Will commodity price rises trigger inflation in 2018?

As we begin our journey into 2018 then there has been one clear trend so far as Bloomberg has pointed out this morning.

The Bloomberg Commodities Spot Index, tracking the price of 22 raw materials, jumped to its highest since December 2014 on Thursday. The gauge has risen for a record 14 days in a row.

If we take a look at the underlying data we see that the index has rallied from just below 340 on the 11th of December to 361 as I type this and it has been pretty much one-way traffic. So perhaps ripe for a correction in the short-term but if we look further back we see that it is up 8% on a year ago and that this stronger phase began just under 2 years ago in mid January 2016 when the index dipped below 255. This leaves us with an intriguing conclusion which is that the commodities index saw a strong rally in 2016 just as we were being told inflation was dead as mainstream analysis looked back on the previous downwards trend.

Bloomberg is upbeat on the causes of this recent phase.

The strongest manufacturing activity since the aftermath of the global financial crisis is slowly draining commodities surpluses, sending prices to a 3-year high as investors pour money into everything from oil to copper.

“Rarely has the outlook for a New Year been as encouraging as it is today,” said Holger Schmieding, chief economist at Berenberg Bank in London.

With factories around the world humming, demand for raw materials is fast increasing.

That is an upbeat way of looking at the issue although of course it omits something that in other articles they tell us is important which is the use of finite resources. We get however a clue to their emphasis from this.

Where to make Big Money in Commodities, Energy

I particularly like the way that Big Money is in capitals. Anyway well done to those who had stockpiled commodities. Also there may be a misprint about the chief economist of Berenberg Bank being in London as of course Bloomberg readers will have been told that all such jobs have gone to Frankfurt although they may be further confused by the brand new shiny Bloomberg offices in London! Moving to the Financial Times we also see that good economic news is on their minds.

Markit’s global survey of manufacturing activity rose to a near seven-year high in December, fuelling optimism that 2018 could be another year of strong growth.

Crude Oil

The rally here poses something of a problem for economics/finance themes because as regular readers will recall we were told that the advent of shale oil production would prevent price rises. One part of the analysis was true in that they have indeed produced more oil.

The U.S. Energy Information Administration (EIA) expects U.S. crude oil production to have averaged 9.2 million bpd for all of last year. It expects U.S. crude oil production to average an all-time high of 10.0 million bpd this year, which would beat the current record set in 1970. ( OilPrice.com)

That is of course more than awkward for those who put Peak Oil theories forwards in the 1970s for a start. Moving back to the current oil price what was not forseen was that OPEC will not only announce production cuts but actually go through with the announcements leading to this.

however, oil prices rose steadily in the fourth quarter of 2017 to end the year at above $60 per barrel WTI and $66 per barrel Brent.

Brent Crude Oil nudged over US $68 per barrel earlier today or as high as it has been for two and a half years. At such a level we see that there is good news for oil producers of all sorts.Firstly there must be something of a bonanza for the shale oil producers with the cash flow style business model we have previously analysed. But also there will be all sorts of gains for the more traditional oil producers in the Middle East as well as Canada and Russia. There has been an irony in that the pipeline shutdown for the UK Forties field meant that Brent production could not benefit from higher Brent prices but that is now over.

Inflation

Last September an International Monetary Fund ( IMF) working paper looked at how oil price moves affected inflation.

 We find that a 10 percent increase in global oil inflation increases, on average, domestic inflation by about 0.4 percentage point on impact, with the effect vanishing after two years and being similar between advanced and developing economies.

There was also some support for those who think that the effect is stronger when prices rise.

We also find that the effect is asymmetric, with positive oil price shocks having a larger effect than negative ones

The results also vary from country to country as the impact on the UK is double that of the impact on the United States although this may be influenced by 1970s data when the UK Pound £ would have acted like the Great British Peso on any oil price rise.

As an aside I would like to remind everyone of the way a surge in the oil price contributed to the economic effects of the credit crunch, something which tends to get forgotten these days. On that road the credit crunch era becomes easier to understand and the establishment mantra which this IMF paper repeats becomes more questionable.

The has declined over time, mostly
due to the improvement in the conduct of monetary policy.

A darker road can be found if we look at the impact of bank commodity trading desks back then because if as I believe they drove oil prices higher there is a raft of questions to add to the other scandals we have seen such as Li(e)bor and foreign exchange rigging.

Metals

There has been a raft of news about these hitting new highs and let us start with what Dr,Copper is telling us.

Copper gained 30%  in 2017 as it continues to recover from six-year lows struck early last year……… Measured from its multi-year lows struck at the beginning of 2016, copper has gained more than 70% in value. ( Mining.com)

Palladium has been hitting all-time highs this week. If we look deeper we see that metals prices have been rising overall as the CRB metals index which was conveniently at 800 this time last year is at 912 as I type this.

Comment

There are various factors to consider here but let me open with a word not in frequent use in the credit crunch era which is reflation. We are seeing a stronger economic phase ( good although there is the underlying finite resources issue) but how much of this higher demand will feed into inflation may be the next question? There have been signs of Something Going On as Todd Terry would put it. From the Composite PMI or business survey for the Euro area.

The pace of inflation signalled for each price
measure remained strong relative to their long-run
trends, however, and among the steepest seen over
the past six-and-a-half years.

Also for the UK services sector.

Input price inflation reached its highest level since
last September, with service providers noting
upward pressures on costs from a wide range of
sources.

Moving to a different perspective some seem to be placing their betting chips in the US according to the Financial Times.

Investors pour money into funds that protect against inflation

Also there will be wealth and GDP shifts in favour of commodity producers and from those that consume them. The obvious beneficiary is much of the Middle East but others such as Australia, Canada and Russia will be smiling and that is before we get to the US shale oil producers who have been handed a lifeline. It also reminds me that the Chinese effort to get control of commodities around the world and particularly in Africa looks much more far-sighted than us western capitalist imperialists have so far managed. That is something which will particularly annoy Japan which of course is a large loser as commodity prices rise due to its lack of natural resources as its own more violent and aggressive efforts in this field badly misfired in the 1940s.

Advertisements

UK unsecured credit continues to flow unlike business lending to SMEs

Today gives us our first main insights into the UK economic trajectory so let us start off with a familiar issue. From the Nationwide Building Society.

UK annual house price growth ended 2017 at
2.6%, compared with 4.5% in 2016

So a slowing as we expected here although there were fewer cases of actual falls than I thought that there might be.

London saw a particularly marked slowdown, with prices
falling in annual terms for the first time in eight years, albeit by a modest 0.5%. London ended the year the weakest performing region for the first time since 2004.

So far house price falls are primarily a London thing as we wait to see if it will prove to be a leading indicator one more time or if you prefer the canary in the coal mine. If we return to the national picture we see that overall for the first time in a while house price growth and wage growth are similar albeit that the former still slightly edges the latter. A period of this ( or even better wage growth exceeding house price growth) would be good but somehow as ever the UK establishment seems to have other plans.

Certainly plenty of help seems to be needed as this from Henry Pryor infers.

Still struggling with this;- 3,858 first time buyers earning over £100k appear to have had Help2Buy..

Apparently according to @Andrew_J_Carter life on over £100k requires help although he has figured out what Abba would call the name of the game.

My household earns over £100k a year. We can’t afford a house (no money from parents for deposit), why shouldn’t we be entitled to Help to Buy, given the sole intent of the Government is to drive house prices up?

This brings us to regional differences as we get a new look at an issue we have discussed many times.

The picture that emerges is that this ‘typical buyer’ moves
up the income spectrum as you move from the north to the
south of the country. In Scotland and the North of England,
this buyer would lie in the 30th income percentile, while in
the South East they would be at the 80th percentile and
above the 90th percentile in London (the closest percentile
with available data).

So a cautionary note reminding us that the overall picture needs a fair bit of regional refinement especially in Northern Ireland where prices are still 40% below the previous peak. Here is some food for thought for you from the ratio of house prices to earnings for first time buyers. Back in the latter part of 2007 it rose to 8.1 in Northern Ireland and we know what happened next which should make property owners in London mull a ratio which is at 9.8!

As ever there is a general cautionary note that these figures cover only Nationwide customers and whilst it does a fair bit of business it is not the whole market and will for example miss purchases for cash.

Unsecured credit

For newer readers this has been on something of a tear in the UK over the past couple of years and in my opinion eyes cannot avoid turning to the “Sledgehammer QE” and “muscular monetary easing” of the Bank of England in August 2016 as a driver of this phase. If you look back at UK economic history monetary policy easing invariably slips into this area as frankly it is easier for the banks to do than even mortgage lending but especially business lending a subject I will return to in a moment. So where do we stand now? From the Bank of England this morning.

The annual growth rate of consumer credit slowed to 9.1% in November (Table J), the lowest rate since
December 2015. This fall partly reflects a particularly strong flow in November 2016 falling out of the annual
growth rate.

In a way it speaks for itself that 9.1% is the lowest annual rate of growth for a while. Even so it is some 7% higher than the economic growth we have been seeing and also wages growth. We have seen increases of £1.4 billion a month for the last three months which has dropped the annual rate of growth from 10% to 9.1%. So a little better but perhaps only from white-hot to red-hot so far. Also yesterday an annual rate of 6.7% growth seemed high in the Euro area and we are considerably above that.

The brochures for QE and interest-rate cuts never stated they aimed at a surge in unsecured credit did they? In fact we were assured that we were deleveraging until it was impossible to make such claims.

Business Lending

The official reason for at least some of the monetary easing in the UK was to boost lending to smaller and medium-sized businesses or SMEs. How is that going? Well net lending was zero in November which is not untypical. Also there was a clue to a possible answer to a question several of you have asked which is has lending here gone to corporate buy-to-lets? The category including rented or leased real estate rose by a net £100 million.

So as a perspective we have an area where monetary easing was definitely not supposed to go rising by £1.4 billion a month whereas the area where it was supposed to has risen by £0. It is going to require quite a few counterfactuals to cover that chasm I think!

Moving to total’s we see that unsecured credit has risen to £205.8 billion whereas lending to SMEs has stayed at £165.6 billion.

Meanwhile the Term Funding Scheme which provides cheap funding for the banks has grown to £102.8 billion which is a fair rate of growth considering it only started in August 2016. Those who follow my social media output will have noted challenges suggesting this is not a subsidy for the banks. Odd isn’t it that they have taken £102.8 billion of something for apparently no gain to them?

Comment

I am reminded of a past Bank of England Governor who is now called Baron King of Lothbury. He used to regularly give speeches about a “rebalancing” of the UK economy except it was not a rebalancing towards unsecured credit which his successor has managed to achieve. That road has been one which has involved higher house prices (check), balance of trade problems ( check) and one which led to overheating of the economy and interest-rate rises to correct it. In a world where consumer inflation is low and we have only had one interest-rate rise in the last decade the old concept of overheating no longer applies but parts of it can.

If we move to the real economy we see that in spite of the “hokey cokey” style policy of the Bank of England on interest-rates since the EU Leave vote the economy has in fact continued pretty consistently. This morning’s Markit PMI business survey was of a still the same variety.

the survey data are consistent with the economy having grown 0.4-0.5% in the fourth quarter of 2017.

There is an irony in that just maybe some of the rebalancing that Baron King could only dream of during his term of tenure as Governor of the Bank of England may be taking place.

Alongside the solid expansion seen in manufacturing.

If so we are doing better than the raft of annual forecasts released this week would suggest. But there is a potential black swan tucked away in the pack concerning the growth of unsecured credit and in particular its interrelation with the automotive industry. Ironically UK sales only have a relatively minor impact on UK production which is mostly exported but over the seasonal break there were a lot of adverts on the radio for car price cuts or excuse me scrappage schemes which may indicate trouble ahead.

No doubt the Bank of England is “vigilant” but the definition of that word is not what it was……..

 

What are the economic prospects for Germany?

After looking at the strength of the Euro yesterday it is an interesting counterpoint to look at an economy which would otherwise have a much stronger exchange rate. Whilst the Euro may be in a stronger phase and overall pretty much back to where it began in trade-weighted terms ( 99.26%) it is way lower than where a Deutsche Mark would be. For Germany the Euro has ended up providing quite a competitive advantage as who knows to what level it would have soared as we suspect it would have been as attractive as the Swiss Franc. Rather than an exchange rate of around 1.20 to the US Dollar the equivalent rate would no doubt have been somewhere north of 1.50.

That means that the German economic experience of the credit crunch has seen quite a monetary stimulus if we combine a lower than otherwise exchange rate with the negative interest rate of the ECB ( European Central Bank) and of course the Quantitative Easing purchases of German sovereign bonds. If we look at the latter directly then the purchase of 449 billion Euros of German government bonds must have contributed to the German government being able to borrow more cheaply as we note that the ten-year yield is only 0.46% and that Germany is actually paid to borrow out to the 6 year maturity. This is a factor in Germany running a small but consistent budget surplus in recent times and a national debt which is declining both in absolute terms and in relative terms as at the half-way point of 2017 it had fallen to 66% of annual economic output or GDP. So it may not be too long before it passes the Growth and Stability Pact rules albeit over 20 years late! But let us move on noting a combination of monetary expansionism and fiscal conservatism.

The Euro area

Unlike some of the countries we look at and Greece and Italy come to mind particularly the Euro era has been good for the German economy. It opened in 1999 with GDP of 87.7 ( 2010 = 100)  which rose to a peak of 102.6 at the opening of 2008. Like so many countries there was a sharp fall ( 4.5% in the opening quarter of 2009) but the difference is that the economy then recovered strongly to 113.8 in the third quarter of last year. You can add on a bit for the last quarter of 2017 if you like. But the message here is that Germany has recovered pretty strongly from the effect of the credit crunch. Indeed once you start to allow for the fact that some of the economic output in 2008 was false in the sense that otherwise how did we have a bust? You could argue that it has done as well as it did before and maybe better in absolute terms although of course that depends on where you count from. In relative terms the doubt disappears.

Looking Ahead

Yesterday’s Markit PMI business survey could hardly have been much more bullish.

“2017 was a record-breaking year for the German
manufacturing sector: the PMI posted an all-time
high in December, and the current 37-month
sequence of improving business conditions
surpassed the previous record set in the run up to
the financial crisis.

Although there was an ominous tone to the latter part don’t you think?! We have also learnt to be nervous about economic all-time highs. Moving back to the report we see that the German trade surplus seems set to increase further if this is any guide.

Notably, the level of new business received from abroad
rose at the joint-fastest rate in the survey history,
with anecdotal evidence highlighting Asia, the US
and fellow European countries as strong sources of
new orders for German manufacturers.

This morning we saw official data on something that has proved fairly reliable as a leading indicator in the credit crunch era. From Destatis.

In November 2017, roughly 44.7 million persons resident in Germany were in employment according to provisional calculations of the Federal Statistical Office (Destatis). Compared with November 2016, the number of persons in employment increased by 617,000 or 1.4%.

The rise in employment has been pretty consistent over the past year signalling a “steady as she goes” rate of economic growth. It has also led to a further fall in unemployment which is also welcome.

 Adjusted for seasonal and irregular effects, the number of unemployed stood at 1.57 million. It was down by roughly 14,000 people on the previous month. The adjusted unemployment rate was 3.6% in November 2017.

Much better than the Euro area average and better than the UK and US but not Japan which is the leader of this particular pack.

Wages

The next issue is to look at wage growth which as we see so often these days seems to be stuck somewhere around 2% per annum even in countries recording a good economic performance. We have seen plenty of reports of wage growth picking up and maybe you could make a case for it rising from 2% to 2.9% over the past year or so but the catch comes if we look back a quarter as it was 2.9% then!

So real wage growth has been solid for these times in Germany since the opening of 2014 but the truth is that it has been driven by lower inflation rather than any trend to higher wages. In what we consider to be the first world wage growth these days seems to be singing along with Bob Seeger and his Silver Bullet Band.

You’re still the same
Moving game to game
Some things never change
You’re still the same

We therefore find ourselves in another quandary for economics 101 which is that economic improvement no longer seems to be accompanied by any meaningful increase in wage growth. A paradigm shift so far anyway. The official data is only up to the half-way point of last year but according to the Bundesbank “Wage growth remained moderate in the third quarter of 2017” so a good 2017 was accompanied by lower real wage growth as far as we know and this from last week will hardly help.

The inflation rate in Germany as measured by the consumer price index is expected to be 1.7% in December 2017. Compared with November 2017, consumer prices are expected to increase by 0.6%. Based on the results available so far, the Federal Statistical Office (Destatis) also reports that, on an annual average, the inflation rate is expected to stand at 1.8% in 2017.

On this road expansionary monetary policy has a contractionary consequence via its impact on real wages and inflation targets should be lowered. Meanwhile it will be party time at the Bundesbank towers as this is quite close to the perfect level of inflation or just below 2%.

Comment

Let us welcome the economic good news from 2017 and the apparent immediate prospects for 2018. We can throw in that the Euro era has turned out to be good for Germany overall as the lower exchange rate cushioned the effect of the credit crunch and helped it continue this.

The foreign trade balance showed a surplus of 18.9 billion euros in October 2017. In October 2016, the surplus amounted to 18.8 billion euros.

For everyone else there are two problems here. Whilst there are gains from Germany being efficient and producing products which are in worldwide demand a persistent surplus of this kind does drain demand from other countries especially if helped by an exchange rate depreciation of the sort provided by Euro area membership. It was one of the imbalances which fed into the credit crunch and which the establishment told us needed dealing with urgently. So urgent in fact that nothing has happened.

So it looks like Germany will have a good opening to 2017 and first half to the year. But that is as far as we can reasonably see these days and is an answer to those on social media who asked why I did not join the annual forecasts published ( for the UK as it happens) yesterday. If there is to be a cloud in the silver lining then it seems set to come from this.

In the third quarter of 2017, the perceptible expansion
in the broad monetary aggregate M3
continued; the annual growth rate at the end
of the quarter came to 5.1%, remaining at the
level observed over the last two and a half
years ( Bundesbank )

The old rules of thumb may not apply but where is the inflation suggested? Also there is this.

Consumer credit likewise continued to expand
substantially during the period under review,
with its annual growth rate climbing to 6.7%
by the end of September

Those are Euro area figures and the consumer credit growth seems light weight compared to the UK but that is perhaps only because we are an extreme. Moving onto German data there is some specific which seems rather Anglicised.

Once again, loans for house purchase were a
decisive driver of growth in lending to households.
However, their quarterly net increase has
already been relatively constant for several
quarters, meaning that at 3.9%, their annual
growth rate remained unchanged on the year.

The old theories of overheating risks cannot be fully applied because so far at least the wages element has disappeared but that does not mean that some of the other parts have done so. After all procyclical monetary policy usually ends in tears for someone.

The future

With the caveats expressed above this does make one stop and think.

 

The Euro rally has ignored the monetary policy of the ECB

Firstly let me welcome your all to 2018 and wish you a Happy New Year. Although those getting ready for the new Mifid ( ii ) rules still feel a little hungover. This bit looks good.

Brokers will be driven to move transactions in a wide range of securities onto open, regulated platforms, limiting unreported broker-to-broker deals that have been the traditional way to trade things such as commodities, bonds and energy.

This bit however begs more than a few questions.

Europe’s new rules require research to be sold and billed separately. This is very disruptive — as banks and brokers struggle to comply, fund managers rethink how they operate and analysts find themselves forced to prove their worth.

Am I alone in thinking that for more than a few this will prove to be a struggle?

The Euro

If we move to news then in financial markets our attention is attracted to thresholds and we are seeing a period of Euro strength as it rallies above 1.20 versus the US Dollar.

Of course this phase also involves a period of US Dollar weakness on the other side of the coin. This combination does pose a question for what we might call economics 101 as we saw only last month the US Federal Reserve do this.

In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1-1/4 to 1-1/2 percent.

So on an interest-rate comparison basis there would be an argument for a higher US Dollar as not only is the ECB ( European Central Bank) deposit rate at -0.4% it has no  current plans to raise it and its President Mario Draghi has hinted several times that there may be no rise in his term. Also there is a difference in terms of QE ( Quantitative Easing) as the US Federal Reserve is beginning to reduce its holdings albeit very slowly whereas the ECB will continue to purchase a further 30 billion Euros a month until at least September. Thus whilst the ECB has reduced the size of its monthly purchases it remains a buyer as the Federal Reserve sells. Back in the day one of the “truths” so to speak of QE was considered to be that it would weaken a currency and yet it is hard not to have a wry smile as we observe exactly the reverse.

Trade Weighted

Actually the pattern here is very similar to that of the chart above showing the US Dollar. The recent rally started in the spring from just below 93 and now is above 99. Whilst there will be individual moves it is time for another wry smile as we note that for all the panics and shocks the Euro is very close to the 100 at which it was first measured in 1999.

As we have looked at several times before this reduces the inflation  trajectory and according to the Draghi Rule from March 2014 will have this impact.

Now, as a rule of thumb, each 10% permanent effective exchange rate appreciation lowers inflation by around 40 to 50 basis points.

This leaves us with something of a conundrum as the ECB is below its inflation target so will now presumably have to run a more easy monetary policy than expected which ordinarily should weaken the Euro, but so far we have seen the reverse.

Why is the Euro in a stronger phase?

A major strategic strength for the Euro is provided by this.

The current account of the euro area recorded a surplus of €30.8 billion in October 2017 (see Table 1). This reflected surpluses for goods (€26.2 billion), primary income(€9.8 billion) and services (€7.3 billion), which were partly offset by a deficit for secondary income (€12.5 billion). ( ECB data).

This continued a pattern which if we look further back is a song with a powerful and consistent beat.

The 12-month cumulated current account for the period ending in October 2017 recorded a surplus of €349.6 billion (3.2% of euro area GDP), compared with one of €363.4 billion (3.4% of euro area GDP) for the 12 months to October 2016.

Whilst balance of payments data remain unreliable as for example we see examples of countries who both think they have a surplus with each other! The Euro area has mostly via Germany run consistent current account surpluses providing support for the currency value.

If economic life was that simple then the Euro would only rise and of course it is not but another factor weighed in during 2017 which was the better economic performance of the Euro area.

We don’t see it as a recovery anymore, but as an expansion. The annual growth rate in the euro area is the strongest for ten years. We expect a GDP growth rate of 2.4% for 2017which by European standards is quite high. Business and consumer confidence are at their highest levels for over 17 years, according to the November reading of the European Commission’s Economic Sentiment Indicator. Seven million jobs have been created in the euro area since mid-2013. ( Benoit Coeure in Caixin General on Saturday).

Indeed he went so far as to imply this is the best period since the Euro began.

The breadth of the expansion in terms of countries and sectors is greater than at any point over the last 20 years.

The better news has been reinforced by the private sector PMI surveys published earlier this morning. From Markiteconomics.

The eurozone manufacturing sector ended 2017 on
a high note. Strong rates of expansion in output, new
orders and employment pushed the final IHS Markit
Eurozone Manufacturing PMI® to 60.6 in December,
its best level since the survey began in mid-1997.

Or as the Black-Eyed Peas would put it.

I got that boom, boom, boom
That future boom, boom, boom
Let me get it now

The outlook looks bright as well/

Forwardlooking indicators bode well for the New Year: new orders rose at a near-record pace, while purchasing
growth hit a new peak as firms readied themselves
for higher production. Meanwhile, job creation was
maintained at November’s record pace.

There was particular optimism for Germany which means the official data series will have to do quite a bit of catching up to play the same song. Also it was nice to see Greece simply recording an expansion as that has been so so rare there.

Comment

There is a fair bit to consider here but we are seeing a phase where the better economic performance of the Euro area is outweighing relative interest-rates for currency investors. The economic good news is problematic at a time of lower inflation as the ECB continues with both a negative interest-rate and monthly QE at a time of this.

The annual growth rate in the euro area is the strongest for ten years.

There have of course been better decades but even so the ECB is out on something of a limb here. They may yet regret not putting asset prices into the inflation measures and more than a few policymakers may be grateful that the higher Euro is putting a bit of a brake on things.

Meanwhile a stronger Euro is as I pointed out a little while back releasing a little of the pressure on the Swiss Franc as the exchange rate between the two at 1.17 edges its way back to the 1.20 floor of three years ago.

Does every silver lining need a cloud? Well a dark cloud is certainly provided by this from the Financial Times.

Now it says the “restatement of the financial statements of Steinhoff Investment Holdings Limited for years prior to 2015 is likely to be required and investors in Steinhoff are advised to exercise caution in relation to such statements”

The cake trolley at the Bank of Finland will no longer be arriving at the desk of whoever decided that Steinhoff was a good investment for the corporate bond QE programme.

 

 

Will the “madness and delusions” of 2017 carry on next year?

Let me open by wishing you all a very Merry Christmas. This morning has brought back an old friend in a way as the UK stock market used to regularly celebrate December with a Santa Rally and yesterday brought a move to an all time high of above 7600 for the FTSE 100 equity index.  We will see if another push higher on the last (half) trading day before Christmas happens. But in many ways equity markets have been eclipsed in 2017 in spite of their sequence of higher highs and now we have seen the icing on the cake I think.

There was a time when the Long Island Ice Tea company at least to me meant a bar in Covent Garden which was fashionable and popular. Well that is just such old era thinking now as I present this. From Bloomberg.

Long Island Iced Tea Corp. shares rose as much as 289 percent after the unprofitable Hicksville, New York-based company rebranded itself Long Blockchain Corp. It’s the latest in a near-daily phenomenon sweeping the stock market, where obscure microcap companies reorient to focus on some aspect of the mania sparked by bitcoin’s 1,500 percent rally this year.

If we look back we see that the share price had fallen from a high of US $6.68 in June to US $1.70 on the 12th of this month. Presumably the fall was caused by the losses which according to CNBC give it a share price to earnings ratio of -4.21 and a Return on Equity of 554%. Anyway from the 12th there was a minor rally which presumably came from some sort of leak of the proposed plan if plan is the right word and then boom.

Let me take you to their website.

Long Island Iced Tea Corp. (NasdaqCM: LTEA) (the “Company”), today announced that the parent company is shifting its primary corporate focus towards the exploration of and investment in opportunities that leverage the benefits of blockchain technology. …… The Company believes that emerging blockchain technologies are creating a fundamental paradigm shift across the global marketplace, with far reaching applications

I don’t know about you but the concept of ultra vires seems applicable to me here but then we get to something that rally takes me back in time to this.

a company for carrying out an undertaking of great advantage, but nobody to know what it is.

That as the Extraordinary Popular Delusions and the Madness of Crowds is from Charles Mackay describing one part of the South Sea Bubble of the early 1720s. Let us now return to today.

The Company is already in the preliminary stages of evaluating specific opportunities involving blockchain technology. The discussions are only in the preliminary stages but indicate the areas of focus for the Company.

We then get some examples but then are told this.

However, the Company does not have an agreement with any of these entities for a transaction and there is no assurance that a definitive agreement with these, or any other entity, will be entered into or ultimately consummated.

But and there is always a but.

Philip Thomas, Chief Executive Officer of the Company, commented, “We view advances in blockchain technology as a once-in-a-generation opportunity, and have made the decision to pivot our business strategy in order to pursue opportunities in this evolving industry

We can at least agree that going from tea to blockchain is indeed a pivot. As to the share price well those who paid over US $9 may already be experiencing the sort of hangover the Long Island Iced Tea Bar used to give me. The actual financial position will not ease it. From Bloomberg.

Long Island Iced Tea had a net loss of $3.9 million on sales of $1.6 million in the three months ended Sept. 30. The company has lost $11.6 million on sales of $3.9 million in the first nine months of the year.

As to assets well there is this.

The company has reserved the web domain name www.longblockchain.com

Until this happened I was only vaguely aware of other developments.

Future FinTech Group Inc. — until May known as SkyPeople Juice International Holding –soared more than 215 percent after a CNBC anchor called attention to its business. The stock was up 9 percent at the time of the tweet, only to take off in what has become the norm in stocks that merely mention “fintech” or “crypto” in their names. ( Bloomberg )

This gets very potentially murky as the fear is that this sort of thing ( “media leak”) can be part of a planned process. Anyway the share price high of 8.2 has after only a couple of days been replaced by 3.25.

Bitcoin

The last few days have seen quite a decline for Bitcoin. It was only on Sunday it nearly reached US $20k at least according to Bitfinex whereas this morning it has dropped as low as US $12110. Quite where this leaves the posse of amateur investors who have piled in I am not sure but I do worry about this development.

“We’ve seen mortgages being taken out to buy bitcoin. … People do credit cards, equity lines,” said Borg, president of the North American Securities Administrators Association, a voluntary organization devoted to investor protection. Borg is also director of the Alabama Securities Commission.

Sadly Borg did not say that resistance is futile or that we will all be assimilated however he did come up with an excellent line which is that.

innovation and technology will always outrun regulation

As usual the Bitcoin price is proving to be very volatile and is now back over US $14,000 as I type this. But blockchains don’t seem quite what they were although of course it is all a question of perspective as on a monthly quarterly or annual basis Bitcoin has soared.

Comment

As we look back it has been an extraordinary year. Just as we were wondering about bubbles in house prices as well as bond and equity markets we saw Bitcoin surge past them all in this regard. As ever Lewis Carroll was way ahead of time

“you see, so many out-of-the-way things had happened lately, that Alice had begun to think that very few things indeed were really impossible.”

Meanwhile there was some seasonal cheer for the UK economy as annual economic ( GDP) growth was revised upwards from 1.5% to 1.7%. However this was not quite so seasonal.

global growth negative in October & flat in September according to CPB: . The & half-year prediction of 3% growth in 2017 as usual now looks wild! ( @RebeccaAHarding )

I will be back in the New Year so let me wish you all a Happy New Year as well. By then I will be able to report on my rebranding on Twitter as Notayesmansecon Blockchain 🙂

 

 

The UK Public Finances continue to see plenty of meddling

As we approach Christmas we find that the news flow on the UK economy has not abated and in particular factors which will impact the public finances. For example yesterday the Agents of the Bank of England reported this.

Pay growth had risen slightly. A significant number of contacts expected pay awards to increase towards 2½%–3½% over the next year, from 2%–3% in 2017. That uplift showed some signs of coming through for the minority making decisions in late 2017.

So perhaps an uptick in taxes on income especially if we note that a different view was expressed compared to last week’s employment data.

Employment intentions continued to point towards modest
headcount growth. Recruitment difficulties continued to intensify, becoming more broadly based across sectors and skill levels.

We will have to see if the dip in employment ( after a period of substantial growth) continues or as the Agents suggest reverses. If the Agents are correct then the yield from income tax should be rising in 2018. One noticeable factor here though is how much less impact on wages “recruitment difficulties” has compared to the past.

Continuing with the same theme the Agents are bullish for manufacturing prospects.

Domestic manufacturing output had continued to grow relatively strongly; export volumes had strengthened, supported by an improving global economic outlook.

This continues the positive view expressed by the Confederation of British Industry or CBI on Monday.

Manufacturing order books were close to a 30 year high in the three months to December, according to the latest monthly CBI industrial trends survey……..Output growth was steady at a brisk pace in the three months to December, at a rate that was far above the long-run average.

Mind you we often find that there is contradictory data and this morning we see that the “strong overall order books were driven by Motor Vehicles and Transport Equipment, and Mechanical Engineering sectors,” of the CBI has somehow morphed into this.

The number of cars made in British factories last month and destined for the UK market plunged 28% to 24,276 according to the Society of Motor Manufacturers and Traders (SMMT)…….Overall, car production fell 4.6% in November, as 161,490 cars left UK factories.

Exports were in fact up a little as we are reminded again that we essentially export our car production. But we are also reminded that domestic car sales are weak although not as weak as directly implied as October saw some over production for the state of the market.

Retail Sales

This is a crucial area for indirect taxation but the mists are not cleared much by this weeks data which gives plenty of scope for the apocryphal two-handed economist to be at play. First the CBI from yesterday.

The survey of 109 firms, of which 56 were retailers, showed that in the year to December, retail sales and orders continued to rise, although both disappointed expectations of somewhat stronger growth.

However hot on its heels came this today from Gfk.

It has been a slipping and sliding year. The Overall Index Score has slipped from – 7 in January to -13 in December – and not a single positive score in between. In fact, we have not been in positive territory for nearly two years.

So on the one hand up and on the other down! The problem for Gfk is that their two years of declines includes last autumn which turned out to be a particular boom period for UK retail sales.

Debt Costs and QE

It is often forgotten what an extraordinary influence the QE ( Quantitative Easing) era has had on what it costs the UK to pay for its debt. Let me give you some numbers as an illustration. Earlier this month we issued some thirty-year debt for a yield of 1.8% whereas if we look back at old era thinking by places like the OBR we would have expected to pay some 3% more. So if conventional Gilt issuance is £90 billion this year the “saving” is £2.7 billion a year going forwards. Soon mounts up doesn’t it?

Actually the “saving” will be higher in 2019 and 20 not because we are about to borrow more but because there are larger Gilt redemptions and subsequent refinancing in those years.

Just to be clear this is a rule of thumb estimate as for example we may issue more or less index-linked stock which requires different calculations and was not included in the Bank of England QE purchases. Ironically the recent phase of higher inflation and specifically inflation as measured by the Retail Price Index has raised the cost of index-linked debt.

The IMF is downbeat

If we skip the politics in the IMF report of yesterday there is an acknowledgement of a future issue.

The Office for Budget Responsibility (OBR) projects that annual spending on healthcare, long-term care and pensions is projected to increase by 1 percent of GDP between 2020 and 2025, and by much more thereafter.

Whilst the first rule of OBR Club is likely to apply there are issues associated with an aging population which of course will affect pretty much every country. Also we get an estimate of economic growth on the public finances.

 each 1 percentage point decline in GDP is estimated to decrease net revenues by about 0.4 percent of GDP.

Today’s data

This can be regarded as steady but unspectacular.

Public sector net borrowing (excluding public sector banks) decreased by £0.2 billion to £8.7 billion in November 2017, compared with November 2016…….Public sector net borrowing (excluding public sector banks) decreased by £3.1 billion to £48.1 billion in the current financial year-to-date (April 2017 to November 2017), compared with the same period in 2016.

This is a better performance than you might think as there were factors which flattered 2016 and also meant that the first rule of OBR Club has applied yet again. Also the cost of our index-linked debt has risen due to the rise in inflation seen and this will be a major part of the £5.4 billion rise in debt costs so far this fiscal year.

Comment

I thought that today I would do it in number crunching style and if there is anything in theme with my reports on all my reports on the misrepresentations this is it.

As of the end of October 2017, English HAs’ net debt amounted to £65.5 billion, which from November 2017 will no longer be counted as public sector debt. Further, public sector net borrowing has fallen by around £0.3 billion a month as a result of this reclassification. ( HA = Housing Association)

At the stroke of a pen. But you see the Bank of England has been acting in the opposite direction particularly in the blundering way it tripped over the rules with its Term Financing Scheme.

Since November 2016, the debt associated with Bank of England increased by £95.7 billion to £160.3 billion. Nearly all of this growth is due to the activities of the Asset Purchase Facility, including £86.8 billion from the Term Funding Scheme (TFS).

It is a coincidence that they offset or at least I think so!

Meanwhile here is a candidate for not getting a job involving numbers.

This tax has been estimated as £7 million per month based on forecasts made by the Office for Budget Responsibility (OBR), with £56 billion recorded in the financial year-to-date.

Not even Bitcoin has managed that rate of growth.

 

 

Can the central banks wean themselves off their monetary addictions?

As 2017 comes to a close and we start to look forwards into 2018 many central banks are finding themselves at something of a crossroad and maybe a nexus. This is driven by two factors of which the first is welcome in that 2017 has been a good year for the world economy overall. The second is that central banking policy has been pro rather than anti-cyclical. What I mean by this is that policy has continued to be expansionary into better times rather than following the philosophy of “taking away the punch bowl as the party gets started”. The danger on this road is the “irrational exuberance” warned about by former US Federal Reserve Chair Alan Greenspan although the more modern development is to question what is irrational about front-running central banks?

Riksbank

According to the Riksbank of Sweden things are going rather well.

 Economic activity is strong and the employment rate is high.

Putting that another way the economy expanded by 0.8% in the third quarter of this year making it 3.1% larger than a year before and according to the Riksbank.

Although inflation has now been close to 2 per cent for some time, prior to this it was below the target for a long time.

There is an implication here of catching up “lost inflation” which appears every now and then from central bankers on this side of the debate whereas you do not hear them wanting to rebalance an inflation excess. If we look at the next bit we see that the central planners have become addicted to their own policies.

 It has required a great deal of support from monetary policy to bring up inflation and inflation expectations. Economic activity needs to remain strong for inflation to continue to be close to the target. It is also important that the krona does not appreciate too quickly.

This returns me to my subjects of Monday and Tuesday where I looked at economic statistics as the Riksbank here will be looking to tell people that “economic activity” is “strong” whilst in fact operating to make them poorer via higher inflation!

As to monetary policy well strong economic growth and inflation on target means that negative interest-rates seem to be from a universe far,far away.

The Executive Board of the Riksbank has therefore decided to hold the repo rate unchanged at −0.50 per cent and is expecting, as before, to begin slowly raising the repo rate in the middle of 2018

As you can see the response to talk of a change is, definitely maybe. What about QE? Here we see a fascinating development with a serve that ends up with more top-spin than even Rafa Nadal can manage. You see QE ( Quantitative Easing) officially ends with 2017. Except.

In essence, will RAISE the pace of bond buying slightly over the next six quarters (front-load) vs recent quarters. ( h/t Danske Bank)

We have got used to up being the new down but now we see that the end is not zero but more. Here is how it works in practice.

Redemptions and coupon payments in the government bond portfolio will be reinvested until further notice. Large redemptions, amounting to around SEK 50 billion, will occur during the first half of 2019. In addition, there are coupon payments totalling around SEK 15 billion from January 2018 to June 2019. To retain the Riksbank’s presence on the market and attain a relatively even rate of purchase going forward, the reinvestments of these redemptions and coupon payments will begin as early as January 2018 and continue until the middle of 2019. This means that the Riksbank’s holdings of government bonds will increase temporarily in 2018 and the beginning of 2019.

I have highlighted the bit which looks like it might have been written by an addict as possible bond redemption buying in 2019 is brought forward to next year. That is a first I think. We have also learnt how to treat the word “temporarily” when it involves monetary expansion haven’t we? Five Star QE.

System addict
I never can get enough
System addict
Never can give it up

Inflation Targets

Regular readers will have noted over time that central banks have switched between inflation targets and economic prospects to justify easy monetary policies. The Riksbank is currently justifying its policy by saying that future inflation looks weak. But there is a catch here in that old relationships do not hold as this from Eurostat yesterday implies.

In the euro area, wages & salaries per hour worked grew by 1.6% and the non-wage component by 1.5%, in the third quarter of 2017 compared with the same quarter of the previous year.

The Euro area boom has seen wage growth slow ( it was 2.1% in the second quarter) so pushing inflation higher runs a high risk of making people poorer. The old relationship(s) between wages and inflation have broken down.

The Bank of France has at least considered something I argue for. From a working paper published yesterday.

Some commentators contend that the Eurosystem should adjust to the “lowflation” environment and lower its inflation target. 

However after a consideration of the situation up is yet again the new down.

As discussed in a current US policy debate, this situation would call for an increase rather than a decrease in the inflation target.

Whilst I have sympathy for the future careers of the three economists concerned it seems that they are in an alternative universe as their response to not being able to reach the current target is to move it further away.

House Prices

Also more than a few may think that the real concern of the Riksbank is this.

the decline in housing prices……..After several years of rapidly rising housing prices, there has been a downswing in recent months.

Bank of Japan

This meets overnight UK time and it too has a fair bit to consider. After all 2017 has been a relatively good year for the Japanese economy. The third quarter saw GDP (Gross Domestic Product) growth of 0.6% making the annual rate of growth 2.1% which is faster than the Bank of Japan thinks it can grow on a sustained basis.If you add in the -0.1% interest-rate and the QE highlighted below by Japan Macro Advisers you might be expecting inflation as a result.

As of December 10 2017, the Bank of Japan held a total of 524.5 trillion yen in assets. Its JGB holding was 420.7 trillion yen, up by 59.1 trillion yen from a year ago.

Yet CPI  inflation was only 0.2% in October and the leading indicator for November ( Tokyo inflation) was only 0.3%.

Some boundaries are being tested here as Nasdaq implies.

The central bank held 40.9 percent of all government debt at the end of September, also the highest on record.

It now also owns around 2.5% of the equity market.

Comment

We find ourselves observing new events as central bankers have not had this sort of economic influence before. Except we need to be careful about our definition of this as whilst it is true in numerical terms as we note negative interest-rates and yields in abundance and ever more purchases of assets in QE programmes. But if we look at inflation rates they remain in so many places below target.  Thus we find central banks clinging to their policies in the hope that this time they will work. The catch is that even the word work may need a redefinition as if they raise inflation but wages do not follow they will have made us worse and not better off. This is before we get to a discussion of all the bubbles they have created.

The one main central bank which is trying to at least steer a new course is the US Federal Reserve and it deserves some credit for that. As to the rest of us the fear is that one day we will have to go cold turkey as a solution to the junkie culture style monetary expansion we see in what we are also told are good economic times.