However much the Tokyo Whale buys wages and consumption seem to struggle

On Wednesday evening the US Federal Reserve will announce its latest policy decision and it will be a surprise if it does not give US interest-rates another 0.25% nudge higher. Yet we see in an example of clear policy divergence other countries ploughing on with monetary easing. For example the European Central Bank continues with monthly QE of 30 billion Euros a month and still has a deposit rate of -0.4%. However the leader of this particular pack is the Bank of Japan especially if we look at other signals of what are known as side-effects. From Bloomberg last week.

That’s the backdrop to Tuesday’s session, when not a single benchmark 10-year note was traded on exchange, according to Japan Trading C0. data. Barclays Securities Japan rates strategist Naoya Oshikubo, summed it up, with perhaps an understatement: “the JGB market was generally thin.”

The latter part is simply part of the Japanese concept of face. One reason for this is the size of the holdings of the Bank of Japan.

The Bank of Japan has vacuumed up so much of the government bond market — in excess of 40 percent — that it’s left fewer securities for others to buy and sell. Some other buyers, such as pension funds and life insurers, also tend to follow buy-and-hold strategies.

The latter sentence there is weak as pension funds and life insurers enact such strategies all over the world and have done so for decades so it is hardly their fault. Indeed quite the reverse s many national bond markets have relied on such purchases.

Whilst we keep being told the Bank of Japan is cutting back the amount of buying remains enormous.

Governor Haruhiko Kuroda noted to lawmakers Wednesday that the central bank has bought 75 percent of the government bonds issued in the fiscal year ending this month.

The next bit contradicts itself as it seems to be claiming that if you buy everything you do not need to intervene. Oops!

The upside for the BOJ is that with such little going on in the market, it makes it easier to control the yield curve, with less need for intervention

The Bank of Japan is the yield curve it would seem which is we step back for a moment begs all sorts of questions. For example you might compare currencies as I have certainly done in the past by comparing bond yields yet in such a calculation there is the implicit assumption that you have a “market” rate. But no, we clearly do not in Japan and that is before we get to the moral hazard of it being set by a body trying to depreciate/devalue the Yen. Oh and if you are a Japanese bond trader you might want to send your CV to the Bank of Japan.

Some jobs might be threatened by automation. But when it comes to government bond trading in Japan, the biggest threat might be the country’s central bank.

The Tokyo Whale

This for newer readers refers to the way that the Bank of Japan has piled into the equity market as well. The numbers are opaque as they are in several accounts but Bloomberg has been doing some number-crunching.

The BOJ started buying ETFs in 2010, with Governor Haruhiko Kuroda later accelerating purchases as part of an unprecedented stimulus package aimed at revitalizing the economy. The central bank had spent $150 billion on Japanese ETFs as of Dec. 8. It owned 74 percent of the market at the end of October, up from 65 percent a year earlier, according to Investment Trusts Association figures, BOJ disclosures and data compiled by Bloomberg. ( ETFs are Exchange Traded Funds)

As the Nikkei-225 equity index fell by 195 points today we know that the Tokyo Whale would have been buying again.

The BOJ stepped up purchases in November after equities retreated, buying 598 billion yen of ETFs.

With there being a buy the dip strategy we can be sure that the Bank of Japan has been buying this year as there have been dips. If we were not sure then this morning’s release of “opinions” from the latest policy meeting reinforce the message.

If the current trends of the appreciation of the yen and the decline in stock prices become prolonged, business fixed investment and consumption will be restrained due to negative wealth effects and a deterioration of households’ and firms’ balance sheets,

Just for clarity the BOJ is breaking new ground here is it really believes that. Not by arguing for “wealth effects” as central bankers the world over are true believers in them. What I mean is the implication that they are larger than other factors at play whereas the evidence I have seen over time is that they are minor and thus often hard to find at all. Looking deeper we see that the BOJ seems to have little intention of changing course although a boundary is on the horizon as some holders must want to keep their ETFs meaning it cannot be long before it has to look for greener pastures.

Perhaps this are suggested last November, from Reuters.

The Bank of Japan should consider using derivatives, rather than buying Japanese stock funds directly as it does now, to affect risk premium on stocks, because that would be a better tool, said the chief investment officer of Japan Post Bank………By selling put options of Japanese stocks, the BOJ should be able to not only help bring down the stock market’s volatility but also to make it easier to wean the markets off its stimulus, said Katsunori Sago, a former Goldman Sachs (GS.N) executive.

Alumni of the Vampire Squid get everywhere don’t they? So the fact that the Bank of Japan’s policies have in effect been a put option for Japanese equities should be added to by writing actual put options. Who would be silly enough to buy these options from the Bank of Japan? It is hard to know where to begin with the moral hazard here.

If the BOJ sells out-of-the-money puts, for example, put option with strike price below the current market levels, it can reduce the market’s volatility, Sago said.

Er simply no. You can reduce perceived or implied volatility but should the market move there is actual volatility. Unless of course Sago san is suggesting that the Bank of Japan should intervene in equity markets on the same scale as it has in bond markets and I think there we have it. Whilst there would presumably be profits for equity holders as much of the Japanese markets are Japanese owned we are in many cases simply shifting from one balance sheet to another.


This is something that fits the famous Churchillian phrase.

 It is a riddlewrapped in a mystery, inside an enigma;

Why? Well it is something which all the buying above should according to economics 101 be on its way down and yet there it is at 106 to the US Dollar. You can argue the US Dollar has been weak but I note that the UK Pound £ has been pushed back to 148 Yen as well. We get a clue from this from the Nikkei Asian Review.

Foreign assets held by Japanese institutional and individual investors appear to have topped 1,000 trillion yen ($8.79 trillion) for the first time, according to Nikkei estimates. The amount has increased roughly 50% during the past five years and now is more than twice as much as the country’s gross domestic product.

The market has been responding to fears of a repatriation much more than any new flows. Also as the BOJ has to some extent driven investors overseas it has undermined its own weak Yen policy. We are back to timing effects where something may be true but for a limited time period, Keynes understood it but modern central bankers lack such humility.


We have looked at the financial economy today but lets us via the “opinions” of the Bank of Japan switch to the real economy.

For instance, although the structural unemployment rate was formerly said to be around 3.5 percent, the actual
unemployment rate has continued to decline and registered 2.4 percent recently.

I imagine each Board Member sipping from their celebratory glass of sake as they type that. But there is a problem as we see below.

Although wage increases by firms have been at around 2 percent for the past few years, real wages registered negative growth in 2017 on a year-on-year basis.

That claim about wage rises is news to me and also the ministry of labor but let us pass that as we note the fall in real wages admitted as we reach the nexus of all of this.

The weak recovery in household consumption since last summer is of concern.

You see one way of looking at the Japanese economy is of deficient domestic demand. So when we are in an official world of wealth effects, plunging unemployment and surging wages ( 2% is a surge in Japanese terms or at least it would be) it should be on the up whereas with a little poetic licence it seems still to be rather Japanese.


What is happening with fiscal policy?

A feature of the credit crunch era has been the way that monetary policy has taken so much of the strain of the active response. I say active because there was a passive fiscal response as deficits soared caused on one side by lower tax revenues as recession hit and on the other by higher social payments and bank bailout costs. Once this was over the general response was what has been badged as austerity where governments raised taxes and cut spending to reduce fiscal deficits. Some care is needed with this as the language has shifted and often ignores the fact that there was a stimulus via ongoing deficits albeit smaller ones.

Cheap debt

Something then happened which manages to be both an intended and unintended consequence. What I mean by that is that the continued expansion of monetary policy via interest-rate reductions and bond buying or QE was something which governments were happy to sign off because it was likely to make funding their spending promises less expensive. Just for clarity national treasuries need to approve QE type policies because of the large financial risk. But I do not think that it was appreciated what would happen next in the way that bond yields dropped like a stone. So much so that whilst many countries were able to issue debt at historically low-levels some were in fact paid to issue debt as we entered an era of negative interest-rate.

This era peaked with around US $13 trillion of negative yielding bonds around the world with particular areas of negativity if I may put it like that to be found in Germany and Switzerland. At one point it looked like every Swiss sovereign bond might have a negative yield. So what did they do with it?


This morning has brought us solid economic growth data out of Germany with its economy growing by 0.6% in the last quarter of 2017. But it has also brought us this.

Net lending of general government amounted to 36.6 billion euros in 2017 according to updated results of the Federal Statistical Office (Destatis). In absolute terms, this was the highest surplus achieved by general government since German reunification. When measured as a percentage of gross domestic product at current prices (3,263.4 billion euros), the surplus ratio of general government was +1.1%.

So Germany chose to take advantage of being paid to issue debt to bring its public finances into surplus which might be considered a very Germanic thing to do. There is of course effects from one to the other because their economic behaviour is one of the reasons why their bonds saw so much demand.

But one day they may regret not taking more advantage of an extraordinary opportunity which was to be able to be paid to borrow. There must be worthy projects in Germany that could have used the cash. Also one of the key arguments of the credit crunch was that surplus countries like Germany needed to trim them whereas we see it running a budget surplus and ever larger trade surpluses.

In the detail there is a section which we might highlight as “Thanks Mario”

 Due to the continuing very low-interest rates and lower debt, interest payments decreased again (–6.4%).


The Swiss situation has been similar but more extreme. Membership of the Euro protected Germany to some extent as the Swiss Franc soared leading to an interest-rate of -0.75% and “unlimited” – for a time anyway – currency intervention. This led to the Swiss National Bank becoming an international hedge fund as it bought equities with its new foreign currency reserves and Switzerland becoming a country that was paid to borrow. What did it do with it? From its Finance Ministry.

A deficit of approximately 13 million is expected in the ordinary budget for 2018.

So fiscal neutrality in all but name and the national debt will decline.

 It is expected that gross debt will post a year-on-year decline of 3.3 billion to 100.8 billion in 2018 (estimate for 2017). This reduction will be driven primarily by the redemption of a 6.8 billion bond maturing combined with a low-level of new issues of only 4 billion.

The UK

Briefly even the UK had some negative yielding Gilts ( bonds) in what was for those who have followed it quite a change on the days of say 15% long yields. This was caused by Mark Carney instructing the Bank of England’s bond buyers to rush like headless chickens into the market to spend his £60 billion of QE and make all-time highs for prices as existing Gilt owners saw a free lunch arriving. Perhaps the Governor’s legacy will be to have set records for the Gilt market that generations to come will marvel at.

Yet the path of fiscal policy changed little as indicated by this.

Or at least it would do if something like “on an annual basis” was added. Oh and to complete the problems we are still borrowing which increases the burden on future generations. The advice should be do not get a job involving numbers! Which of course are likely to be in short supply at a treasury………..

But the principle reinforces this from our public finances report on Wednesday.

Public sector net borrowing (excluding public sector banks) decreased by £7.2 billion to £37.7 billion in the current financial year-to-date (April 2017 to January 2018), compared with the same period in the previous financial year; this is the lowest year-to-date net borrowing since the financial year-to-date ending January 2008.

So we too have pretty much turned our blind eye to a period where we could have borrowed very cheaply. If there was a change in UK fiscal policy it was around 2012 which preceded the main yield falls.

Bond yields

There have been one or two false dawns on this front, partly at least created by the enthusiasm of the Bank of Japan and ECB to in bond-buying terms sing along with the Kaiser Chiefs.

Knock me down I’ll get right back up again
I’ll come back stronger than a powered up Pac-Man

This may not be entirely over as this suggests.

“Under the BOJ law, the finance ministry holds jurisdiction over currency policy. But I hope Kuroda would consider having the BOJ buy foreign bonds,” Koichi Hamada, an emeritus professor of economics at Yale University, told Reuters in an interview on Thursday.

However we have heard this before and unless they act on it rises in US interest-rates are feeding albeit slowly into bond yields. This has been symbolised this week by the attention on the US ten-year yield approaching 3% although typically it has dipped away to 2.9% as the attention peaked. But the underlying trend has been for rises even in places like Germany.


Will we one day regret a once in a lifetime opportunity to borrow to invest? This is a complex issue as there is a problem with giving politicians money to spend which was highlighted in Japan as “pork barrel politics” during the first term of Prime Minister Abe. In the UK it is highlighted by the frankly woeful state of our efforts on the infrastructure front. We are spending a lot of money for very few people to be able to travel North by train, £7 billion or so on Smart Meters to achieve what exactly? That is before we get to the Hinkley Point nuclear power plans that seem to only achieve an extraordinarily high price for the electricity.

One example of fiscal pump priming is currently coming from the US where Donald Trump seems to be applying a similar business model to that he has used personally. Or the early days of Abenomics. Next comes the issue of monetary policy where we could of course in the future see news waves of QE style bond buying to drive yields lower but as so much has been bought has limits. This in a way is highlighted by the Japanese proposal to buy foreign bonds which will have as one of its triggers the way that the number of Japanese ones available is shrinking.

How does Abenomics solve low wage growth?

The last day or two has seen a flurry of economic news on Japan. If we look back it does share a similarity with yesterday’s subject Italy as economic growth in Japan has disappointed there too for a sustained period. The concept of the “lost decade” developed into “lost decades” after the boom of the 1980s turned to bust in the early 1990s. This is why Japan was the first country to formally start a programme of Quantitative Easing as explained by the St. Louis Fed in 2014.

An earlier program (QE1) began in March 2001. Within just two years, the BOJ increased its monetary base by roughly 60 percent. That program came to a sudden halt in March 2006 and was, in fact, mostly reversed.

This is what other western central banks copied when the credit crunch hit ( except of course overall they are still expanding ) which is really rather odd when you look at what it was supposed to achieve.

Inflation expectations in Japan have recently risen above their historical average. The Japanese consumer price index (CPI) in October 2013 was roughly the same as in October 1993. While Japan’s CPI has had its ups and downs over the past 20 years, the average inflation rate has been roughly zero.

The author David Andolfatto seems to have been a QE supporter and hints at being an Abenomics supporter as that was the time it was beginning.

However, some evidence relating to inflation expectations suggests that this time could be different.

We also see something familiar from QE supporters.

Essentially, the argument is that the BOJ was not really committed to increasing the inflation rate…………More generally, it suggests that QE policies can have their desired effect on inflation if central banks are sufficiently committed to achieving their goal. Whether this will in fact eventually be the case in Japan remains to be seen.

In other words the plan is fine any failure is due to a lack of enthusiasm in implementing it or as Luther Vandross would sing.

Oh, my love
A thousand kisses from you is never too much
I just don’t wanna stop

As the CPI index is at 101.1 compared to 2015 being 100 you can see that the plan has not worked as the current inflation rate of 1% is basically the inflation since then. Extrapolating a trend is always dangerous but we see that if the Bank of Japan bought the whole Japanese Government Bond or JGB market it might get the CPI index up to say 103. Presumably that is why QE became QQE in Japan in the same fashion that the leaky UK Windscale nuclear reprocessing plant became the leak-free Sellafield.

Economic growth

The good news is that Japan has had a period of this as the lost decades have been something of a stutter on this front.

But it is still the country’s eighth consecutive quarter of growth – the longest streak since the late 1980s.

Indeed if you read the headline you might think things are going fairly solidly.

Japan GDP slows to 0.5% in final quarter of 2017.

But if we switch to Japan Macro Advisers we find out something that regular readers may well have guessed.

According to Cabinet Office, the Japanese economy grew by 0.1% quarter on quarter (QoQ), or at an annualized rate of 0.5%.

Not much is it and I note these features from the Nikkei Asian Review.

 Private consumption grew 0.5%, expanding for the first time in six months……….Capital expenditures by the private sector also showed an expansion of 0.7%, the fifth consecutive quarter of growth, as production activities recovered and demand for machine tools increased.

Whilst it may not be much Japan is keen on any consumption increase as unlike us this has been a problem in the lost decades. But if we note how strong production was from this morning’s update we see that there cannot have been much growth elsewhere at all.  The monthly growth rate in December was revised up to 2.9% and the annual growth rate to 4.4%.

Troublingly for a nation with a large national debt there was this issue to note.

Nominal GDP remained almost unchanged from the previous quarter, but decreased 0.1% on annualized rate, the first negative growth since the July-September quarter of 2016.

Yes another sign of disinflation in Japan as at the national accounts level prices as measured by the deflator fell whereas of course the nominal amount of the debt does not except for as few index-linked bonds.


There was rather a grand claim in the BBC article as shown below.

Tokyo-based economist Jesper Koll told the BBC that for the first time in 30 years, the country’s economy was in a positive position.

“You’ve got wages improving, and the quality of jobs is improving, so the overall environment for consumption is now a positive one, while over the last 30 years it was a negative one,” said Mr Koll, from WisdomTree asset management company.

One may begin to question the wisdom of Koll san when you note wage growth in December was a mere 0.7% for regular wages and even more so if you note that overall real wages fell by 0.5% on a year before. So his “improving” goes into my financial lexicon for these times. You see each year we get a “spring offensive” where there is a barrage of rhetoric about shunto wage increases but so far they do not happen. Indeed if this development is any guide Japanese companies seem to be heading in another direction.

Travel agency H.I.S Co., for instance, is turning to robotics to boost efficiency and save labor. At a hotel that recently opened in Tokyo’s glitzy Ginza district, two humanoid robots serve as receptionists at the front desk. The use of advanced technology such as robotics enables the hotel, called Henn Na Hotel (strange hotel), to manage with roughly a fourth of the manpower needed to operate a hotel of a similar size, a company official said. ( Japan Times)


As we look at the situation we see that there is something foreign exchange markets seem to be telling us. The Japanese Yen has been strengthening again against the US Dollar and is at 106.5 as I type this. It is not just US Dollar weakness as it has pushed the UK Pound £ below 150 as well. Yet the Bank of Japan continues with its QE of around 80 trillion Yen a year and was presumably shipping in quite a few equity ETFs in the recent Nikkei 225 declines. So we learn that at least some think that the recent volatility in world equity markets is not over and that yet again such thoughts can swamp even QE at these levels. Some of the numbers are extraordinary as here are the equity holdings from the latest Bank of Japan balance sheet, 18,852,570,740,000 Yen.

So the aggregate position poses questions as we note than in spite of all the effort Japan’s potential growth rate is considered to be 1%. However things are better at the individual level as the population shrank again in the latest figures ( 96,000 in 5 months) so per capita Japan is doing better than the headline. If we note the news on robotics we see that it must be a factor in this as we wonder who will benefit? After all wage growth has been just around the corner on a straight road for some time now. Yet we have unemployment levels which are very low (2.8%).

As to the “more,more,more” view of QE ( QQE) we see that some limits are being approached because of the scale of the purchases.

Me on Core Finance TV




What is going on at the Bank of Japan?

It is time to take another step on our journey that Graham Parker and the Rumour would have described as discovering Japan as quite a bit is currently going on. On Tuesday eyes turned to the Bank of Japan as it did this according to Marketwatch.

The central bank cut its purchases of Japanese government bonds, known as JGBs, expiring within 10-25 years and those maturing in 25-40 years by ¥10 billion ($88.8 million) each.

It created something of a stir and rippled around financial markets. There were two pretty clear impacts and the first as you might expect was a stronger Yen which has become one of the themes of this week. An opening level of above 113 to the US Dollar has been replaced by just above 111 and any dip in the 110s will give a sour taste to the Friday night glass of sake for Governor Kuroda.

If we look back to this time last year we see that the Yen is stronger on that measure as back then it was above 114 versus the US Dollar. This may seem pretty poor value in return for this.

The Bank will purchase Japanese government bonds (JGBs) so that their amount outstanding will increase at an annual pace of about 80 trillion yen.

Even in these inflated times for assets that is a lot of money and the Bank of Japan is not getting a lot of bang for its buck anymore as we have discussed. It would be particularly awkward if after not getting much progress for the extra (Q)QE any reduction or tapering took it back to where it began. The impact of Quantitative Easing on currencies is something we regularly look at as the impact has become patchy at best and this week has seen us start to wonder about what happens should central banks look to move away from centre stage. That would be a big deal in Japan as a weaker currency is one of the main arrows in the Abenomics quiver. As ever we cannot look at anything in isolation as the US Dollar is in a weaker phase as let me pick this from the Donald as a possible factor partly due to its proximity to me.

Reason I canceled my trip to London is that I am not a big fan of the Obama Administration having sold perhaps the best located and finest embassy in London for “peanuts,” only to build a new one in an off location for 1.2 billion dollars. Bad deal. Wanted me to cut ribbon-NO!

Mind you that is a lot better than what he called certain countries! If nothing else this was to my recollection also planned before the Obama administration.

Bond Markets

You will not be surprised to learn that the price of Japanese Government Bonds fell and yields rose, after all the biggest buyer had slightly emptier pockets. However in spite of some media reports the change here was not large as 0.06% for the ten-year went initially to 0.09% and has now settled at 0.07%. Up to the 7 year maturity remains at negative yields and even the 40 year does not quite yield 1%. If we look at that picture we see how much of a gift that the “independent” Bank of Japan has given the government of Shinzo Abe. It runs a loose fiscal policy where it is borrowing around 20 trillion year a year and has a debt of 1276 trillion Yen as of last September which is around 232% of GDP or Gross Domestic Product. So each year QQE saves the Japanese government a lot of money and allows it to keep its fiscal stimulus. We do not get much analysis of this in the media probably because the Japanese media is well Japanese as we mull the consequences of the owning the Financial Times.

A stronger effect was found in international bond markets which were spooked much more than the domestic one. US government bond prices fell and the 10-year yield went above 2.5% and got some questioning if we were now in a bond bear market? After around three decades of a bull market including of course these days trillions of negative yielding bonds around the globe care and an especially strong signal is needed for that. Maybe we will learn a little more if the US 2-year yield goes above 2% as it is currently threatening to do. But in a world where Italian 10-year bonds yield only 2% there is quite a way to go for a proper bond bear market.

The real economy

If we look at the lost decade(s) era then Japan is experiencing a relatively good phase right now. From The Japan Times.

The economy grew an annualized real 2.5 percent in the July-September period, revised up from preliminary data and marking seven straight quarters of growth — the longest stretch on record —.

Someone got a bit excited with history there I think as there was a time before what we now call the lost decade. However for those who call this success for Abenomics there are some things to consider such as these.

Exports grew 1.5 percent from the previous quarter amid solid overseas demand as the global economy gains traction.

Japan is benefiting from a better world economic situation but like so often in the era of the lost decades it is not generating much from within.

But private consumption, a key factor accounting for nearly 60 percent of GDP, continued to be sluggish with a 0.5 percent decline from the previous quarter as spending on automobiles and mobile phones fell.

Let us mark the fact that we are seeing another country where car demand is falling and move to what is the key economic metric for Japan.

Workers will see a 1 percent increase in their total earnings next year, the most since 1997, as rising profits and the tightest labor market in decades add upward pressure on pay, a Bloomberg survey shows.

Actually what we are not told is that compared to so many Bloomberg reports this is a downgrade as in its world wages have been on the edge of a surge for 3-4 years now. But reality according to the Japan Times is very different as we note the size of the increase it is apparently lauding.

In a sign that worker could receive better pay, a separate survey on the average winter bonus at major companies this year showed a slight increase — 0.01 percent — from a year earlier to ¥880,793, up for the fifth consecutive year.


There are quite a few things to laud Japan for as we note its ultra low unemployment rate at 2.7% and the way it takes care of its elderly in particular. At the moment the economic wheels are being oiled by a positive world economic situation which of course helps an exporting nation. That poses a question for those crediting Abenomics for the improvement as we note the more recent surveys are not as positive and the rises in commodity and oil prices and the likely effect on a nation with limited natural resources.

But more deeply this weeks market moves are tactically perhaps just a response to the way that “Yield Curve Control” works in practice which currently requires fewer bond purchases. But strategically the Bank of Japan is left with this.


That tweet misses out the QQE for Japan and QE for the latter two but we return yet again to monetary policy being pro cyclical and in the case of Japan fiscal policy as well. What could go wrong in a country where demographics are a ticking economic time bomb?


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. (

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.


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.


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. (

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.


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

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.

The murky world of central banks and private-sector QE

The last 24 hours has seen something of a development in the world of central bank monetary easing which has highlighted an issue I have often warned about. Along the way it has provoked a few jokes along the lines of Poundland should now be 50 pence land or in old money ten shillings. Actually the new issue is related to one that the Bank of England experienced back in 2009 when it was operating what was called the SLS or Special Liquidity Scheme. If you have forgotten what it was I am sure the words “Special” and “Liquidity” have pointed you towards the banking sector and you would be right. The banks got liquidity/cash and in return had to provide collateral which is where the link as because on that road the Bank of England suddenly had to value lots of private-sector assets. Indeed it faced a choice between not giving the banks what they wanted or changing ( loosening) its collateral rules which of course was an easy decision for it. But valuing the new pieces of paper it got proved awkward. From FT Alphaville back then.

Accepting raw loans would also ensure that securities taken in the Bank’s operations have a genuine private sector demand rather than comprising ‘phantom’ securities created only for use in central bank operations.

In other words the Bank of England was concerned it was being done up like a kipper which is rather different from the way it tried to portray things.

Under the terms of the SLS, banks and building societies (hereafter ‘banks’) could, for a fee, swap high-quality mortgage-backed and other securities that had temporarily become illiquid for UK Treasury bills, for a period of up to three years.

Some how “high-quality” securities which to the logically minded was always problematic if you thought about the mortgage situation back then had morphed into a much more worrying “phantom” security.  Indeed as the June 2010 Quarterly Bulletin indicated there was rather a lot of them.

But a large proportion of the securities taken have been created specifically for use as collateral with the Bank by the originator of the underlying assets, and have therefore not been traded in the market. Such ‘own-name’ securities accounted for around 76% of the Bank’s extended collateral (around the peak of usage in January 2009), and form the overwhelming majority of collateral taken in the SLS.

Although you would not believe it from its pronouncements now the Bank of England was very worried about the consequences of this and in my opinion this is why it ended the SLS early. Which was a shame as the scheme had strengths and it ended up with other schemes ( FLS, TFS) as we mull the words “one-off” and “temporarily”. But the fundamental theme here is a central bank having trouble with private-sector assets which in the instance above was always likely to happen with instruments that have “not been traded in the market.”

The ECB and Steinhoff

Central banks can also get into trouble with assets that have been traded in the market. After all if market prices were always correct they would move much less than they do. In particular minds have been focused in the last 24 hours on this development.

The news that Steinhoff’s long-serving CEO Markus Jooste had quit sent the company’s share price into freefall on Wednesday morning. Steinhoff opened more than 60% lower, falling from its overnight close of R45.65 to as low as R17.57.

Overall, Steinhoff’s share price has dropped more than 80% over the past 18 months. The stock peaked at over R90 in June last year.  ( Moneyweb).

According to Reuters today has seen the same drum beat.

By 0748 GMT, the stock had slid 37 percent to 11.05 rand in Johannesburg, adding to a more than 60 percent plunge in the previous session. It was down about 34 percent in Frankfurt where it had had its primary listing since 2015.

You may be wondering how a story which might ( in fact is…) a big deal and scandal arrives at the twin towers of the ECB or European Central Bank. The first is a geographical move as Steinhoff has operations in Europe and two years ago today listed on the Frankfurt stock exchange. I am not sure that Happy Birthday is quite appropriate for investors who have seen the 5 Euros of then fall to 0.77 Euros now.

Next enter a central bank looking to buy private-sector assets and in this instance corporate bonds.

Corporate bonds cumulatively purchased and settled as at 01/12/2017 €129,087 (24/11/2017: €127,690) million.

One of the ( over 1000) holdings is as you have probably already guessed a Steinhoff corporate bond and in particular one which theoretically matures in 2025. I say theoretically because the news flow is so grim that it may in practice be sooner. From FT Alphaville.

German prosecutors say they are investigating whether Steinhoff International inflated its revenue and book value, one day after the global home retailer announced that its longtime chief executive had quit…The investigators are probing whether Steinhoff flattered its numbers by selling intangible assets and partnership shares without disclosing that it had close connections to the buyers. The suspicious sales were in “three-digit million” euros territory each, according to the prosecutors.

In terms of scale then the losses will not be relatively large as the bond size is 800 million Euros which would mean that the ECB would not buy more than 560 million under its 70% limit but it does pose questions.

they have a minimum first-best credit assessment of at least credit quality step 3 (rating of BBB- or equivalent) obtained from an external credit assessment institution

This leaves us mulling what investment grade actually means these days with egg on the face of the ratings agencies yet again. As time has passed I notice that the “high-quality” of the Bank of England has become the investment grade of the ECB.

The next question is simply to wonder what the ECB is doing here? Its claim that buying these bonds helps it achieve its inflation target of 2% per annum is hard to substantiate. What it has created is a bull market in corporate bonds which may help economic activity as for example we have seen negative yields even in some cases at issue. But there are side-effects such as moral hazard where the ECB has driven the price higher helping what appears to be fraudulent activity.

How much?

For those of you wondering about the size of the losses there are some factors we do not know such as the size of the holding. We do know that the ECB bought at a price over 90 which compares to the 58.2 as I type this. Some amelioration comes from the yield but not much as the coupon is 1.875% and of course that assumes it gets paid.

My understanding of how this is split is that 20% is collective and the other 80% is at the risk of the national central bank. So there may well be some fun and games when the Bank of Finland ( h/t Robert Pearson) finally reports on this.


There is much to consider here. Whilst this is only one corporate bond it does highlight the moral hazard issue of a central bank buying private-sector assets. There is another one to my mind which is that overall the ECB will have a (paper) profit but that is pretty much driven by its own ongoing purchases. This begs the question of what happens when it stops? Should it then fear a sharp reversal of prices it is in the situation described by Coldplay.

Oh no what’s this
A spider web and I’m caught in the middle
So I turn to run
And thought of all the stupid things I’d done.

The same is true of the corporate bond buying of the Bank of England which was on a smaller scale but even so ended up buying bonds from companies with ever weaker links ( Maersk) to the UK economy. Even worse in some ways is the issue of how the Bank of Japan is ploughing into the private-sector via its ever-growing purchases of Japanese shares vis equity ETFs. At the same time we are seeing a rising tide of scandals in Japan mostly around data faking.

Me on Core Finance



Bitcoin both is and is not a store of value

The weekend just gone has seen some extraordinary price moves and yet as I looked through most of the media early this morning there was no mention of it. For example I have just scanned the front page of the online Financial Times and there was not a peep. One mention on Bloomberg seems a little confused.

Bitcoin’s march toward respectability faces another hurdle as hedge-fund platforms reject the overtures of firms trading cryptocurrencies.

I didn’t realise it was marching towards respectability myself and if it was are hedge funds a benchmark? Apparently things are going badly.

It’s the latest blow for a digital currency that’s struggling to break into the financial mainstream.

The next bit I found particularly fascinating.

Joe Vittoria, CEO of the Mirabella platform, said he has doubts over bitcoin’s liquidity and where oversight might come from. There are also suggestions that the digital currency’s valuation should be below where it’s currently trading, he said.

You see that second sentence applies to so many markets right now for example many of the world’s bond markets have been pumped up by central bank buying. Others might be wondering is another example is the online food delivery company Just Eat in the UK which looks set to join the FTSE 100 as it has a larger market capitalisation than the supermarket chain Sainsburys.

For an article posted around 4 hours ago they seem rather behind the times.

While investors have embraced bitcoin, sending it soaring above $8,000.

Last night as I checked how financial markets were starting the week in the far east I noted this and put it on Twitter.

Bitcoin has been on another surge and is US$ 9396 now.

Of course it is soaring above $8000 technically but is behind events. Indeed this morning it has risen again as Reuters point out.

Bitcoin’s vertiginous ascent showed no signs of stopping on Monday, with the cryptocurrency soaring to another record high just a few percent away from $10,000 after gaining more than a fifth in value over the past three days alone.

The digital currency has seen an eye-watering tenfold increase in its value since the start of the year, and has more than doubled in value since the beginning of October.

It BTC=BTSP surged 4.5 percent on the day on Monday to trade at $9,687 on the Luxembourg-based Bitstamp exchange.

There are different pricing platforms but on the one I look at it reached US $9771 earlier. Although as ever there is a fair bit of volatility as it is US $9606 as I type this sentence.

Jamie Dimon

The Chief Executive of JP Morgan hit the newswires back on the 12th of September.

If a JPMorgan trader began trading in bitcoin, he said, “I’d fire them in a second. For two reasons: It’s against our rules, and they’re stupid. And both are dangerous.” ( Bloomberg)

Considering the role of the banking sector in money laundering and financial crime this bit was somewhat breathtaking.

“If you were in Venezuela or Ecuador or North Korea or a bunch of parts like that, or if you were a drug dealer, a murderer, stuff like that, you are better off doing it in bitcoin than U.S. dollars,” he said. “So there may be a market for that, but it’d be a limited market.”

This intervention can be seen two ways. The first is simply expressed by the fact that the price of Bitcoin has more than doubled since then. The second is ironically also that it has doubled as of course that is a building block in determining whether something is a bubble or not.

What has driven this surge?

Back on the 29th of December last year I pointed out the Chinese connection.

There have been signs of creaking from the Chinese monetary system as estimates of the actual outflow of funds from China seem to be around double the official one. Oops!

If we move onto this morning Reuters have been on the case.

By some estimates, China’s overall debt is now as much as three times the size of its economy……..Outstanding household consumer loans have surged close to 30 percent since the middle of last year and reached 30.2 trillion yuan as of October.

This has the government worried.

China’s central bank governor, Zhou Xiaochuan, made global headlines with a warning last month of the risks of a “Minsky moment”, referring to a sudden collapse in asset prices after long periods of growth, sparked by debt or currency pressures.

In such a position Bitcoin investment may seem a lot more sensible than otherwise. If nothing else those caught in the clampdown on the shadow banking sector may think that it is worth a go and the funds involved are so large it would only take a relatively small amount to have a large impact.

It was also be a particular irony if some of the money the Bank of China pumped into the system last week found its way into Bitcoin.

ECB and the war on cash

This is something which must provide some support to Bitcoin which is simply fears over what plans central banks have for cash. This particularly applies to those who have been willing to dip into the icy world of negative interest-rates such as the European Central Bank and I am reminded of this from the 22nd of this month.

The general exception for covered deposits and claims
under investor compensation schemes should be replaced by limited discretionary exemptions to
be granted by the competent authority in order to retain a degree of flexibility. Under that approach,
the competent authority could, for example, allow depositors to withdraw a limited amount of
deposits on a daily basis consistent with the level of protection established under the Deposit
Guarantee Schemes Directive (DGSD)34,

Currently those with most to fear seem to be those with money in Italian banks although just to be clear as we stand now the deposit protection scheme up to 100,000 Euros still operates.

If we look forwards to the next recession it would appear that some central banks will arrive at it with interest-rates still negative so if they apply the usual play-book we will  then see interest-rates negative enough to mean that cash will be very attractive. I have postulated before than somewhere around -1.5% to 2% is the threshold. Then they will have to do something about cash. Perhaps they are on the case.


Other fears may come from the way that central banks have expanded balance sheets and thus narrow measures of the money supply. The Bank of Japan explicitly set out to double the monetary base.


There is a mixture of fear and greed in the price of Bitcoin. The fear comes from those wishing to escape domestic worries in China in particular as well as worries about the next moves of central banks. The greed simply comes from the rise in the price which has been more than ten-fold since I looked at it on December 29th last year. So if you have some well done although of course the real well done comes when you realise the profit. I note others making this point.

Bitcoin’s market cap just passed 150 billion USD. For those who do not know, that is how much money NEW bitcoin “investors” will have to spend, in order for the current bitcoin holders to get the money that they THINK they have.  ( @JorgeStolfi )

That statement is true of pretty much every price although of course some have backing via assets or demand. So often we see a marginal price used to calculate a total based on an average price that is not known. Also with a price that has varied between US $8992 and 9771 today alone I would suggest that this below must have more than a few investors screaming for financial stretcher bearers. From @JosephSkinner74

Long/Short Bitcoin swings with up to 100x Leverage at Bitmex! 💰💰 Enjoy a 10% Fee Discount! 👌🏽

What could go wrong?

This leaves us with the issue of how Bitcoin functions as a store of money which depends on time. Today’s volatility shows that over a 24 hour period it clearly fails and yet if we extend the time period so far at least it has worked rather well as one.

A royal wedding

Firstly congratulations to the hopefully – our royal family has form in this area – happy couple. But fans of the magnificent Yes Prime Minister will already be wondering what it is designed to distract us from and whether Theresa May has turned out to be more effective in this regard than Jim Hacker?!