The UK housing market looks ever more dysfunctional

Today has opened with some more news on the UK housing market so let us take a look at one perspective on it from The Express newspaper.

Britain’s property market booming as house prices hit record highs
BRITAIN’S property market is booming with house prices hitting a record high – and sales at their highest level for a decade, figures show today…..
Rightmove’s director and housing market analyst Miles Shipside said: “High buyer demand in most parts of the country has helped to propel the price of newly marketed property to record highs. There are signs of a strong spring market with the number of sales agreed achieved at this time of year being the highest since 2007.”

It is hard to know what to say about this bit.

Experts last night hailed the bricks-and-mortar bonanza as a key marker of the nation’s prosperity as we head towards the General Election.

What were the numbers?

Let us first remind ourselves that the Rightmove survey is based on asking rather than actual sale prices and then take a look via Estate Agent Today.

The price of property coming to the market has hit anoher record high, up 1.1 per cent over the past month according to Rightmove.

The increase is equivalent to £3,547 and takes the average asking price for homes new to the market to £313,655, exceeding the previous high of £310,471 set in June 2016.

The £3,547 in a month is of course much more than the average person earns although if we look back we see that it is lower than last year as Rightmove points out.

This month’s 1.1 per cent rise is also weaker than the average 1.6 per cent spring-boosted surge of the last seven years.

Why might that be?

“Strong buyer activity this month has led to 10 per cent higher numbers of sales agreed than in the same period in 2016. This large year-on-year disparity should be viewed cautiously as the comparable timespan in 2016 saw a drop in buy to let activity with the additional second home stamp duty” says Shipside ( of Rightmove)

Actually the year on year rate of increase has fallen to 2.2% although as pointed out earlier first-time buyers are facing a 6.5% rise. The idea that house price growth is fading is one of my 2017 themes and adds to this from the listings website Home earlier this month.

Overall, the website claims price rises are much more subdued this year than last. In April 2016 the annualised rate of increase of home prices was 7.5 per cent; today the same measure is just 3.0 per cent.

London

Here asking prices are falling according to Rightmove.

The price of property coming to market in Greater London is now an average of 1.5% cheaper than this time a year ago, a rate of fall not seen since May 2009. The fall is mainly driven by Inner London, down by 4.2% (-£35,504), while Outer London is up 1.7% (+£9,017). Since last month, asking prices in both Inner and Outer London have fallen, though again it is Inner London with a monthly fall of 3.6% that is dragging the overall average down. Outer London remains broadly flat, down 0.2% (-£1,177) on the month.

The prices of larger houses are seeing a drop.

The fall of 11.9% this month reflects volatility in one month’s figures in a smaller section of the market, but the annual rate of fall of 7.3% is a more reliable longer-term indicator of the challenges that this sector is facing.

but first-time buyers seem to be in the opposite situation.

Typical first-time buyer properties (two bedroom or fewer) are both up for the month (+1.3%) and for the year (+0.5%).

Perhaps the house price forecasts of former Chancellor George Osborne were for the sort of houses he and his friends live in.

However before I move on we do learn something from these asking prices but as Henry Pryor shows they seem to be a long way from actual sale prices.

Record lows for UK mortgage rates

There was this from Sky News on Friday.

A building society is launching Britain’s cheapest ever mortgage deal with a rate of 0.89% as competition between lenders intensifies.

The two-year deal offered by Yorkshire Building Society requires a deposit worth at least 35% of the value of the property. There is also a product fee of £1,495……Moneyfacts said the 0.89% rate was the lowest on its records going back to 1988.

This is a variable rate and a little care is needed as whilst it is an ex ante record it is not an ex post one. What I mean by that is that there were rates fixed to the Bank of England Bank Rate which ended up below this as it slashed interest-rates in response to the credit crunch. One from Cheltenham and Gloucester actually went very slightly negative.

The Mail Online seems to be expecting even more.

Experts say lenders are so desperate for business that rates could fall to as low as 0.5 per cent……..Santander’s cuts are expected to trigger an all-out price war, and deals will be slashed over the next fortnight as the big names fight for business.

Santander has not actually cut yet and we will have to wait until tomorrow. If we look back the record low for a five-year fixed rate mortgage of 1.29% from Atom Bank lasted for about a week before the supply was all taken.

These mortgage rates have been driven by the policies of the Bank of England when it decided in the summer of 2013 that a Bank Rate of 0.5% and QE bond purchases were not enough. It began the Funding for ( Mortgage) Lending Scheme which has now morphed into the £55 billion Term Funding Scheme.  Thus banks do not need to compete for savers deposits leading to ever lower savings rates and they can offer ever cheaper mortgages. This is the reality regardless of the Forward Guidance given by Michael Saunders of the Bank of England on Friday. He gave vague hints of a possible Bank Rate rise, how did that work out last time? Oh yes they ended up cutting it!

Throughout this period we have been told that this is to benefit business lending so what happened to terms for it in February?

Effective rates on SMEs new loans increased by 11 basis points to 3.22% this month.

Also there was more financial repression for savers.

Effective rates on Individuals new fixed-rate bonds fixed 1-2 years fell by 19 basis points to 0.85%

Comment

The official view on the UK house price boom is that it has led to economic growth and greater prosperity. However that is for some as those who sell tale profits and of course there is some building related work. But for many it is simply inflation as they see unaffordable house prices and also rents. So there is a particular irony in some of the media cheerleading for higher prices for first time-buyers. With real wages now stagnating and likely to dip again how can they face rises in prices which are already at all-time highs.

The dysfunctional housing market seems to have some very unpleasant consequences foe those left out as the BBC reported earlier this month.

Young, vulnerable people are being targeted with online classified adverts offering accommodation in exchange for sex, a BBC investigation has found…….Adverts seen by BBC South East included one posted by a Maidstone man asking for a woman to move in and pretend to be his girlfriend, another publicising a double room available in Rochester in exchange for “services” and one in Brighton targeting younger men.

The rally of the UK Pound from the lows matches a 1.25% Bank Rate rise

Yesterday was a day where we discovered a few things. For example we learned that  Prime Minister Theresa may was not going to be the new Dr. Who nor the new manager of Arsenal football club as we discovered that she was in fact trying to launch a General Election. I say trying because she needs to hurdle the requirements of the Fixed Term Parliament Act later today although if she does I presume it will fade into the recycle bin of history. Let us take a look at the economic situation.

The outlook

Rather intriguingly the International Monetary Fund or IMF published its latest economic outlook. There was good news for the world economy as a whole.

With buoyant financial markets and a long-awaited cyclical recovery in manufacturing and trade, world growth is projected to rise from 3.1 percent in 2016 to 3.5 percent in 2017 and 3.6 percent in 2018.

There was particular good news for the UK economy.

Growth in the United Kingdom is projected to be 2.0 percent in 2017, before declining to 1.5 percent in 2018. The 0.9 percentage point upward revision to the 2017 forecast and the 0.2 percentage point downward revision to the 2018 forecast reflect the stronger-than-expected performance of the U.K. economy since the June Brexit vote,

However this was problematic to say the least for Christine Lagarde who after the advent of Donald Trump is now the female orange one.

. Asset prices in the UK (and, to a lesser degree, the rest of the EU) would likely fall in the aftermath of a vote for exit…..In the limited scenario, GDP growth dips to 1.4 percent in 2017, and GDP is almost fully at its new long-run level of 1.5 percent below the baseline by 2019. GDP growth falls to -0.8 percent in 2017 in the adverse scenario,

There was more.

On this basis, the effects of uncertainty seem to be universally negative, and potentially quite strong and persistent, even if ultimately temporary.

In fact asset prices rose and the uncertainty had no effect at all. Of course the long-term remains uncertain and ironically the IMF after being too pessimistic has no become more optimistic just as the factor which is likely to affect us is around, that is of course higher inflation. Oh and the UK consumer spent more and not less.

If we stick with the higher inflation theme there is this from Ann Pettifor today.

UK govt promotes usury: interest on student debt rises later this year from 4.6% to 6.1% = RPI + 3%.

That is the same UK establishment which so regularly tells us that CPIH ( H= Housing Costs via Imputed Rents) is the most “comprehensive” measure of inflation so is it not used? Also if we look other UK interest-rates we see Bank Rate is 0.25% and the ten-year Gilt yield is 1.02% so why should student pay 5/6% more please? Even worse much of that debt will never be repaid so it is as Earth Wind & Fire put it.

Take a ride in the sky
On our ship, fantasize

So can anybody guess the first rule of IMF Fight Club?

UK Pound £

There was an immediate effect here and as so often it was completely the wrong one as the UK Pound £ dropped like a stone. Well done to anyone who bought down there as it then engaged some rocket engines and shot higher and at one point touched US $1.29. For those unfamiliar with financial market behaviour this was a classic case of stop losses being triggered as so many organisations had advised selling the UK Pound that the trade was very over crowded. My old employer Deutsche Bank was involved in this as it has been cheerleading for a lower Pound £ at US $1.21, Ooops.

So we only learn from yesterday’s move that the rumours a lot of organisations had sold the UK Pound £ were true. As they looked to cover their positions the momentum built and we saw a type of reverse flash crash.

If we take stock we see the following which is that the UK Pound £ is now some 10.1% lower than a year ago against the US Dollar at US $1.282. As it sits just below 1.20 versus the Euro it is now only down some 5% on where it was a year ago. If we move to the effective or trade-weighted exchange-rate we see that at 79.1 it is some 6.7% lower than the 84.8 it was at a year ago. What a difference a day makes? Of course what we never have is an idea of what the permanent exchange rate will be or frankly if there is any such thing outside the economic theories of the Ivory Towers but if we stay here the outlook will see some ch-ch-changes. For example a little of the prospective inflation and likely economic slow down will be offset.

If we stay with inflation then there are other influences which are chipping bits off the oncoming iceberg. I have previously discussed the lower price for cocoa which offers hope for chocoholics and maybe even a returning Toblerone triangle well there is also this from Mining.com.

The Northern China import price of 62% Fe content ore plunged 5% on Tuesday to a six-month low of $61.50 per dry metric tonne according to data supplied by The Steel Index. The price of the steelmaking raw material is now down by more than a third over just the last month.

Shares and bonds

The UK Gilt market is extraordinarily high as we mull the false market which the £435 billion of QE purchases by the Bank of England has helped create. As someone who has followed this market for 30 years it still makes an impact typing that the ten-year Gilt yield is as low as 1.04%. This benefits various groups such as the government and mortgage borrowers but hurts savers and as I noted earlier does nothing for student debt.

The UK FTSE 100 fell over 2% but that was from near record levels. I do not know if this is an attempt at humour but the Financial Times put it like this.

The surging pound has pushed Britain’s FTSE 100 negative for the year

So a lower Pound £ is bad as is a higher £? Anyway they used to be keen on the FTSE 250 because they told us it is a better guide to the UK domestic economy which has done this.

So more heat than light really here because if we take a broad sweep the changes yesterday were minor compared to the exchange-rate move

House prices

Perhaps the likeliest impact here is a continuation of low volumes in the market as people wait to see what happens next. It seems likely that foreign buyers may wait and see as after all it is not a lot more than a month, so we could see an impact on Central London in particular.

In a proper adult campaign issues such as money laundering and the related issue of unaffordable house prices would be discussed. But unless you want to go blue in the face I would not suggest holding your breath.

Comment

The real change yesterday was the movement in the UK Pound £ which will have been noted by the Bank of England. I wrote only recently that some of it members would not require much to vote for more monetary easing such as Bank Rate cuts and of course should the UK Pound £ move to a higher trajectory that gives them a potential excuse. I do not wish to put ideas in their heads but since the low the rise in the UK Pound £ is equivalent to five 0.25% Bank Rate rises according to the old rule of thumb.

By the time you read this most of you will know the British and Irish Lions touring squad and as a rugby fan I look forwards to today’s announcement of the squad and even more to the tour itself. However just like economic statistics there seems have been an early wire about the captain.

By contrast the General Election announcement came much more out of the blue.

The ongoing UK problem with pensions

Today has brought a piece of news that is another element in an ongoing saga. It also brings into play some economic developments that are interrelated to it. Oh and a past manipulation of the UK public finances. From Reuters.

Royal Mail said on Thursday it would close its defined benefit pension scheme at end-March 2018 after a review found it would need to more than double annual contributions to over 1 billion pounds to keep the plan running.

Royal Mail, the British postal service privatised in 2013, said it was one of only a few major companies that still had employees in a defined benefits scheme, a type of pension that pays out according to final salary and length of service.

The company, which pays around 400 million pounds a year into the scheme, said it was currently in surplus, but it expected the surplus to run out in 2018.

There are various initial consequences such as threats of strike action from the postal union and something to cheer central bankers everywhere. From the Financial Times.

Investors were more positive about the plan, however. Shares in Royal Mail rose 1.6 per cent after the announcement to their highest level since January. JPMorgan Cazenove analysts estimated last month that markets have already priced in a £100m a year step-up in pension charges, and investors have welcomed signs of an end to questions over the scheme’s future.

UK Public Finances

Those who recall my analysis from 2013 will remember that this is another version of the Royal Mail pension scheme that was originally booked in the UK National Accounts for a £28 billion profit! How can you have a profit on acquiring something which is unaffordable? Later the methodology was quietly changed.

This reflects the shortfall between the £28 billion of assets transferred from the RMPP and the £38 billion of future pension liabilities that were consequently assumed by Government…….. Furthermore, the transfer of the assets no longer reduces borrowing as it did under ESA95.

To be fair to our statisticians and indeed Eurostat they did catch up with this manipulation eventually but of course by then the public’s attention had moved elsewhere.

Why are these pension schemes now so unaffordable?

The latest report from HM Parliament describes the problems and issues.

poor investment returns, associated with low underlying interest rates and loose monetary policy following the 2008–09 financial crisis and associated recession;8

 

rises in longevity that have been faster than was widely anticipated;

 

sponsor behaviour, including many employers taking contribution holidays when schemes were in surplus.

Only actuaries and economists can make rising longevity seem a bad thing! But if we move to the effect of low interest-rates there is this evidence from Deputy Governor Ben Broadbent to HM Parliament on this and the emphasis is mine.

First, I don’t think it damages the value of their assets; it pushes up the price of their liabilities. That is what happens when bond yields fall. The price of that bond and the present value of the liabilities go up. But it also pushes up the assets.

Even with such analysis Dr.Ben was forced to admit that schemes in deficit were net losers. But I find the overall idea that they lose on the swings but gain on the roundabouts simply extraordinary! Another example of Ivory Tower thinking. You see they have present gains although of course they will be across many markets but the real issue is that they have to pay for future liabilities and the answer misses of the fact that pension funds have going forwards to buy assets such as bonds which are much more expensive. Indeed in an odd but true development pushing up the price of ordinary UK Gilts via QE has in some ways had more of an effect on index-linked Gilts which are not bought! This matters because most defined benefit schemes have inflation based liabilities to pensioners.

The odd case of index-linked Gilts

Because ordinary Gilts offer so little interest these days and index-linked Gilts offer annual coupons based on the Retail Price Index ( 3.1%) if you need income then linkers look more attractive. Of course the price adjusted to this but this means that the Index-Linked Gilt market is in quite a bubble right now. It also means that it is in a way not fit for purpose as it is being priced on annual cash returns rather than inflation prospects as we see yet another market which has been turned into a false one by the central planners.

I have written before about how you could lose money by being right about UK inflation and this is why. So how do pension funds now hedge inflation risk?

The UK Gilt market

This has been on something of a surge recently or perhaps I should say another surge. Let me put an apology in with that because that has wrong-footed my stated view on here as I expected it to fall as inflation prospects deteriorated.  But  the ten-year Gilt yield is quite near to 1% and the two-year yield is 0.1% which is insane in terms of real yield with inflation heading to 3/4% depending on the measure used. Pension funds look a long way ahead so if we look at the thirty-year yield we see it has fallen to 1.63%.

Thus if we switch to prices we see that any investment now is at an extraordinarily expensive level. What could go wrong?

Actually according to HM Parliament defined benefit schemes tend to value themselves versus the higher quality end of the Corporate Bond market.

scheme funding statistics show that discount rates used by DB pension schemes for calculating liabilities since 2005 have consistently been around 1 per cent above gilt yields.

Can anybody spot a flaw in the Bank of England buying £10 billion of these ( £9.1 billion so far) to raise the price and reduce the yield?

Pre pack problems

Another issue was raised by Josephine Cuombo in the Financial Times.

Companies in the UK have used a controversial insolvency procedure to offload £3.8bn of pension liabilities, often as part of a sale to existing directors or owners, a Financial Times investigation has found…….

The FT investigation found that two in three pre-pack schemes entering the PPF involved sales to existing owners or directors. A string of prominent cases that used pre-pack arrangements, but where companies are still trading, include the turkey producer Bernard Matthews, the bed company Silentnight and the textile group Bonas.

In essence the schemes have found their way into the Pension Protection Fund which is backed by the industry thus raising costs for other schemes and pensioners get reduced benefits.

Comment

When the Bank of England looks at pensions it is hard to avoid the thought that views are influenced by their own more than comfortable position. For example in its latest accounts Ben Broadbent had received pension benefits valued at £104,586 in the preceding year. It is also hard to forget that just as it was telling everyone inflation was going lower back in 2009 the Bank of England piled into index-linked Gilts in its own scheme! But for everyone else involved there are no shortage of sharks in the water.

As to the befuddled and bemused Ben Broadbent he has views which question why we pay him at all!

One thing I want to get across today is not to confuse the low level of interest rates with monetary policy…….

Even though we are that last link and even though it is the MPC that sets interest rates, it is not a realistic question—I do not think it is a realistic premise to say low interest rates are because of monetary policy.

Until of course he can claim gains from his policies….

Let me sign off for a few days by wishing you all a very Happy Easter.

 

 

 

The ethical problems of UK banking continue to pile up

On Friday Bank of England Governor Mark Carney was in full flow at Thomson Reuters headquarters in London. In particular he wanted to lecture us about the improvements in ethical standards at the Bank of England and in banking more generally.

The high road to a responsible, open financial system

Okay so what does that mean?

The financial system is fairer because of reforms that are ending the era of “too big to fail” banks and
addressing the root causes of a torrent of misconduct.

I am sure that many of you will be wondering about how he defines the word “fairer” or how the many mergers that were a feature of the UK response to the credit crunch helped end “too big to fail”? The creation of a mega bank by merger Lloyds with Halifax Bank of Scotland for example surely only made the situation more acute. As to addressing the root cause of misconduct we still actually await this happening in practice.

There was plenty of high-flying rhetoric to be found.

On one path, we can build a more effective,
resilient system on the new pillars of responsible financial globalisation.

The new buzz phrase is “efficient resilence” which if the previous buzz words and phrases are any guide ( temporary…… vigilant etc.) will mean anything but! Here is how Mark describes it.

Finally, efficient resilience is why the Bank of England, working with the Financial Conduct Authority, has
been at the forefront of efforts to increase individual accountability in financial services. While the UK’s
action plan to improve conduct includes stronger deterrents and reduced opportunities for bad behaviour, we
recognise that ex post penalties are only part of the solution.

Events other the weekend have brought the claims and boasts of the section below into focus.

To put greater emphasis on individual accountability, the UK has introduced new compensation rules that go
much further than other jurisdictions in aligning risk and reward. And we have put greater stress on the
importance of better governance and firm culture. …
Since codes are of little use if no one reads, follows or enforces them, the UK has instituted a unique Senior
Managers Regime to embed cultures of risk awareness, openness and ethical behaviour. Based on its early
successes, international authorities are now considering following the UK’s lead.

Barclays

Let us see if this is one of the early successes? It too has the rhetoric with its values of  Respect,  Integrity,  Service,  Excellence,  Stewardship or RISES program. ( https://www.home.barclays/about-barclays/barclays-values.html )

Barclays PLC and Barclays Bank PLC (Barclays) announce that the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) have commenced investigations into:

·    Jes Staley, Group Chief Executive Officer of Barclays, as to his individual conduct and senior manager responsibilities relating to Barclays whistleblowing programme and an attempt by Mr Staley in 2016 to identify the author of a letter that was treated by Barclays Bank PLC as a whistleblow; and  

We are expected to believe apparently it was all just a misunderstanding.

The Board has concluded that Jes Staley, Group Chief Executive Officer, honestly, but mistakenly, believed that it was permissible to identify the author of the letter and has accepted his explanation that he was trying to protect a colleague who had experienced personal difficulties in the past from what he believed to be an unfair attack, and has accepted his apology

I would imagine that pretty much everyone reading this is aware of modern whistleblowing procedures so it seems strange that the CEO of Barclays was not. Actually even when he was told he had another go a month later.

There is a clear example of “back to the future” when we note that rather than being sacked we move into Yes Prime Minister land as he will receive one of the “strongly worded letters” so beloved of the apochryphal civil servant Sir Humphrey Appleby! We are told there will be this too “a very significant compensation adjustment will be made to Mr Staley’s variable compensation award.” But as it is “variable” how will we know?

The Bank of England

There is bad news in the offing tonight for the Bank of England as the BBC’s Panorama has looked again at its role in Libor ( London Interbank Offered Rate ) rigging.

A secret recording that implicates the Bank of England in Libor rigging has been uncovered by BBC Panorama.

The 2008 recording adds to evidence the central bank repeatedly pressured commercial banks during the financial crisis to push their Libor rates down.

Well done to Andy Verity for continuing to pursue this issue and along the way we meet some old “friends”

The recording calls into question evidence given in 2012 to the Treasury select committee by former Barclays boss Bob Diamond and Paul Tucker, the man who went on to become the deputy governor of the Bank of England.

It is like a television series with a regular cast isn’t it? Also the BBC does not do Paul Tucker full justice as there was this from 2013.

Paul Tucker, who served as a deputy governor at the Bank of England, has been given a knighthood for services to central banking.

Some might think that a substantial salary and a pension which would current cost around £7 million to buy were rewards enough in themselves. Unless of course you believe that Paul Tucker got his “K” for covering things up.

Comment

There is much to consider here and in the individual case of Governor Carney the Libor or as it became named the Liebor issue predated his arrival. However he has his own problems. The most recent was the resignation of Charlotte Hogg who seemed as uninformed about monetary policy as she was about the consequences of her bother’s job. It was put well by Deborah Orr in the Guardian.

Clearly, people run the risk of feeling over-entitled. They believe strongly in rules, but develop a belief that they are the people who make the rules, not the people who follow them……..….Finally, of course, privileged people assume, often rightly, that no one is going to hold them to account.

Only on Thursday we looked at Gertjan Vlieghe and his problems understanding that once he was at the Bank of England he had to break his financial links with the hedge fund Brevan Howard. Hardly a brave new dawn is it?

Meanwhile if we look back to the effective bailout by the Qataris of Barclays back in the day we wonder how the court case into this will play out? It is all quite a mess is we throw in PPI miss selling and the way that small businesses were miss sold interest-rate swaps as well as those who became “mortgage prisoners”.

Meanwhile though in Mark Carney’s world it is all going rather well.

Being at the heart of the global financial system reinforces the ability of the rest of the UK economy, from
manufacturing to the creative industries, to compete globally. And it broadens the investment opportunities
for UK savers, giving them the potential to earn better risk-adjusted returns.

Do UK savers realise how good they apparently have it? Oh and was the Barclays story released today to help take the pressure off the Bank of England Liebor news?

 

 

Gloomy Gertjan of the Bank of England could easily vote for another Bank Rate cut

Yesterday gave us another opportunity to discover what a Bank of England policy maker is thinking. This was because former hedge fund manager Gertjan Vlieghe gave a speech at the headquarters of Bloomberg in London in . Sadly Gertjan is yet another policy member of the Bank of England who has had trouble with his ethical radar. From the Guardian in July 2015.

“Despite the fact that there would be no conflict of interest between my future role and any continued passive stake in Brevan Howard, we have now come to an agreement whereby I shall be bought out of my remaining interest in the partnership before taking up my position on the MPC. As of 31 August I will have severed all financial and other ties with Brevan Howard. I have taken this step to avoid any mistaken impression of a conflict of interest,” said Vlieghe.

If Gertjan had wanted to avoid the impression that he was focused on the City of London perhaps Bloomberg was not the best place to give his speech.

What did he say?

Forecasting problems

Gertjan is obviously troubled by the fact that the Bank of England got the post EU leave vote economic forecasts wrong.

I will argue that there is an important distinction to be drawn between good monetary policy and making accurate forecasts………..And there have been times, just recently, when forecast errors were small and policy was broadly right.

Ah so he was right by being wrong apparently! If we go back to August we were told this by the Bank of England in the monetary policy minutes.

the outlook for growth in the short to medium term has weakened markedly.

Now the medium term has yet to happen but in the short-term the error was not small as the UK economy mimicked the film “Carry on Regardless” . If you had looked at economic growth without knowing about the referendum vote you would have seen 2016 as a pretty constant year.

Staying with the forecasting problem Gertjan is keen to put in our minds the view that it does not matter.

But the existence of forecast errors per se, whether large or small, is not necessarily a sign of either wrong policy or of using the wrong framework

Also in an increasingly desperate effort he tries to claim that it was unpredictable.

Sometimes forecast errors simply tell you things happened that could not have been foreseen.

All you have to do is look back to last summer on this website when I pointed out the powerful effect of the then lower UK Pound £. Either Gertjan is not aware of that or he chose to ignore it.

Also if we step back for a moment Gertjan also offers a critique of his own policy because this below is one of his own central planning policies.

We only have an imperfect notion of how the economy works, we only have partial information about the state of the economy at any point in time, and the economy is constantly hit by unanticipated shocks.

Yet he charged in with policy easing on August 4th 2016 anyway. Apparently as he splashed around in his speech this policy easing was the equivalent of this from a doctor.

a doctor can perform life-saving procedures, such as administering blood-thinning medication, widening the coronary artery, or performing a coronary artery bypass.

What about policy then?

This is where the forecast errors came in as Gertjan explains his thinking back then.

First and foremost, short-term indicators of the economy, such as business surveys, consumer confidence, housing indicators, had turned down sharply. We always monitor published data that, historically, has given a decent but not perfect signal of where the economy is heading in the near term . And these data were falling rapidly in the immediate aftermath of the referendum. For example, the Composite PMI, an indicator of business activity growth, had fallen to its lowest level since 2009.

He then makes another step.

actual published data on economic activity  and uncertainty

You see if you look at what he was using yes they were published but in the main they were sentiment indicators rather than actual numbers. Acting on sentiment is of course a feature of a hedge fund manager but a central banker faces many other issues.

If we add into this that Gertjan seems a naturally gloomy chap then an easing was on the cards.

I already saw considerable weakness in nominal growth as we headed into the referendum, and I was starting to think the economy might need more stimulus even in the status quo scenario of a remain vote.

and

We have gone from expecting a short and sharp slowing, to pencilling a much milder and more protracted slowing.

Indeed he is so troubled by accusations that he is gloomy he feels the need to deny it.

My main point regarding our August forecast is that we were not possessed by some innate feeling of gloom,

This gloom led Gertjan to being completely wrong.

we put in place a stimulus package in August, of a 25bp Bank Rate cut, a funding scheme to make sure the rate cut was passed on, additional gilt purchases, and corporate bond purchases……. I thought our August package would be the start, and further stimulus would be needed.

Not only was that completely wrong the Forward Guidance ( to the November meeting) was wrong as well.

We get four explanations of why he was wrong and none of them mention the impact of the UK Pound £ so having given him the benefit of the doubt at the beginning I do not do so now. This is rather poor. Also his claim of a “fiscal reset” is contradicted by the UK fiscal statistics as I have reported on here.

Future policy

Oddly the lower exchange rate now does get a mention! Accordingly we will get higher inflation and there is also a mention which if you blink you will miss of an economic boost too. But of course gloomy Gertjan has a couple of other things to worry about. The first is wage growth.

 Let’s be clear, wage growth has picked up somewhat from the sub-1% pace in 2013 and 2014, but not nearly as much as we had expected, given the fall in the unemployment rate

 

Ah another forecasting error. Anyway this will lead to a consumer slow down.

The consumer slowdown, which initially did not materialise, now appears to be underway…….. I think the slowdown is more likely to intensify than fade away.

Added to this I note that the inflation will be in Gertjan’s words.

Inflation is set to rise, but that seems entirely accounted for by exchange rate pass-through, which, although persistent, will ultimately fade as long as inflation expectations remain well anchored.

Of course we all ultimately fade along the lines of the famous statement by JM Keynes “In the long run we are all dead” but I have no idea how that helps in the intervening period.

Comment

Gloomy Gertjan seems to be in denial here. He placed his faith in the wrong factors last August and made a mistake based on unsurprisingly for him a gloomy forecast. Is it not intriguing to wonder why a financial sector insider ( ex-hedge fund manager) is so gloomy? Of course we can add to that the issue of why the Bank of England needed another representative of the financial sector onboard?

Sooner or later he will be right as of course economic slow downs eventually arrive a like a watch that has stopped gloomy Gertjan will then claim he was right all along. But in his speech was a single sentence which explains in my opinion where he has gone wrong.

Until mid-2016, inflation was close to zero, courtesy of the earlier drop in oil prices and the strength of sterling. That meant that real household labour income growth was close to 3%, despite subdued nominal wage growth.

Lower inflation led to an economic boost via stronger real wage growth so in my opinion the objective is to keep inflation low, as wage growth seems set to be subdued. However whilst claiming he has provided an economic boost the expectation and then arrival of the Bank of England easing last August pushed the Pound £ lower and inflation higher. Thus via the real wage effect the likelihood is that gloomy Gertjan has created his own future gloom by repeating the errors made in 2010/11. If he continues on that road he will probably cut Bank Rate again in spite of his talk of a rise.

Also if we continue his rather bizarre medical analogy the side-effects are growing.

Consumer credit growth has been accelerating over the past few years, and has accelerated further in the second half of last year, suggesting that the resilience of household spending was in part financed by credit,

Chocolate bars

We have been through a phase where prices have risen and chocolate bars have suffered from shrinkflation due to higher costs and a lower £ .Well there is this.

Cocoa futures in London have slumped by about a third since reaching a six-year high in July. ( Bloomberg).

Any chance of an extra Toblerone triangle?

Me on TipTV Finance

http://tiptv.co.uk/look-nova-banco-mess-czech-currency-peg-not-yes-man-economics/

 

 

 

 

The Corporate Bond problem at the Bank of England

It is time to once again lift the lid on the engine of Quantitative Easing especially in the UK. As a I pointed out several weeks ago the ordinary version where sovereign bonds are purchased has reached its target of £435 billion ( to be precise £39 million below). However corporate bond purchases are continuing under this from the August 2016 MPC (Monetary Policy Committee ) Minutes.

the purchase of up to £10 billion of UK corporate bonds

This was to achieve the objectives shown below and the emphasis is mine.

Purchases of corporate bonds could provide somewhat more stimulus than the same amount of gilt purchases. In particular, given that corporate bonds are higher-yielding instruments than government bonds, investors selling corporate debt to the Bank could be more likely to invest the money received in other corporate assets than those selling gilts. In addition, by increasing demand in secondary markets, purchases by the Bank could reduce liquidity premia; and such purchases could stimulate issuance in sterling corporate bond markets.

Okay let me open with the generic issue of whether this is a better version of QE? This starts well if we look at the US Federal Reserve.

The FOMC directed the Desk to purchase $1.25 trillion of agency MBS ( Mortgage Backed Securities)……..The goal of the program was to provide support to mortgage and housing markets and to foster improved conditions in financial markets more generally.

Later it bought some more but here we see a case of a central bank buying assets from the market which was in distress which was a combination of housing and banking. We can see how this had a more direct impact than ordinary QE but applying that to the UK in 2016 has the problem of being years too late unless of course the Bank of England wanted to argue the UK economy was in distress whilst growing solidly in August 2016!

This is a clear change of course from Mark Carney as the previous Governor Baron King of Lothbury was not a fan and whilst the Bank of England had a plan for corporate bond QE in theory in practice it just kicked the ball around for a while and gave up. Why? Well as I have pointed out before the market is small because UK businesses are often international and issue in Euros and US Dollars so that the UK Pound market is reduced. This leads to the Bank of England finding itself having to purchase bonds from foreign companies and this week it is back offering to buy the bonds of the Danish shipping company Maersk.  No doubt it and Danish taxpayers are happy about this but I do hope one day we will get a Working Paper explaining how this boosts the UK economy more than ordinary QE.

The technical view

There are some suggested examples in the Financial Times today from Zoso Davies of Barclays.

Initially, this seemed to work. August and September 2016 witnessed a flurry of new deals in the sterling corporate markets despite the uncertainty created by the UK’s vote to leave the EU. Since then, however, companies’ interest in borrowing in sterling has fallen to levels similar to those seen in 2013 and 2014.

As you can see once the “new toy” effect wore off things seem to have returned to something of a status quo. The “new toy” effect was exacerbated because the borrowing was so cheap.

Borrowers have also benefited from somewhat better terms on their bonds. After the initial announcement, sterling credit spreads (the additional yield risk borrowers must pay relative to the UK government to borrow in sterling) came down sharply.

If we look back we see that not only did the UK ten-year Gilt yield drop towards 0.5% but the spread above it corporate bond issuers had to pay fell, so there was a clear incentive to borrow. The catch is that if we recall the “lost decade(s)” experience of Japan the link between that and productivity activity tends to fail. One rather revealing fact is that the article does not mention real economy benefits at all instead we get this.

Our analysis, based on the limited data available for corporate bond markets, suggests that trading activity has not picked up across the sterling market as a whole, implying that the Bank of England has been crowding out other market participants. That said, the evidence is far from convincing in either direction.

The price effect did not last either.

Since then, however, the sterling market has hardly moved, indicating that most of the market impact came from the announcement rather than their execution. And that lack of movement has been a marked underperformance versus dollar and euro credit markets, to the extent that sterling has returned to being a relatively expensive bond market in which to raise financing.

Of course we have a tangled web here because one of the factors at play is the the 208 billion Euro corporate bond purchases of the ECB have allowed some companies to be paid to borrow, or if you prefer issue at negative yields. This is from Bloomberg in January.

Henkel AG’s two-year note issued at a negative yield

Also its activities make us again wonder who benefits? From Credit Market Daily.

A big theme in 2015-16 was the amount US domiciled corporates funded in the euro-denominated debt markets. As shown in the chart above, it was a record 26% of the total volume in 2015 and 22% in 2016. Low rates everywhere, but lower in Europe along with low spreads made it attractive for US corporates to borrow in euros (even when swapped back to dollars)

So the Bank of England is supporting European corporates and the ECB US ones? Time for Kylie.

I’m spinning around
Move out of my way

The article ends with some points that pose all sorts of moral hazards.

If sterling corporate bond issuance collapses and secondary market volumes plummet, it will be clear that the Bank’s newest tool has been propping up this small corner of the fixed-income universe over the past six months. Conversely, the more graceful the exit from corporate bond buying, the less clear it will be that the CBPS has been much more than a placebo for markets.

So if borrowers want to borrow cheaply just go on an issuers strike? Also what if the lower yields have sent other buyers away and crowded them out? That would have created quite a mess.

Comment

There are a lot of issues here. Lets us look at the real economy where are the arguments that it has benefited? Whereas on the other side of the coin we can see that subsidising larger companies both ossifies the economy and would help stop what is called “creative destruction”. Whilst the productivity problem began before this program started is it yet another brick in the wall for it via the routes just described? As the Bank Underground blog puts it.

Since 2008, aggregate productivity performance in the UK has been substantially worse than in the preceding eight years.

Also whilst the Federal Reserve purchases of MBSs seems to have been a relatively successful version of QE we have to add “so far”. This is in the gap between the word “stop” and “end” as whilst it stopped new purchases it maintains its holdings at US $1.75 trillion. How can it sell these and what if there are losses which could easily be large? Will the Bank of England end up in the same quicksand? Frankly I think it is already in it.

Yes equity markets are higher but the one area in the UK that has surged in response to this extra monetary easing has been unsecured rather than business credit.

 

 

 

Both UK unsecured credit and car loans surge

After looking at US auto-loans yesterday attention shifts today to the consequences of the easy monetary policy of the Bank of England. This was where Bank of England Governor Mark Carney regularly gave Forward Guidance about interest-rate rises and then ended up cutting them to 0.25% in Bank Rate terms. We also got an extra £60 billion of UK Gilt (government bond) QE and £10 billion of corporate bond QE of which the former is complete but the latter continues. As ever a subsidy for the banking sector or “The Precious” was tucked away in it and now amounts to some £47.25 billion of cheap funding called the Term Funding Scheme. All this was based on the Bank of England’s grim economic forecasts post the EU Leave vote. How have they gone?

BANK OF ENGLAND MPC’S MCCAFFERTY SAYS DOES NOT EXPECT UNCERTAINTY TO DISSIPATE SOON, BUT HAVING LESS IMPACT THAN PREVIOUSLY FEARED ( @hartswellcap )

BoE’s McCafferty says “We did get it wrong last August” on the forecasts for downturn made after Brexit vote ( @KatieAllenGdn )

In other words they got it wrong again but will he respond to rising inflation with an interest-rate rise?

“I don’t know if I will vote for a rate hike… hahahaha. It will depend on how I feel at the next meeting” ( @SigmaSquawk )

In spite of admitting to being wrong he appears unwilling to put right his mistake and as he was one of those considered to be most likely to be willing to do so the UK Pound £ fell below US $1.25.

Unsecured Lending

If we look for a consequence of easy monetary policy we would expect to find it here and regular readers will be aware that I have been warning about this since late summer last year. I warned about unsecured credit growth back on the 29th of September in particular.

The three-month annualised and twelve-month growth rates were 10.4% and 10.3% respectively.

How is that going? From this morning’s update.

The net flow of consumer credit was £1.4 billion in February. The twelve-month growth rate remained at 10.5%

So as you can see the UK consumer continues to borrow at what frankly is an alarming rate if you look at the growth in the economy or even worse real wages. Each month we get a hint of slowing ( this month in personal loans) but there were hints of that in January which have just been revised upwards!

Car Loans

Some of the increases above are from the car loan sector so let me hand you over to the Bank Underground blog from last August.

This article examines a fairly recent development in the industry, namely that new car purchases nowadays are mostly financed by manufacturers’ own finance houses.

This was discussed in yesterday’s comments section and the blog puts it like this.

First, a growing proportion of finance is now provided by the car manufacturers themselves, often through their own finance houses. Intelligence gathered by the Banks’ Agents suggests that these so-called “captive” finance providers have a market share of about 70% of all private new car finance. Second, households increasingly rent their vehicles using Personal Contract Purchase (PCP) plans.

This is another version of the economic world using the rental model which in truth is a sort of back to the future change and it has happened on a grand scale.

Industry contacts of the Bank’s Agents estimate that around two-thirds of private new car buyers now rent their vehicles using PCPs. Under PCP, the car buyer does not initially take ownership of the vehicle, but instead rents it for an average length of typically three or four years.

There are various changes here and let us start with the monetary and economic one.

This change in buyer behaviour has undoubtedly contributed to the sharp rise in new car registrations and the level of consumer debt in the economy in recent years.

This has fed into the economy and boosted economic output and GDP as more cars are bought.

The popularity of PCPs has thus been associated with a shortening of the replacement cycle for private buyers, thereby boosting the aggregate level of consumer demand for new cars.

So far, so good, although where do the old cars go and what happens to them? Is there some sort of graveyard or perhaps lower prices for older cars? We also get a confirmation of my view that the economic world is increasingly rented these days.

A consumer who might never own the car is likely to view it in the same way they view a mobile phone contract, i.e. just another monthly Direct Debit.

The conclusion is that sooner or later there will be trouble.

Those structural changes have: (a) concentrated financial risk in an industry that is especially sensitive to the economic cycle (in contrast to previous cycles when risk had been shared to a greater degree with the household sector); (b) contributed to increased household borrowing, reflected in the very rapid growth of car finance in recent years and a trend towards premium models; and hence (c) made the car industry more vulnerable to negative shocks, including hikes in interest rates, exogenous falls in market prices of used cars, lengthening of the replacement cycle and changes in consumer tastes.

 

Number Crunching

The UK Finance and Leasing Association or FLA helps out.

New figures released today by the Finance & Leasing Association (FLA) show that new business in the point of sale (POS) consumer car finance market grew 12% by value and 8% by volume in 2016……The percentage of private new car sales financed by FLA members through the POS reached 86.6% in 2016, up from 81.4% in 2015.

Meaning the Bank of England was behind the times again. In terms of amounts there is this.

£88 billion of this was in the form of consumer credit, over a third of total new consumer credit written in the UK in 2016. £41 billion of it supported the purchase of new and used cars,

Here are the most up to date numbers we have.

New figures released today by the Finance & Leasing Association (FLA) show that new business in the point of sale (POS) consumer new car finance market grew 9% by value and 3% by volume in January, compared with the same month in 2016.

On the way we see another hint of inflation in the UK. Oh and should you look at their website I too am unsure why they have a Base Rate at 0.5%.

Business Lending

Back in the summer of 2013 when the Funding for Lending Scheme began we were promised that it was for business lending. In reality we have seen the mortgage market return to positive net lending and for unsecured credit to mimic a hot air balloon. So what about business lending?

Loans to non-financial businesses decreased by £1.8 billion in February, compared to the recent average increase of £0.9 billion . Loans to small and medium-sized enterprises (SMEs) increased by £0.6 billion in February.

If we look for some perspective the annual growth rate is 1.7% overall and 1.2% for SMEs which provides quite a contrast to the household unsecured credit data does it not?

Comment

As you can see the easy monetary policy of the Bank of England has boosted unsecured credit and a lot of it comes from the car loan sector it would appear. So earlier this week it warned about the consequences of its own actions.

UK household indebtedness remains high by historical standards and has begun to rise relative to incomes.  Consumer credit has been growing particularly rapidly.

Is that the same unsecured credit that it has told us is not growing rapidly or a different one? As to the motor industry there are clear worries although so far it assures us there is no problem. From MotorTrader on the 20th of this month.

The used car market is showing “no signs” of cooling down despite the high volume of PCP cars coming back into dealers as part exchanges.

As a last thought has the borrowing been shifted from businesses to the household in the car sector? That fits with the novel below.

Dune

A great novel and are we on the way to its suspensor suitcases?