the repo rate unchanged at –0.50 per cent and to reinvest maturities and coupon payments on the government bond portfolio until further notice…….Moreover, a majority of the Executive Board members considered that the risks to the upturn in inflation call for a continuation of the government bond purchases during the first half of 2017 and that they should be extended by SEK 30 billion, corresponding to SEK 15 billion in nominal bonds and SEK 15 billion in real bonds.

Newer readers will be beginning to see my interest as we see something of a full house of negative interest-rates, QE (Quantitative Easing) government bond purchases and an Operation Twist style reinvestment of maturing bonds. In short even Paul Krugman of the New York Times can call them “sadomonetarists” although of course my avoidance of politics means I can only rarely mention him these days although I suppose I can point out his current plan to boost the US economy by buying some bathroom fixtures.

So we see that the monetary pedal is close to the metal although it would seem that the Riksbank has dropped its threat/promise to intervene in foreign exchange markets. although we do have some Forward Guidance.

Increases in the repo rate are not expected to begin until the beginning of 2018.

Care is needed though as Riksbank Forward Guidance has had all the success of Forward Guidance from the Bank of England.

Inflation is on its way

This morning Sweden Statistics has told us this.

In December 2016, the inflation rate according to the Consumer Price Index (CPI) was 1.7 percent, up from 1.4 percent in November. The CPI rose by 0.5 percent from November to December 2016.

If you are wondering why well it is not a particular surprise.

mainly due to a rise in prices for transport services (9.1 percent), which contributed 0.3 percentage points.

There were other effects of the higher price of oil (package holidays were 4.8% more expensive) and the cost of food rose. So in terms of essential goods ( food and fuel) inflation is particularly rising although of course central bankers consider these to be non-core. If you try to allow for the initial effects of the official negative interest-rate then you see this.

The inflation rate according to the CPIF (CPI with a fixed interest rate) was 1.9 percent in December, up from 1.6 percent in November.

All this matters because this is badged as the modus operandi of the Riksbank.

More precisely, the Riksbank’s objective is to keep inflation around 2 per cent per year.

No doubt you are seeing the point which is that the level of consumer inflation is plainly on its way into that zone in 2017. Also you may note a difference from the ECB (European Central Bank) which aims to keep it just below 2%. So the Riksbank has an easier target and if you like has a little “wriggle” room.

House Prices

Extraordinary monetary policy is often accompanied by a rise in asset prices of which house prices are an example so let us examine today’s data.

Real estate prices for one- or two-dwelling buildings increased by almost 1 percent in the fourth quarter 2016, compared with the third quarter. Prices increased by almost 10 percent on an annual basis during the fourth quarter of 2016, compared with the same period last year.

A driving force in this is the availability of mortgage credit which of course is one of the objectives of the Riksbank. Central bankers love to “pump it up”.

The downturn was mainly due to housing loans, with an annual growth rate of 7.8 percent in November, which was a decrease of 0.1 percentage points compared with October.

It is revealing that an annual growth rate of 7.8% is a downturn isn’t it? If you want it in monetary terms here it is.

Housing loans amounted to SEK 2 882 billion in November, which is an increase of SEK 17 billion compared with the previous month and SEK 209 billion compared with the same month last year.

Also you may note as we have observed before that you can push the cost of mortgage credit lower but it then appears to find something of a floor. After all we cannot harm the “precious” can we?

The average interest rate for housing loans for new agreements was 1.57 percent in November, which means that it dropped compared with October, when it was 1.59 percent.

Comment

There is much to consider here but first let me give you a clear example of the alternative universe which is inhabited by central bankers and their ilk.

Another positive in November was food prices continuing to rise and surprise on the upside.

The only group that should be welcoming this is farmers! Everyone else will be disappointed in the rise of a commodity so essential that it is called “non-core” by central bankers.

If we move to monetary policy then there are echoes of the situation in the Czech Republic that I analysed on Tuesday as we see another country where inflation had a strong December. Oh and I did mention the Riksbank’s poor Forward Guidance performance didn’t I?

Inflation therefore continues to surprise on the downside,

Now they are in danger of being wrong-footed as they continue with negative interest-rates and more QE designed to push inflation higher just as it approaches its target. In my opinion they are rather like Julius Caesar when he crossed the Rubicon as not only is inflation rising but economic growth looks solid.

A growth rate of 3.4 per cent is expected this year, a tenth higher than in the October forecast. Growth for 2017 has been revised upwards by 0.4 percentage points to 2.4 per cent.

Also they expect that the performance of the Krona in 2016 will further boost inflation.

The impact of the exchange rate on inflation has also been analysed. The Swedish krona has recently been unexpectedly weak.

Thus we find ourselves arriving at one of my earliest topics which was and is how central banks will reverse the extraordinary monetary policies they have implemented or more simply what is their exit strategy? So far Life’s Been Good for Sweden and the Riksbank but Joe Walsh also has a warning.

I go to parties sometimes until four
It’s hard to leave when you can’t find the door