Can QE defeat the economic impact of the Corona Virus?

The weekend just passed has seen more than a few bits of evidence of the spread of the Corona Virus especially in Japan, South Korea, Italy and Iran. It has been a curious phase in Japan where on that quarantined cruise ship they have seemed determined to follow as closely as they can to the plot of the film Alien. Even China has been forced to admit things are not going well. This is President Xi Jinping in Xinhua News.

The epidemic situation remains grim and complex and it is now a most crucial moment to curb the spread, he noted.

Yet later in the same speech we are told this.

Stressing orderly resumption of work and production, Xi made specific requirements to that end.

Back on February 3rd we looked at the potential impact on the economy of China but today we can look wider. Let us open by seeing the consequences of some of the rhetoric being deployed.

Bond Markets

UST 30-Year yield falls to an all-time low 1.83 ( @fullcarry )

So we see an all-time low for the long bond in the worlds largest sovereign bond market. Rallies in bond markets are a knee-jerk response to signs of financial turmoil except it is supposed to be for the certainty of yield or if you prefer  interest. The catch is that there is not much to be found even in the US now and if we look wider afield we see that in one of the extreme cases of these times there is none to be found at all. This is because even the thirty-year yield in Germany is now -0.04% so in fact it is being paid to borrow all along its maturity spectrum.

It was only on Friday that I pointed out some were suggesting that the “bond vigilantes” might return to the UK whereas the UK Gilt market has surged also today with the 50 year Gilt at a mere 0.76%.

These are extraordinary numbers which come on the back of all the interest-rate cuts and all the central bank QE bond buying. Of course the latter is ongoing in the Euro area and in Japan. So let us look at them in particular.

The ECB has already hinted in the past that a reduction in its deposit rate to -0.6% could be deployed but frankly their situation is highlighted by talking about a 0.1% move. After all if full percentage points have not helped then how will 0.1%? Even they are tilling the ground on this front as they join the central banking rush to claim lower interest-rates are nothing to do with them at all.

Interest rates in advanced economies have been on a broad downward path for more than three decades
and remain close to historical lows.[5]
As has been highlighted in many studies, the drivers of this long-term pattern largely boil down to
demographics, productivity and the elevated net demand for safe assets. ( ECB Chief Economist Lane on Friday )

Next comes the issue that an extension of QE is limited by that fact that there are not so many bonds to buy on Germany and the Netherlands. But the reality is that under pressure this “rules based organisation” has a habit of changing the rules.

Switching to Japan we see that Governor Kuroda has been speaking too.

RIYADH (Reuters) – The Bank of Japan will be fully prepared to take necessary action to mitigate the impact of the coronavirus on the world’s third-largest economy, its Governor Haruhiko Kuroda said.

Okay what?

He also repeated the view that, while the central bank stands ready to ease monetary policy further “without hesitation”, it saw no immediate need to act.

That reminds me of the time he denied any plans to move to negative interest-rates and a mere eight days later he did. The next bit seems to be from a place far,far,away.

Kuroda said there was no major change to the BOJ’s projection that Japan’s economy would keep recovering moderately thanks to an expected rebound in global growth around mid-year.

Perhaps he was hoping that people would forget that GDP fell by 1.6% in the last quarter of 2018 meaning that the economy was 0.4% smaller than a year before.Or that Japanese plans for this year involved an Olympics in Tokyo that is now in doubt, after all the Tokyo Marathon has been dramatically downsized. I write that sadly as there are a couple of people who train at Battersea Park running track with hopes of competing in the Olympics.

But the grand master of expectations here was this from the G 20 conference over the weekend.

“I’m not going to comment on monetary policy, but obviously central bankers will look at various different options as this has an impact on the economy,” Mnuchin said.


There have been various false dawns for the price of gold and of course enough conspiracy theories about this for anyone. But gold bugs will be singing along with Spandau Ballet as they note a price of US $1688 is up over 23% on a year ago.

Always believe in your soul
You’ve got the power to know
You’re indestructible, always believe in, ‘cos you are ( Spandau Ballet )

Equity Markets

This have faced something of a conundrum as fears of a slowing world economy have been been by the hopium of even more central bank easing. Last week the Dax 30 of Germany hit an all-time high and today it is down 3.6% at 13,070 as I type this. So for all the media panic today it remains close to its highest ever.


There are two main trends here I want to mark. The first is that we seem to be again in a period of what might be called King Dollar. Also there is this.

SNB propping up 1.0600 in $EURCHF ( @RANSquawk )

Trying that at 1.20 imploded rather spectacularly in January 2015. For newer readers the Swiss Franc (CHF) has been strong as the reversal of the pre credit crunch carry trade has been added to by the perceived strength of Switzerland. This was exacerbated as its neighbour the Euro area kept cutting interest-rates and went negative. So the Swiss National Bank are presently intervening against a safe haven flow towards the Swissy.

I have suggested for a while now I could see the Swiss National Bank cutting interest-rates to -1% and expect not to be “so lonely” as The Police put it. Also I would remind you that 20% of the intervention will be reinvested in the US equity market.


Who knew that interest-rate cuts and QE could be effective cures for the Corona Virus? Especially as they have not worked for much else. Although there are also whispers that it can cure climate change too. This highlights the moral and intellectual bankruptcy at play as central bankers try to offer more central planning to fix the problems of past central planning. The Corona Virus is of course not their fault but anything unexpected was always going to be a problem for a group determined not to allow a recession and thus any reform under creative destruction.

Meanwhile the rest of us wait to see the full economic impact as we mull the flickers of knowledge we get. For example Jaguar Land Rover saying it only has 2 weeks supply of some parts or reports that for some US pharmaceuticals 80% of the basic ingredients come from China. So the latter could see large demand they cannot supply and higher prices just as we see lower demand and inflation elsewhere. More conventionally there is this for France which must send a chill down the spine of Italy to its boot.

The drop off in tourist numbers is an “important impact” on France’s economy, Bruno Le Maire, the country’s finance minister, said…….France is one of the most visited countries in the world, and tourism accounts for nearly 8% of its GDP.






2019 and all that….

As we arrive at Christmas and reach the end of the blogging year there is a lot to consider and review. Markets have thinned out to such an extent I noted a news service mentioning a rally in Japan earlier. Well I suppose 9 points up to 23,830 is indeed a rally but you get the idea. It also gives us a opening perspective as that level means it has been a successful year for The Tokyo Whale. As it progresses on its journey to buy all the ETFs listed in Japan the buying on down days strategy has been a winner on two counts. Firstly it provides a type of put option for an equity market already bolstered by a negative interest-rate and other forms of QE or rather QQE as the former name got rather debased in Japan by all the failures. Secondly it can declare a marked to market profit although of course there is the issue of how you would ever take it?

Below from this morning’s Bank of Japan balance sheet update are its holding so far.

28,199,294,050,000 Yen

The Plunge Protection Team indeed.

As Governor Kuroda enjoys his glass of celebratory sake there is the issue of the economy though which this was supposed to boost. This morning’s release of the minutes of the October meeting suggest little real progress has been made here.

A different member pointed out that, taking into account the current situation in which downside risks to economic activity and prices were significant, the Bank should continue to examine whether additional monetary easing would be necessary.

Then there was this,

In response to this, some members pointed out that, while it was appropriate for the Bank to maintain the current monetary easing policy at this meeting, it was necessary for the Bank not to hesitate to take additional easing measures if there was a greater possibility that the momentum toward achieving the price stability target would be lost.

This really is fantasy stuff as the inflation rate below indicates.

  The consumer price index for Japan in Novbember 2019 was 102.3 (2015=100), up 0.5% over the year before seasonal adjustment, and up 0.2% from the previous month on a seasonally adjusted basis.

More significant is the index level showing a total of 2.3% inflation since 2015 or in spite of the Abenomics effort there pretty much isn’t any. The Consumption Tax rise will bump it up for a bit and then it will presumably go back down just like last time.


As you can see there was quite an event yesterday,

New York (CNN Business)Tesla CEO Elon Musk once said he had a buyer that would take Tesla private at $420 a share. That never happened — but the stock just got there on its own.

Musk tweeted in August last year that he is “considering taking Tesla private at $420. Funding secured.” At the time, the share price was $379.57 — nowhere near $420. Speculation about the identity of the mystery buyer was rife, and many investors thought Musk might be making a joke: 420 has become synonymous with cannabis culture.

This provokes all sorts of thoughts starting with Elon Musk should in my opinion have been punished much harder for that tweet. Next comes the fact that the share price fell to US $180 in June when there were lots of doubts about the company. One of the amazing parts of the rally has been that they have not gone away. In fact in some ways they are reinforced by this sort of thing,

BEIJING/SHANGHAI (Reuters) – U.S. electric vehicle maker Tesla Inc (TSLA.O) and a group of China banks have agreed a new 10 billion yuan ($1.4 billion), five-year loan facility for the automaker’s Shanghai car plant, three sources familiar with the matter said, part of which will be used to roll over an existing loan.

Also I guess it has benefited to some extent by the stock market ramping of President Trump. A development which we noted late last year carried on where he is essence got at least some of the policy moves from the US Federal Reserve he wanted and the equity market has flown.

The S&P 500 climbed 0.09, hitting another all-time high of 3,224.01. The Nasdaq Composite advanced 0.23% to 8,945.65. The S&P 500 is up more than 28% for 2019 through Friday, about 1 percentage point away from 2013′s gain of 29.6%. ( CNBC)

Merry Christmas Mr.President….

Bond Markets

This is a slightly different story from the one above. Yes we saw some extraordinary highs for bond markets this year and out of them the most extraordinary was seen In Germany.  A ten-year yield that went below -0.7% for a while in late summer which begged all sorts of questions. In compound terms you would be expecting to lose more than 7% if you bought and held to maturity which poses the question why would you buy at all? Beyond that there is the issue of the impact on pensions and other forms of long-term saving as who would invest 100 Euros to get around 92 back?

That to my mind is one of the reasons why QE has not worked. The impact on what Keynes called “animal spirits” of the fact that we always seemed to need more monetary “help” and easing unsettled things as well as, ironically in the circumstances, torpedoing the banking business model.

But back to bond markets we saw the futures contract in Germany head near to 180 which to any does not mean much but these things were designed to be between say 80 and 120. The QE era put a light under that.

Now though things have quietened down with some longer-date German bonds in positive yield territory and the ten-year now -0.25%. Still negative in the latter case but less so. It has turned out to be a case of buy the rumour and sell the fact as bond prices have fallen and yields risen since the ECB restarted its QE bond purchases in November. Some were obviously punting on the amount being higher than 20 billion a month which is curious as for some countries ( Germany and the Netherlands for example) there are not so many left to buy.

Meanwhile back home in the UK the ten-year Gilt yield has for now anchored itself around the Bank Rate of 0.75%. There is a tug of war going on between chances of an interest-rate cut and more fiscal expansionism. But there are two themes as the fiscal policy chance to have really low borrowing yields has to some extant passed and as a final point real yields are still strongly negative.


I intend to take a break until the New Year. So let me wish you all a Merry Christmas and a Happy New Year and I will return in the next decade.

The bond market surge is the financial news story of 2019

This has been quite an extraordinary year in financial markets and we find that even the summer lull is being very active.Or rather it tried to go quiet and then kicked off again. The good news is that amongst a sea of indifference and sadly ignorance we have been on the case. What I am referring to is the surge in bond markets that has taken them to quite extraordinary heights and changes a large proportion of the financial landscape. So let’s get straight to it and where else to start but with President Trump.

Trade talks are continuing, and…..during the talks the U.S. will start, on September 1st, putting a small additional Tariff of 10% on the remaining 300 Billion Dollars of goods and products coming from China into our Country. This does not include the 250 Billion Dollars already Tariffed at 25%…

So he now plans to expand his tariff trade war to pretty much everything Chine exports to the US. This has had the usual impact of lowering equity markets, strengthening the Yen ( into the 106s versus the US Dollar) and more importantly for our purposes today sending bond markets surging again.

This is our first lesson of the day which is that the financial markets version of economics 101 does still apply in some areas. What I mean by this is that sharp falls in equity markets still make bond markets rally. The logic such as it is comes from the fact that bonds pay a regular coupon as opposed to lower equity returns which makes the bonds more attractive. I am sure that many of you have spotted what Shakespeare would call the “rub” in this so for the moment let our analysis remain in the United States where there still are positive bond yields.

The situation now is that the ten-year Treasury Note now yields a mere 1.84% whereas yesterday I was reviewing a post US Federal Reserve 2,04%. The exact levels will change as this is a febrile volatile environment but the general picture has been singing along with Alicia Keys.

Oh baby
I, I, I, I’m fallin’
I, I, I, I’m fallin’

I keep on

This has caught out US Federal Reserve Chair Jerome Powell as he was doing his best to pour cold water on the view that interest-rates are about to be chopped. In a sense this shows that whilst central banks have a lot of power they were accurately described by Hall and Oates.

You’re out of touch

Anticipation of the extra US $40 billion of bond purchases on their way via the (even earlier) ending of QT or Quantitative Tightening will have pushed the market higher on their own. But they found that The Donald was there with some petrol and a match. Oh and according to Market watch he may have just found another petrol can.

President Donald Trump on Friday will make an announcement on European Union trade at 1:45 p.m. Eastern, according to the White House’s daily guidance. Trump has threatened tariffs on European Union cars as well as food and alcohol, and plane makers Airbus AIR, -4.54% and Boeing BA, -2.02% have also been the source of trade tensions between the two sides.

So let me conclude the section on the world’s largest bond market with two points. Chair Powell thinks he is in charge but in reality a combination of President Trump and the markets are running rings around him, Next is that the real world economic effects of this will be cheaper fixed-rate mortgages and business borrowing as well as lower borrowing costs for the US government. Leaving us with a view that the Trump era is a curious combination of blazing away incoherently in the moment but also showing signs of an underlying plan as he gets lower bond yields for his fiscal expansionism.


He was right by the way it is more today. Also as a nuance the amount of corporate debt that has a negative yield has passed the US $1 trillion mark. A nice little earner for some and of course as we look at the overall picture I find myself musing about future trends.

Glaciers melting in the dead of night
And the superstars sucked into the super massive
Super massive black hole
Super massive black hole
Super massive black hole

The UK

The situation here is remarkable in its own way. Even Bank of England Governor Mark Carney could not entirely blame Brexit for the situation.

Since May, global trade tensions have intensified, global activity has remained soft, and the perceived likelihood of a no-deal Brexit has increased significantly. These developments have led to substantial declines in market interest rates and a marked depreciation of sterling.

Let me give credit to Joumanna Bercetche of CNBC who asked a question about Forward Guidance. After all Governor Carney has been giving Forward Guidance about interest-rate rises through the period that bond yields have plunged. Sadly he deployed the tactic of answering a question he would have preferred to have been asked, gambling that no-one in the press corps would have the chutzpah to point that out.

This matters because we find ourselves in an extraordinary situation with the five-year yield at a mere 0.33% this morning. Firstly let me point out the ongoing excellence of the comments section of this blog as Kevin suggested we would reach 0.4% a while back when such views were deeply unfashionable elsewhere. Next this should be impacting on fixed-rate mortgages as banks can fund very cheaply in this area now although so far there seems to have been little sign of this, so perhaps the banks are keeping the change here for themselves. Finally the UK can borrow ever more cheaply an issue which the media and the “think-tanks” keep ignoring as they pontificate over whether the government can spend more? Of course it can at these yields! Whether that is a good idea or whether it will spend it wisely are different matters.

There is a curious situation in the UK yield curve where the five year yield at 0.33% is below the two-year at 0.42% and the ten-year at 0.55% so let me explain it. We have a 0.75% Bank Rate which in explicit terms only applies overnight but let us more loosely say until the next Bank of England meeting. That has more of an influence on the two-year which is why it is higher. But even so it is some 0.33% below the Bank Rate.

Before I move on let me point out how extraordinary this is by reminding everyone that the last time we were here the Bank of England was involved in making some £60 billion of purchases at almost any price. In fact as it wanted lower Gilt yields back then it wanted to pay more. How insane in the membrane is that?


It is rather kind of financial markets to help me out here as just as I start typing this section they reach a threshold.

German bonds at -0.5% yield Klaxon.

The benchmark ten-year yield is already telling us what it expects the new ECB deposit rate to be. Or perhaps I should say the maximum as the two-year is at -0.78%.

Let me resume my insane in the membrane theme with this.

Putting it another way here is Bloomberg.

Borrowing costs for house purchases and companies in Italy are at an all-time low

Politicians must wish they had thought of the idea of creating “independent” central banks even earlier than they did……

What could go wrong? Well let me start you off, with a quarterly and annual economic growth rate of 0% it does not seem to be doing Italy much good.

What and indeed where next for bond markets?

The credit crunch era has brought bond markets towards the centre stage of economics and finance. Before then there were rare expressions of interest in either a crisis or if the media wanted to film a response to an economic data release. You see equities trade rarely but bonds a lot so they filmed us instead and claimed we were equities trades so sorry for my part in any deception! Where things changed was when central banks released that lowering short-term interest-rates ( Bank Rate in the UK) was not the only game in town and that it was not having the effect that they hoped and planned. Also the Ivory Towers style assumption that short-term interest-rates move long-term ones went the way of so many of their assumptions straight to the recycling bin.


It is easy to forget now what a big deal this was as the Federal Reserve and the Bank of England joined the Bank of Japan in buying government bonds or Quantitative Easing ( QE). There is a familiar factor in that what was supposed to be a temporary measure has now become a permanent feature of the economic landscape. As for example the holdings of the Bank of England stretch to 2068 with no current plan to reverse any of it and instead keeping the total at £435 billion by reinvesting maturities. Indeed on Friday it released this on social media.

Should quantitative easing become part of the conventional monetary policy toolkit?

The Author Richard Harrison may be in line for promotion after this.

Though the model does not support the idea that central banks should maintain permanently large balance sheets, it does suggest that we may see more quantitative easing in the future.

So here is a change for bond markets which is that QE will be permanent as so far there has been little or no interest in unwinding it. Even the US Federal Reserve which to be fair is doing some unwinding is doing so with baby steps or the complete opposite of the way it charged in to increase QE.

Along the way other central banks joined in most noticeably the European Central Bank. It had previously indulged in some QE via its purchases of Southern European bonds and covered ( bank mortgage) bonds but of course it then went into the major game. In spite of the fact that the Euro area economy is having a rather good 2017 it is still at it to the order of 60 billion Euros a month albeit that halves next year. So we are a long way away from it stopping let alone reversing. If we look at one of the countries dragged along by the Euro into the QE adventure we see that even annual economic growth of 3.1% does not seem to be enough for a change of course. From Reuters.

Riksbank’s Ohlsson: Too Early To Make MonPol Less Expansionary

If 3.1% economic growth is “too early” then the clear and present danger is that Sweden goes into the next downturn with QE ongoing ( and maybe negative interest-rates too). One consequence that seems likely is that they will run out of bonds to buy as not everyone wants to sell to the central bank.

Whilst we may think that QE is in modern parlance “like so over” in fact on a net basis it is still growing and only last month a new player came with its glass to the punch bowl.

In addition, the Magyar Nemzeti Bank will launch a targeted programme aimed at purchasing mortgage bonds with maturities of three years or more. Both programmes will also contribute to an increase in the share of loans with long periods of interest rate fixation.

Okay so Hungary is in the club albeit via mortgage bond purchases which can be a sort of win double for central banks as it boosts “the precious” ( banks) and via yield substitution implicitly boosts the government bond market too. But we learn something by looking at the economic situation according to the MNB.

The Hungarian economy grew by 3.6 percent in the third quarter of 2017…….The Monetary Council expects annual economic growth of 3.6 percent in 2017 and stable growth of between 3-4 percent over the coming years. The Bank’s and the Government’s stimulating measures contribute substantially to economic growth.

We are now seeing procyclical policy where economies are stimulated by monetary policy in a boom. In particular central banks continue with very large balance sheets full of government and other bonds and in net terms they are still buyers.

The bond vigilantes

They have been beaten back and as we observe the situation above we see why. Many of the scenarios where they are in play and bond yields rise substantially have been taken away for now at least by the central banks. There can be rises in bond yields in individual countries as we see for example in the Turkish crisis or Venezuela but the scale of the crisis needs to be larger and these days countries are picked off individually rather than collectively.

At the moment there are grounds for the bond yield rises to be in play in the Euro area with growth solid but of course the ECB is in play and in fact yesterday brought news of exactly the reverse.


A flat yield curve?

The consequence of central banks continuing with what the Bank of Japan calls “yield curve control” has led to comments like this. From the Financial Times yesterday.

Selling of shorter-dated Treasuries pushed the US yield curve to its flattest level since 2007 on Tuesday. The difference between the yields on two-year Treasury notes and 10-year Treasury bonds dropped below 55 basis points in afternoon trading in New York. While the 10-year Treasury was little changed, prices of two-year notes fell for the second consecutive day. The two-year Treasury yield, which moves inversely to the note’s price, has climbed 64 basis points this year to 1.83 per cent.

If we look long the yield curve the numbers are getting more and more similar ironically taking us back to the “one interest-rate” idea the central banks and Ivory Towers came into the credit crunch with. With the US 2 year yield at 1.8% and the 30 year at 2.71% there is not much of a gap.

Why does something which may seem arcane matter? Well the FT explains and the emphasis is mine.

It marks a pronounced “flattening” of the yield curve, with investors receiving decreasing returns for holding longer-dated bonds compared to shorter-dated notes — typically a harbinger of economic recession.


We have seen phases of falls in bond prices and rises in yield. For example the election of President Trump was one. But once they pass we are left wondering if the around thirty year trend for lower bond yields is still in play and we are heading for 0% ( ZIRP) or the icy cold waters of negativity ( NIRP)? On that road the idea that the current yield curve shape points to a recession gets kicked into touch as Goodhart’s Law or if you prefer the Lucas Critique comes into play. But things are now so mixed up that a recession might actually be on its way after all we are due one.

For yields to rise again on any meaningful scale there will have to be some form of calamity for the central banks. This is because QE is like a drug for so many areas. One clear one is the automotive sector I looked at yesterday but governments are addicted to paying low yields as are those with mortgages. On that road they cannot let go until they are forced to. Thus the low bond yields we see right now are a short-term success which central banks can claim but set us on the road to a type of junkie culture long-term failure. Or in my country this being proclaimed as success.

“Since 1995 the value of land has increased more than fivefold, making it our most valuable asset. At £5 trillion, it accounts for just over half of the total net worth of the UK at end-2016. At over £800 billion, the rise in the nation’s total net worth is the largest annual increase on record.”

Of course this is merely triumphalism for higher house prices in another form. As ever those without are excluded from the party.



Whatever happened to the concept of price? how has it changed and what does it mean?

Today I wish to return to what was my earliest theme when I stepped into the online world nearly 6 years ago. Back on the 17th of November 2009 I argued that there were problems with the simple concept of what is a price and used some examples from my own shopping bag to demonstrate this.

For example own brand wine gums have varied between 27 pence and 85 pence. On Sunday a 300 gram tin of garden peas cost 25 pence whilst a 142 gram tin cost 30 pence. So what is the price of these two articles and what level of inflation would we get from them? As the world has changed as a nation we shop more at supermarkets. Everybody who does so will realise that they manipulate prices quite a lot.

This was on my mind the other day when I noticed that the price of a supermarket own brand pot of yoghurt seems to bounce backwards and forwards between 90 pence and £1.10 for no apparent reason.

I pointed out that if we were struggling at times with what is a price or more formally price discovery then we were on dodgy ground when we tried to calculate inflation. I will go further now and say it is one of the reasons why we get caught out more often by inflation numbers and it was nice of Bavaria statistics to illustrate my point on cue this morning by publishing an inflation number  rising by 0.5% and catching the “experts” out (again).

Subsequently I went onto other areas where modern life had made price discovery ever more difficult.

Now if we leave the supermarket who has recently compared mobile phone tariffs? How easy are they to compare? I can confirm that domestic energy prices (electricity and gas) are very difficult to compare even on websites that are supposed to help you. Suppliers are clearly making comparisons difficult. There are many other examples of this. This is quite a serious market failure.

Bringing this up to date the TalkTalk scandal which may cover me as a customer poses its own questions as my custom got sold on from AOL to Carphone Warehouse and now maybe whoever! But the truth is I lost touch a bit with both what was happening and the price. Here is another awkward bit as one of the reasons I did that was because internet service reliability is important to me.

This brings me one of the fundamental credit crunch issues which is that as price discovery was failing pre credit crunch so was much economic theory. We had no equilibrium or if we briefly did we were unaware of it. However it has got much worse in the credit crunch era


This time it is the official bodies which have failed to discover price and inflation numbers as the UK Office for National Statistics have reminded us this morning.

We have designated the IPHRP (Rents) as experimental statistics. The results presented in this article are subject to revisions if improvements in the methodology are identified.

You see they had a series which did so badly it found itself stopped and redacted and sent to whatever place you find abandoned and friendless statistics. It did not stop the UK economics establishment (Consumer Prices Advisory Committee and others) from recommending it. So everyone – apart from those who read my blogs – were sent in the wrong direction on rental and indeed owner occupied inflation. Of course nobody is to blame and indeed many of those responsible have been promoted! But the point is that we were misled as to another price.


These are another form of price and we have seen an emergency interest-rate of 0.5% in the UK for over 6 years now. This has been accompanied by QE and other measures to drive down longer-term interest-rates as well. So in terms of Bank Rate we have no signal of a recovery from the price.

What we do have though is plenty of hype and I note that Bloomberg classify Mark Carney as a “hawk” ignoring the fact that he has yet to actually cast a vote for an interest-rate hike. So let me through in something more subtle. As we struggle to know what a price is central bankers are acting on expectations of price changes via Forward Guidance and expecting that to work. What could go wrong?

Also there was the Li(e)bor scandal.

Market manipulation

Bond  Markets

One can debate the issue over control of short-term interest-rates as central banks have of course intervened in them for decades and decades. Although driving them negative is a new venture. However the advent of large-scale QE and the way that government bond prices and yields have been influenced is new outside of Japan. Let me show you something which illustrates this. From the Financial Times

Italy has sold two-year debt at a negative yield for the first time………Investors accepted a guaranteed loss to buy €1.75bn of Italian debt at a yield of minus 0.023 per cent .

I pointed out last week that such bonds were trading at negative yields but Tuesday was the first time that the Italian Treasury and taxpayer had a guaranteed profit from it.

Now back as 2012 began the ten-year yield in Italy was popping above 7% and back then the national debt had been 116% of GDP (Eurostat 2011). Now the national debt is 136% of GDP and the yield is 1.4%. We need also to factor in the economy but it shrank by 2.8% in 2012 then 1.7% in 2013 and by 0.4% in 2014 followed by growth of 0.9% so far in 2015. So as you can see but for the fact there has been some recent growth everything is worse! Accordingly we see that the “everything it takes speech” and subsequent actions of Mario Draghi have driven this. There is no price discovery here beyond what the European Central Bank wishes us to see.

Only yesterday Sweden announced another effort in this long-running game as it announced another 65 billion Krona of government bond purchases. After that Swedish bond yields went negative out to the five-year maturity chasing Germany (6 years) and Switzerland (15 years). The FT puts it like this.

Sub-zero club now encompasses €2.6tn of debt, up from €2tn in a week.

In a recovery? How is the price discovery system working right now then?

Exchange Rates

Here we obviously have the issue of currency wars. In the last week we have had the Open Mouth Operations of Mario Draghi followed by an interest-rate cut in China, more QE in Sweden and “next time” promises from Janet Yellen and the US Federal Reserve. So we have had some action but mostly talk. But my point is that exchange-rates follow central banking pronouncements like dogs on a short lead. The Euro fell for Draghi and the US Dollar rose for Yellen making a win double of course for the former. Does anybody believe that either of these two individuals have any idea where the equilibrium or market-clearing exchange-rate is? Actually we could go deeper and argue that it is a bit like Heisenberg Uncertainty Theorem but that is for another day.

For now let me just point out that as exchange-rates are a zero-sum game then as a total the effort is pointless unless of course Blondie were prescient here.

And out comes a man from Mars

Rather than “we come in peace” I fear we would try to devalue our currencies against the Martian currency even quicker than Paul Krugman would be able to ask him/her for a fiscal boost.


I am reminded of the 1983 Yes Minister episode which discussed manipulation of numbers so some of this has been going for a long time. But my contention is that it has got worse and just as we would hope to know more via price discovery we in fact know less as they are manipulated. This leads us to Goodhart’s Law.

When a measure becomes a target, it ceases to be a good measure.

Prices? inflation? Interest-Rates? Bond Yields? Exchange-Rates? Oh and I have not even got onto how the QE era and the flow of funds seems to have influenced both commodity and equity prices. Is it a fluke that as bank trading desks withdrew from commodity markets prices fell?

Actually today has seen a more basic manipulation in another sphere apparently come to an end. From Xinhua News.

China abandons one-child policy, allows two kids for all couples

Dear ECB What effect is your Quantitative Easing actually having?

One of the features of the Quantitative Easing (QE) era is that things have not turned out as the  economic theories predicted. The basic issue of it being a form of “printing money” is true in terms of liquidity created –  the creation is electronic rather than in terms of physical notes and coins – but the effects have not fully bourne that out as we move through the monetary system. For example there was a stage when the Bank of England found that whilst it was operating its £375 billion of QE the banks redeposited some £260 billion of it back at the Bank of England. The European Central Bank is finding that its push is being neutered to  a fair extent as well. In the latest Press Conference Mario Draghi told us this although of course he did not put it quite like that. Matters start well from his point of view.

the narrow monetary aggregate M1 growing at an annual rate of 10.5% in April.

You could also say that he likes the broad money pick-up

The annual growth rate of M3 increased to 5.3% in April 2015, up from 4.6% in March.

But loan growth to households is disappointing.

The annual growth rate of loans to households (adjusted for loan sales and securitisation) increased further to 1.3% in April 2015, after 1.1% in March.

If you think that this is not much for all the effort well wait for the lending to business figures.

The annual rate of change of loans to non-financial corporations (adjusted for loan sales and securitisation) was -0.1% in April, after -0.2% in March, continuing its gradual recovery from a trough of -3.2% in February 2014.

Supporters of QE would argue that this is early in the piece as it only started in January. I do hope therefore that they are not the same people claiming it has caused the recent uptick in economic growth! However if we look at other QE efforts the position has been similar and of course the ECB has been bashing away with policies to improve loans to businesses for years and look at the numbers. As we discuss often on here something has changed in the credit crunch era with regards to business borrowing as for example I looked at on the 2nd of this month the UK has a very similar problem.

Actually you do not have to take my word for it as I note this from Mario Draghi.


So yes QE starts as a form of money printing but by the time it has found its way through the monetary system much of the push disappears.

What about financial markets?


It was not so long ago (April) that the ten-year yield of Germany plunged to 0.07% in a frenzy of bond buying. We later had the “flash-crash” and on May 12th I pointed out that it was now ten times larger at 0.7%. Well this morning it reached 1% and then went as high as 1.04%. Quite a change is it not? Also it is a lot higher than when QE began in the Euro area. From Ransquawk.

German 10y yield now = 1.01% German 10y yield on day announced QE = 0.45%

This poses quite a litany of questions. For example the ECB has purchased some 159.6 billion Euros of sovereign bonds up to now and as of the end of May some 34.4 billion Euros of these were German bonds. We know from the Bank of England that such purchases are supposed to raise prices and lower yields.

Through lower borrowing costs and higher wealth, asset prices then raise demand, which acts to push up the consumer price level.

Of course in this contradictory world we have already seen the head of Austria’s central bank Ewald Nowotny tell us exactly the reverse. From Monday’s article.

‘s Nowotny says rising 10yr yields are a ‘success story’ (h/t )

I will leave Ewald to explain to business borrowers in Austria why paying more for loans will improve business borrowing and indeed to owners of the 100 year Austrian bond why that fact that the price has fallen more than 60 points is a success!

What was that about never believing anything until it is officially denied! Still if what happened in Japan at a similar period continues to work Ewald will have plenty more “success” to be a cheerleader of.

So we see that the expectation of QE and then the announcement of it boosted bond prices and lowered yields but now we are wondering if Maxine Nightingale was right all along.

Ooo and it’s alright and it’s comin’ ‘long
We got to get right back to where we started from

To be more specific we are back to late September 2014 at these levels.

Safe Haven Alert

This is a subject where the credit crunch has changed things. Government bonds used to be considered as safe investments. There always was an issue with this as for example in the UK inflation often punished holders of UK Gilts. But can a 10 year German bond yielding 0.07% be considered “safe”? Certainly not in my view. Even shorter-dated bonds have their issues now especially when they offer a guaranteed loss if held to maturity via negative yields.

Or putting it another way central bank interference via QE has made bond markets very volatile which means that they are failing in their role of promoting market stability.

The Euro’s exchange rate

This was something which was performing according to theory as we saw expectations and then the realisation of QE combined with a falling value for the Euro. In the middle of March it fell below 1.05 to the US Dollar which was very different to the nearly 1.37 of last July. But now it is at 1.13. The Euro has also pushed the UK Pound £ back below 1.36.

The trade-weighted index fell to 89.5 in mid-April but has now risen to 93.6. So we see that the reality of QE not only is now seeing higher yields but also a rising currency or exactly the reverse of the theory.

One bit of economic theory that does seem to be working is that higher yields in a country or area support the exchange-rate. Or to put it another way in more practical terms the carry trade looks like it is back. Of course that has led to a double-whammy for the ECB as it decides whether to tell us up is the new down or not.

Equity Markets

One of the supposed certainties of QE is that equity markets rise. The liquidity provided may only weakly reach households and may not reach businesses at all but the 0.1% seem able to get it to boost their equity portfolios! The Eurofirst 300 equity index has surged since the real QE rumours began last December but even it turned lower in late May.


This subject is much more complex than it first appears as we note that money does appear as liquidity is produced but then much of the growth “disappears” as we look at wider measures. Much seems to go into asset prices although here currently we are seeing something of a set back especially in bond markets. The clearest move has been for a lower Euro exchange-rate although even it has changed direction recently. It is like looking at a battlefield where someone has laid a smokescreen!

This has not stopped some from already declaring ECB QE to be a success as economic growth pushed ahead in the first part of 2015. That ignores the impact of the falling oil price which in my opinion was a much stronger force. Actually the World Economic Forum seems not to have noticed that the oil price has bounced back to some extent, perhaps the author does not drive.

Other indicators, however, paint a different picture. Notably, price growth turned positive last month, suggesting that the threat of deflation has been eliminated.

Who would have thought that many of the effects of QE would be so uncertain so far down the road?

Quango Mania

It is the UK Mansion House speech tonight and already it would appear we have this to consider.

Committee of the Commissioners for the Reduction of the National Debt

I am trying to decide whether that is more reminiscent of the South Sea Bubble or the writings of George Orwell!

Apparently we will have a budget surplus in “normal times”. So not any time soon and maybe never?