What are the consequences of a parallel currency for Italy?

This week has seen the revival of talk about a subject which has done the rounds before. It would also appear that you cannot keep Silvio Berlusconi down as he was the person bringing it back into the news! Here is what was put forwards according to the Financial Times.

Berlusconi said the right-wing Lega Nord’s proposal of introducing the so-called ‘mini-BoT’ (short-term, interest-free, small-sized government securities, a sort of ‘IOUs’ to be used as internal currency to pay government suppliers, taxes, social security contributions, etc) would not be too far from his idea of a parallel currency.

There are quite a few issues here but let us stick to the obvious question which is could it happen? The FT again.

Berlusconi’s point then is that a parallel currency could be launched entirely legally within the constructs of European treaties, with the ECB potentially powerless to intervene once the decision has been taken.

Either way, regardless of whether Italy goes down the path of an explicit parallel currency or the introduction of small-sized Italian government securities, it’s clear the will to break up the euro’s monopoly in Italy is growing.

According to Citi’s analysts more than two thirds of Italian voters currently support parties with an anti-euro stance.

An interesting view although of course likely to cause something of an Italian turf war as the current President of the ECB Mario Draghi told us this in July 2012.

And so we view this, and I do not think we are unbiased observers, we think the euro is irreversible. And it’s not an empty word now, because I preceded saying exactly what actions have been made, are being made to make it irreversible.

Of course the speech went further with the by now famous phrase below.

Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.

So there would be an especial irony should it be that Mario’s home country ends up torpedoing the whole project. Perhaps that is why his speech this morning refers back to 2012.

Investors had begun pricing redenomination risk into sovereign debt and interbank markets, as they worried about the possible break-up of the euro area.

And reminds us of his “Jedi Mind Trick” from back then.

This is why we announced Outright Monetary Transactions (OMTs) as an instrument that can support our monetary policy. The idea was for the ECB to purchase the sovereign bonds of countries affected by panic-based redenomination risk.

This brings us back to this week where Italian bond yields rose in response to such risk but only to 2.1% for the ten-year as I type this. So some 5% lower than the time of the Euro crisis and those selling Italian bonds would most likely be selling them to the bond buyers of the ECB. So in that sense Mario has played something of a blinder here especially if we allow for the fact that going forwards the ECB may purchase such bonds disproportionately ( partly because it is running out of German bonds to buy).

Some care is needed as on the face of it there is only one winner which is the “whatever it takes” ECB. But take care because if we dive a little deeper there is the issue of the ECB being backed by 19 different treasuries including the Italian one. What if people started to believe it would no longer be one of them? What would the other treasuries think about owning lots of Italian government bonds ( 283.7 billion Euros)? It would make the discussions with the UK look like a tea party.

How did this begin?

In essence the parallel currency thoughts came out of this summarised by Roubini’s Economonitor in July 2014.

Since 2008, Italy’s industrial production has shrunk 25 per cent. In the last quarter of 2013, while exports reached back to almost the same level as in 2007, household consumption was down by about 8 per cent and investment by 26 per cent, with a capacity loss in manufacturing hovering around 15 per cent. Between 2007-2013 employment fell by more than a million, and the unemployment rate more than doubled (Banca d’Italia 2014a).

So we have the issue of Italian economic underperformance which regular readers will be well aware of. Not only was economic output below that below the credit crunch peak it went below the level of the year 2000. On an individual level the position was in fact even worse as the population has grown in the Euro area and I recall calculating that economic output ( GDP) per head was in fact 7% lower than in 2000.

What about now?

Whilst the specific numbers this morning were for France and Germany the Markit PMI business survey hinted at more growth for Italy.

The rest of the eurozone saw a slightly weaker increase in output during the month, albeit one that was still marked. A slower rise in services activity outweighed stronger growth of manufacturing output.

This adds to last weeks official release.

In the second quarter of 2017 the seasonally and calendar adjusted, chained volume measure of Gross Domestic Product (GDP) increased by 0.4 per cent with respect to the first quarter of 2017 and by 1.5 per cent in comparison with the second quarter of 2016.

So we find an irony in that the parallel currency has been revived when Italy is doing better economically. The catch is that if we move to the individual experience and look at GDP per inhabitant we see the underling issue. In 2007 GDP per individual was 28.699 Euros and in 2016 it was 25876 Euros in 2010 prices.


There is a fair bit to consider here and the first is that parallel currencies are usually not approved by the government and may even be restricted or made illegal. Usually it is the US Dollar being used due to a loss of faith in the national currency although in an irony some places could use the Euro. We saw an example of the US Dollar being used in Ukraine for example. So the crux of the matter in many ways would be what would be legal tender in Italy going forwards and as someone observed when we looked at Bitcoin can it be used to pay taxes? Presumably this time the answer to the latter would be yes.

Next comes the interrelated issues of capital flight and currency depreciation or devaluation. I think that it is clear that large sums would leave Italy which poses the issue of whether a 1:1 exchange-rate could be maintained and for how long? I see no mention for example of what the official interest-rate would be? Moving onto debts such as bank debt and Italian government bonds or BTPs in theory the ECB could insist on repayment in Euros but in practice we come to the famous quote from Joseph Stalin.

“How many divisions does the Pope of Rome have?”

In the end it comes down to the words fiat and and faith. The first is easy as the government can make a law but will people not only have faith but really believe? Also in a way it is something of a side show ( Bob) because both pre and during the Euro what Italy has needed is reform and of course neither has delivered it. Mario Draghi reminds us of this at every ECB press conference.





Has the Bank of England fed yet more subprime lending troubles?

One of the main drivers of the UK public finance data which arrives later is the state of the UK economy. There we find that the solid GDP ( Gross Domestic Product) growth of recent years has been replaced by slower more marginal growth in 2017 so far. Also the attempts of the Bank of England to boost the economy via its extra monetary easing of last August are hitting the problems described by former HM Treasury Permanent Secretary Nick Macpherson like this yesterday.

QE like heroin: need ever increasing fixes to create a high. Meanwhile, negative side effects increase. Time to move on.

It raises a wry smile to see a latter-day Sir Humphrey agree with me although Nick did in fact move higher in establishment terms as he is now a Lord. Also it is easy to say  it now after the damage has been done it would have been much braver to say it against the establishment consensus at the time.

Car Loans

One of the areas where stresses in the UK economy are being seen are in the car and car loan markets. As I wrote only on Friday these were fed by the way that the finance subsidiaries of the car manufacturers have been able to step into the market via what are rental deals dressed up as purchases. This will have been oiled by the Bank of England £435 billion of QE and £80.3 billion of its Term Funding Scheme. Whilst the latter specifically helped banks and building societies the aim was ” to support additional lending to the real economy,” Was it a further push for the car market?

The problem after the boom for the car market is that you pump it up so much that you then get a bust. On Friday I pointed out that incentive schemes and subsidies being provided by the manufacturers are a sign of trouble ahead and today the BBC is reporting this. From the BBC.

Ford is the latest car company to launch an incentive for UK consumers to trade in cars over seven years old, by offering £2,000 off some new models.

Unlike schemes by BMW and Mercedes, which are only for diesels, Ford will also accept petrol cars.

All of the part-exchanged vehicles will be scrapped, Ford said, which would have an “immediate positive effect on air quality”.

Old cars, from any manufacturer, can be exchanged until the end of December.

There is of course an addition for my financial lexicon for these times as we discover a price cut is in fact a “positive effect on air quality”.

Provident Financial

I have regularly pointed out the dangers of the surge in unsecured lending in the UK that was also fed by the Bank of England “Sledgehammer” QE and Bank Rate cut of last August. One of the places you would look for trouble is in the area of subprime lending where Provident Financial has released quite a tale of woe this morning. Let us go back only a month.

The group has continued to exercise strong discipline around credit and not observed changes in customer behaviour in relation to either demand for credit or credit performance.

And this morning.

Collections performance is currently running at 57% versus 90% in 2016 and sales at some £9m per week lower than the comparative weeks in 2016. ………….The pre-exceptional loss of the business is now likely to be in a range of between £80m and £120m.

That is a bit different to a pre exceptional profit of £60 million. How much can you lose in a month? This is the sort of Forward Guidance we associate with central banks. Yet again we see a banking organisation which chooses to be “economical with the truth” to coin a phrase and try to drip feed or manage bad news. It has not gone well today with the Chief Executive gone, the dividend scrapped, and a FSA investigation into one of the subsidiaries. The share price is not for the faint hearted because as I type this it is £6.78 or down some £10.67 on the day.

I do hope that someone will ask Bank of England Chief Economist Andy Haldane about this as he undertakes his UK tour which if the FT coverage is any guide seems to be part of an effort to make him the next Governor. After all it was entirely predictable ( please look at my past updates on here) that unsecured lending would boom and lead to trouble just like it has in the past. Andy’s “Sledgehammer” QE lit the blue touch-paper.

A Fiscal Stimulus?

I ask this on several fronts. Let me open with this from former Chancellor George Osborne on BBC Radio 4 Today earlier. From the BBC.

Former Chancellor George Osborne has urged the government to build high-speed rail lines across the north of England, from Liverpool to Hull.

Mr Osborne, who launched the “Northern Powerhouse” initiative when in government,

The so-called HS3 railway project seems a much better idea than HS2 but then almost anything is. A weak minority government is always likely to succumb to such ideas and I was thinking of that as I noted this in this morning’s public finance release.

Over the same period, central government spent £245.9 billion; around 5% more than in the same period in the previous financial year.

Actually some £4.1 billion of this is extra debt interest. An awkward number when you consider we have such low yields as we mull a fiscal stimulus to holders of UK Gilts! What is happening here is the consequence of the rise in inflation as index-linked Gilts use the Retail Price Index which rose in July at an annual rate of 3.6%.

Revenue is not bad

Whilst it was eclipsed by the spending growth revenues did beat the official inflation data comfortably.

In the current financial year-to-date, central government received £226.6 billion in income; including £168.1 billion in taxes. This was around 4% more than in the same period in the previous financial year.

Indeed if we look at July specifically there was some hopeful news from the self-assessment numbers.

This month, receipts from self-assessed Income Tax increased by £0.8 billion to £8.0 billion, compared with July 2016. This is the highest level of July self-assessed Income Tax receipts on record (records began in 1999).

This meant we had a small surplus in July but that the fiscal year so far saw an extra £1.9 billion of borrowing compared to last year.


There are two ironies today. The first is that on a day when I was thinking about public sector debt we get a reminder of the troubles in private debt via the unsecured sector and subprime in particular. Next is a timing irony as this from Ann Pettifor hints at.

Former chairman of Northern Rock given a platform by to opine about “principles” shows how corrupt is the British establishment.

So a former chairman of a past subprime lender gets a media soapbox on a day new subprime fears see signs of a coming to fruition? The phrase credit crunch has many meanings but a flicker of it seems likely to be added to by the fact that official restrictions on outward investment from China seem to be biting. From City-AM.

Chinese conglomerate Dalian Wanda has ditched plans to buy London’s Nine Elms Square, it was announced this morning.

Meanwhile the Bank of England and its Governor Mark Carney are “Vigilant.”



The Jackson Hole symposium should embace lower inflation

Later this week the world’s central banks will gather at the economics symposium of the US Kansas Federal Reserve at Jackson Hole in Wyoming. The description can be found below.

The 2017 Economic Symposium, “Fostering a Dynamic Global Economy,” will take place Aug. 24-26, 2017.  (The program will be available at 6 p.m., MT, Aug. 24, 2017).

It is appropriate that they do not yet know the program as the world’s central bankers find themselves at a variety of crossroads which they are approaching from different directions. It is also true that after all their expansionary monetary policy and “masters ( and mistresses) of the universe” activities over the last decade or so they now approach one of the most difficult decisions which is how to exit these programs. For some this will simply mean a slowing of the expansion. This all looks very different to when a speech on Forward Guidance was eagerly lapped up by a receptive audience and quickly became policy in many countries. After all Open Mouth Operations make a central banker feel both loved and important as we all hang on every word. Oh and there is a clear irony in the title of “Fostering a Dynamic Global Economy” for a group of people whose propping up of many zombie banks has led to anything but. That is of course assuming anyone knows what the phrase means in practice!

The inflation issue

The issue here is highlighted by this from Bloomberg today.

The world’s top central bankers head to Jackson Hole amid growing unease about low inflation.

Of course central bankers and those in the media subject to their brainwashing program may think this but the ordinary worker and consumer will be relieved. Should any of the central bankers suffer from stomach problems no doubt they will be delighted to discover this from CNBC.

Hikma Pharmaceuticals Plc’s U.S. subsidiary has raised the price of a common diarrhea drug by more than 400 percent and is charging more for five other medicines as well, the Financial Times reported on Sunday……The average wholesale price of a 60 ml bottle of liquid Atropine-Diphenoxylate, a common diarrhea drug also known as Lomotil, went from about $16 a bottle to $84, the FT reported.

Central banker heaven apparently and what needs looking into in my opinion is the clear examples of price gouging we see from time to time. Also more mundane products are seeing price rises. From Mining.com last week.

The iron ore price is now trading up a whopping 43% from its 2017 lows struck just two months ago.

According to Yuan Talks the Dalian futures contract rose 6.6% today before price limits kicked in. It is not alone as the Nikkei Asian Review points out.

Three-month zinc futures were at their highest level in 10 years, at about $3,100 per ton, rising 26% over the same period.
Aluminum also rose 10% over the same period.

So as well as raising a smile on the face of the heads of the central banks of Canada and Australia there are hints of some commodity inflation about. This provides a counterpoint to the concerns about low inflation which in the Euro area and the US is not that far below especially when we allow for the margin of error.

Does QE lead to inflation?

Some care is needed here as of course we have seen waves of asset price inflation across a wide range of countries. But of course the statistical policy across most of the world is to avoid measuring that in consumer inflation. Then it can be presented as growth which for some it is but not for example for first time buyers. However one of the building blocks of economics 101 is that QE ( Quantitative Easing) leads to inflation. Yet the enormous programs in the US and the ongoing one in the Euro area have not got consumer inflation back to target and the leader of the pack in this regard Japan has 0% inflation. After all the money involved has it simply led to price shifts? That is especially awkward for Ivory Tower theorists as they are not supposed to be able to happen with ~0% inflation so I guess they sent their spouse out to fill up the car as the petrol/diesel price fell.

More deeply whilst the initial effect of QE should have some inflationary implications is there something in it such as the support of a zombie business culture that means inflation the fades. It could of course be something outside of the monetary environment such as changing demographics involving ageing populations. Perhaps it was those two factors which broke the Phillips Curve.

As to future prospects there are two issues at play. The US Federal Reserve will start next month on an exit road which I remember suggesting for the Bank of England in City-AM some 4 years ago. If you do not want QE to become a permanent feature of the economic landscape you have to start somewhere. The issue for the ECB is getting more complex mostly driven by the fiscal conservatism of Germany which means that a supply crunch is looming as it faces the prospect of running out of German bonds to buy.

Currency Wars

There are two specific dangers here which relate to timing ( during thin summer markets) and the fact that markets hang on every central banking word. Eyes will be on the Euro because it has been strong in 2017 and in particular since mid April when it did not quite touch 93 on its effective ( trade-weighted) index as opposed to the 98.7 the ECB calculated it at on Friday. It has put another squeeze on the poor battered UK Pound £ but of more international seriousness is yet another example of a problem for economics 101 as interest-rate rises should have the US Dollar rising. Of course there is a timing issue as the US Dollar previously rose anticipating this and maybe more, but from the point of Mario Draghi and the ECB there is the fear that cutting the rate of QE further might make the Euro rally even more. Although one might note that in spite of the swings and roundabouts along the way the Euro at 98.7 is not far away from where it all began.

The Bank of Japan is also facing a yen rallying against the US Dollar and this morning it briefly rose into the 108s versus the US Dollar. Whilst it is lower than this time last year the trend seemed to change a few months back and the Yen has been stronger again.


It is hard not to have a wry smile at a group of people who via Forward Guidance and Open Mouth Operations have encouraged markets to hang on their every word now trying to downplay this. If you create junkies then you face the choice between cold turkey or a gradual wind down. Even worse you face the prospect of still feeding addiction number one when a need for number two arises as sooner or later an economic slow down will be along. Or creating fears about low inflation when the “lost decades” of Japan has shown that the world does not in fact end.

If we move onto the concept of a total eclipse then I am jealous of those in the United States today. From Scientific American.

Someone said that it is like suddenly being in some sort of CGI of another world or maybe like a drug-induced hallucination that feels (and is) totally real.

No they have not switched to central banking analysis but if the excellent BBC 4 documentary ”  do we really need the moon?” is any guide we should enjoy solar eclipses whilst we still have them. Meanwhile of course there is Bonnie Tyler.

I don’t know what to do and I’m always in the dark
We’re living in a powder keg and giving off sparks.





What is the state of play in the UK car loan market?

One of the features of the last few years has been the boom in car finance in the UK. This has led to a subsequent rise in car sales leading to something of a boom for the UK automotive sector.  the rate of annual UK car registrations dipped to below 2 million in 2011 and much of 2012 but then accelerated such that the SMMT ( Society of Motor Manufacturers and Traders) reported this in January last year.

UK new car registrations for 2015 beat 2.6 million units for the first time, sealing four years of consecutive growth. The market has posted increases in all bar one of the past 46 months ………Overall, the market rose 6.3% in 2015 to 2,633,503 units – exceeding forecast and outperforming the last record year in 2003 when 2,579,050 new cars left the UK’s showrooms.

So volumes surged as we note the official explanation of why.

Buyers took advantage of attractive finance deals and low inflation to secure some of the most innovative, high tech and fuel efficient vehicles ever produced.

The “attractive finance deals” attracts my attention as it feeds into one of my themes. This is that the Bank of England loosened up credit availability with its Funding for Lending Scheme in the summer of 2013. This flowed into the mortgage market but increasingly looks as if it flowed into the car finance market as well leading to what are described as “attractive finance deals”. This was added to by the Term Funding Scheme ( £80.4 billion and rising) of last August when the Bank of England wanted a “Sledgehammer” of support for lending. We know from past experience that such actions lead to the funds going to all sorts of places that no doubt will be officially denied, or disintermediation. But the car finance industry has exploded to now be 86% of the new car market. Of course the Bank will also describe itself as being “vigilant” about credit risks.

Bank Underground

This is the blog of the staff of the Bank of England rather than the London Underground station to which I commuted for quite a few years. They point out that the car market is now slowing.

Private demand for new cars slowed in 2016 (Chart 2). New car registrations spiked higher in 2017 Q1 — mostly due to changes in vehicle excise duty — but fell back sharply thereafter. The Society for Motor Manufacturers and Traders (SMMT) forecasts registrations declining by 2½% in 2017 and by a further 4% in 2018.

I know that this is being described as a consequence of the EU leave vote but whilst the fall in real wages may have added to it a fall was on its way for a saturated market. How many cars can we all drive on what are often very congested roads? Also the bit about “high-tech” I quoted from the SMMT last January has not worn the passage of time well. Although to be fair the emissions cheating software on many diesels was indeed high-tech. The consequence of that episode has also affected the market as I am sure some are waiting to see if the diesel scrappage scheme that was promised actually appears.

So we had a monetary effort to create a Keynesian effect which is that what was badged as “credit easing” did what it says on the tin. Car manufacturers and others used it to offer loans and contracts which shifted car demand forwards. But the catch is what happened next? The future is supposed to be ready for us to pick up that poor battered can which was kicked forwards but increasingly it does not turn out like that.

What about the finance market?

According to the Bank of England it has responded and below is one of the changes.

Providers are increasingly retailing contracts where consumers have no option to purchase the car at the end.  This avoids some risks associated with voluntary terminations, but it creates new risks around resale value.

Are they avoiding a problem now being creating one at the end of the contract? Anyway that issue is added to by the familiar response of a credit market to signs of trouble which can be described as “extend and pretend”

finance providers have responded by lengthening loan terms and increasing balloon payments rather than upping monthly repayments.

Actually there are a variety of efforts going on in addition to lengthening the loan term.

Manufacturers typically set the GMFV ( Guaranteed Minimum Future Value) at around 90% of the projected second-hand value at the end of the contract, in order to build a safety margin into their calculations. Tweaking the proportion can have a material impact on the cost of car finance. Switching the GMFV from 90% to 95% would likely reduce the consumer’s monthly payment.

Reducing the safety margin at the first sign of trouble is of course covered by one of the Nutty Boys biggest hits.

Madness, they call it Madness

Also there is a switch to PCH or Personal Contract Hire finance where the consumer does not have the option to buy the car. This is presumably to avoid what for them will be a worrying development.

So-called voluntary terminations are increasing, and usually result in losses to the finance houses.

However this comes with quite a price.

Greater use of PCH has certain risks attached for car finance houses. The primary risk inherent in PCP finance (ie the car’s uncertain market value when returned at the end of the contract) is at least as great under PCH. And a business model of increasingly relying on volatile and lower-margin wholesale markets to sell cars adds to the risk.

Oh and when all else fails there is of course ouvert price cuts.

Manufacturers often vary the amount of cash support to car dealers in order to meet sales targets — sometimes referred to as variable marketing programmes….. Our intelligence suggests that dealership incentives have increased over the past year.

So my financial lexicon for these times needs to add “cash support” and “dealership incentives” to its definition of price cuts. As it happens an advert for SEAT came on the radio as I was typing this I looked up the details. This is for an Ibiza SE.

One year’s Free Insurance (from 18 yrs)^

  • £1,500 deposit contribution**
  • 5.9% APR Representative**
  • Plus an extra £500 off when you take a test drive*


It is hard not to look across the Atlantic and see increasingly worrying signs about the car loans market. There are differences as for example the falling car prices seen in the consumer inflation data are not really being repeated in the UK so far. I checked the July data earlier this week and whilst used car prices fell by 1.1% new car prices rose by 1.3% although of course we wonder if the new offers are reflected in that? However the move towards “extend and pretend” and the use of the word “innovative” is troubling as we know where that mostly ends up. Or if you prefer here is it via the Bank of England private coded language.

That is partly because car manufacturers and their finance houses are increasingly stimulating private demand by offering cheaper (and new) forms of car finance. As amounts of consumer credit increase, so do the risks to the finance providers. Most car finance is provided by non-banks, which are not subject to prudential regulation in the way that banks are. These developments make the industry increasingly vulnerable  to shocks.


My deepest sympathies go out to those caught up in the terrorist attacks in and around Barcelona yesterday.




Is housing a better investment than equities?

As you can imagine articles on long-term real interest-rates attract me perhaps like a moth to a flame. Thank you to FT Alphaville for drawing my attention to an NBER paper called The Rate of Return on Everything,but not for the reason they wrote about as you see on the day we get UK Retail Sales data we get a long-term analysis of one of its drivers. This is of course house prices and let us take a look at what their research from 16 countries tells us.

Notably, housing wealth is on average roughly one half of national wealth in a typical economy, and can fluctuate significantly over time (Piketty, 2014). But there is no previous rate of return database which contains any information on housing returns. Here we build on prior work on housing prices (Knoll, Schularick, and Steger, 2016) and new data on rents (Knoll, 2016) to offer an augmented database which can track returns on this important component of national wealth.

They look at a wide range of countries and end up telling us this.

Over the long run of nearly 150 years, we find that advanced economy risky assets have performed strongly. The average total real rate of return is approximately 7% per year for equities and 8% for housing. The average total real rate of return for safe assets has been much lower, 2.5% for bonds and 1% for bills.

If you look at the bit below there may well be food for thought as to why what we might call the bible of equity investment seems to have overlooked this and the emphasis is mine.

These average rates of return are strikingly consistent over different subsamples, and they hold true whether or not one calculates these averages using GDP-weighted portfolios. Housing returns exceed or match equity returns, but with considerably lower volatility—a challenge to the conventional wisdom of investing in equities for the long-run.

Higher returns and safer? That seems to be something of a win-win double to me. Here is more detail from the research paper.

Although returns on housing and equities are similar, the volatility of housing returns is substantially lower, as Table 3 shows. Returns on the two asset classes are in the same ballpark (7.9% for housing and 7.0% for equities), but the standard deviation of housing returns is substantially smaller than that of equities (10% for housing versus 22% for equities). Predictably, with thinner tails, the compounded return (using the geometric average) is vastly better for housing than for equities—7.5% for housing versus 4.7% for equities. This finding appears to contradict one of the basic assumptions of modern valuation models: higher risks should come with higher rewards.

Also if you think that inflation is on the horizon you should switch from equities to housing.

The top-right panel of Figure 6 shows that equity co-moved negatively with inflation in the 1970s, while housing provided a more robust hedge against rising consumer prices. In fact, apart from the interwar period when the world was gripped by a general deflationary bias, equity returns have co-moved negatively with inflation in almost all eras.

A (Space) Oddity

Let me start with something you might confidently expect. We only get figures for five countries where an analysis of investable assets was done at the end of 2015 but guess who led the list? Yes the UK at 27.5% followed by France ( 23.2%), Germany ( 22.2%) the US ( 13.3%) and then Japan ( 10.9%).

I have written before that the French and UK economies are nearer to each other than the conventional view. Also it would be interesting to see Japan at the end of the 1980s as its surge ended and the lost decades began wouldn’t it? Indeed if we are to coin a phrase “Turning Japanese” then this paper saying housing is a great investment could be at something of a peak as we remind ourselves that it is the future we are interested as looking at the past can hinder as well as help.

The oddity is that in pure returns the UK is one of the countries where equities have out performed housing returns. If we look at since 1950 the returns are 9.02% per year and 7.21% respectively. Whereas Norway and France see housing returns some 4% per annum higher than equities. So the cunning plan was to invest in French housing? Maybe but care is needed as one of the factors here is low equity returns in France.

Adjusted Returns

There is better news for UK housing bulls as our researchers try to adjust returns for the risks involved.

However, although aggregate returns on equities exceed aggregate returns on housing for certain countries and time periods, equities do not outperform housing in simple risk-adjusted terms……… Housing provides a higher return per unit of risk in each of the 16 countries in our sample, and almost double that of equities.

Fixed Exchange Rates

We get a sign of the danger of any correlation style analysis from this below as you see this.

Interestingly, the period of high risk premiums coincided with a remarkably low-frequency of systemic banking crises. In fact, not a single such crisis occurred in our advanced-economy sample between 1946 and 1973.

You see those dates leapt of the page at me as being pretty much the period of fixed(ish) exchange-rates of the Bretton Woods period.


There is a whole litany of issues here. Whilst we can look back at real interest-rates it is not far off impossible to say what they are going forwards. After all forecasts of inflation as so often wrong especially the official ones. Even worse the advent of low yields has driven investors into index-linked Gilts in the UK as they do offer more income than their conventional peers and thus they now do not really represent what they say on the tin. Added to this we now know that there is no such thing as a safe asset more a range of risks for all assets. We do however know that the risk is invariably higher around the time there are public proclamations of safety.

Moving onto the conclusion that housing is a better investment than equities then there are plenty of caveats around the data and the assumptions used. What may surprise some is the fact that equities did not win clearly as after all we are told this so often. If your grandmother told you to buy property then it seems she was onto something! As to my home country the UK it seems that the Chinese think the prospects for property are bright. From Simon Ting.

From 2017-5-11 90 days, Chinese buyers (incl HK) spent 3.6 bln GBP in London real estate.
Anyway, Chinese is the #1 London property buyer.

Perhaps the Bitcoin ( US $4456 as I type this) London property spread looks good. Oh and as one of the few people who is on the Imputed Rent trail I noted this in the NBER paper.

Measured as a ratio to GDP, rental income has been growing, as Rognlie (2015) argues.

Meanwhile as in a way appropriately INXS remind us here is the view of equity investors on this.

Mystify me
Mystify me

UK Retail Sales

There is a link between UK house prices and retail sales as we note that both have slowed this year.

The quantity bought increased by 1.3% compared with July 2016; the 51st consecutive year-on-year increase in retail sales since April 2013.





UK employment remains incredibly strong with even a flicker from real wages

Yesterday brought good news in that UK inflation is looking like it will be a little more subdued than our worst fears. However even so today we move onto comparing it with wage growth which is in a phase where it is below the inflation target measure of the Bank of England ( CPI 2.6% ) and even more so compared to the Retail Price Index at 3.6%. We started the week with some ominous news on the wages front as the Chartered Institute of Personnel and Development or CIPD released this survey on Monday.

basic pay award expectations for the next 12 months remain at just 1%

That was a downgrade from the circa 2% that we seem to be rumbling forwards at. According to the CIPD the reasons for this are as follows.

Against the backdrop of poor productivity growth, the report points to an increase in labour supply over the past year as a key factor behind the modest pay projection. This is driven by relatively sharp increases in the number of non-UK nationals from the EU, ex-welfare claimants and 50-64 year olds; although the report is keen to stress the future migration trends appear highly uncertain.

I do not know about you but I was not expecting to see a rise in employment based migration from the European Union being reported! This seems to be predominantly for lower-skilled jobs.

Employers report a median number of 24 applicants for the last low-skilled vacancy they tried to fill, compared with 19 candidates for the last medium-skilled vacancy and eight applicants for the last high-skilled vacancy they were seeking to fill.

This is fascinating in an economics concept and of course yet more dreadful news for the Ivory Tower theorists who face yet again the prospect of explaining why 2+2=5. Labour supply is supposed to have shrunk as EU citizens leave adding to the output gap which means wages will surge. We got something on those lines from Ben Broadbent of the Bank of England a week or two ago. The same Bank of England that makes this mistake every year.

The good news was that labour demand was reported as strong.

the long-term unemployed are finding work more quickly and the amount of workers aged 50-64 who are in employment has risen by around 200,000 during the past year……This is reflected in the quarter’s net employment balance – a measure of the difference between the proportion of employers who expect to increase staff levels and those who expect to decrease staff levels in Q3 2017 – which shows an increase from +20 to +27 during the past three months.

Bank of England Agents

They were more upbeat perhaps indicating that bonus pay is on the rise.

Recruitment difficulties had edged higher, and were gradually broadening across sectors and skill areas. Despite this, labour cost growth had been modest, with pay awards clustered around 2%–3%.

Today’s data


There is continuing evidence that labour demand continues its long climb in the UK.

There were 32.07 million people in work, 125,000 more than for January to March 2017 and 338,000 more than for a year earlier…….The employment rate (the proportion of people aged from 16 to 64 who were in work) was 75.1%, the highest since comparable records began in 1971.

This backs up the CIPD view that labour demand remains strong and poses yet again a conundrum that was in vogue around 4 years ago. This is that the employment figures look stronger than the economic output ( GDP ) ones. Last time around it was the employment figures which were the leading indicator so let us cross our fingers. Also there was another piece of news hinting at a stronger jobs market.

There were 883,000 people (not seasonally adjusted) in employment on “zero-hours contracts” in their main job, 20,000 fewer than for a year earlier.

Also the numbers employed had something that you might not have thought was true if you read the mainstream media. From Andy Verity of the BBC.

In year to end of June, the number of UK born people working in the UK increased by 88,000. Non-UK born people working increased by 262,000.

I thought everyone was leaving? If we look at the sector mostly likely to be affected EU nationals there has still been growth mostly driven by Bulgarians and Romanians but slower growth than before.


There was further good news here.

There were 1.48 million unemployed people (people not in work but seeking and available to work), 57,000 fewer than for January to March 2017 and 157,000 fewer than for a year earlier……The unemployment rate (the proportion of those in work plus those unemployed, that were unemployed) was 4.4%, down from 4.9% for a year earlier and the lowest since 1975.

For newer readers higher employment mostly means lower unemployment but does not have to as there are other factors such as size of the labour force. The good news extends to the news on underemployment. We only get quarterly hints on this but in the 3 months to June the rate was 0.5% lower than last year at 7.7%. So relatively good but if we look back for some perspective then we see that it was pre credit crunch mostly in the mid 6% range.


There was some better news here which is welcome to say the least.

Latest estimates show that average weekly earnings for employees in Great Britain in nominal terms (that is, not adjusted for price inflation) increased by 2.1%, both including and excluding bonuses, compared with a year earlier.

This means that real wages fell by a little less than the trend predicted.

Latest estimates show that average weekly earnings for employees in Great Britain in real terms (that is, adjusted for price inflation) fell by 0.5%, both including and excluding bonuses, compared with a year earlier.

Actually if we drill down into the monthly detail we see that in terms of official calculations real wages nudged a little higher in June as annual wage growth was 2.8%. This was due to two factors one is that bonus payments were strong and that weekly wages fell by £1 last June so sadly it seems set to drift away. Also for those of us who still look at the RPI inflation figures even this better number still gives a negative answer for real wages.


There is some genuinely good news here as we see that the employment picture remains very strong a year after the EU leave vote ( as the numbers stretch to June). Unemployment is hitting lifetime lows for an ever higher percentage of the population and even wage growth has nudged higher. Yet as ever we need to ask if this is an example of “tractor production is higher?”

As we do so then we need to note that the underemployment numbers are higher giving a rate a bit more than 1% higher than in the pre credit crunch era. So more jobs but perhaps not quite as much more work as one might think. This is a partial explanation of what are wages growth numbers less than half of Ivory Tower output gap style explanations and expectations.

As to the wages numbers themselves we need to remind ourselves that they exclude the self-employed which means that we are likely to need to subtract something. But there is another factor heading the other way which is that we have created more lower paid jobs which seem to have weak wage growth and may be influencing the numbers or what is called compositional change. As ever the numbers let us down or as the TV series Soap reminded us.

Confused? You will be…..




Expensive times are ahead for UK railway travellers and commuters

Before we even get to the latest UK inflation data some worrying data has emerged. What I mean by this is that Sweden has announced its inflation data which makes its monetary policy even more mind-boggling.

The inflation rate according to the Consumer Price Index (CPI) was 2.2 percent in July 2017, up from 1.7 percent in June. The Swedish Consumer Price Index (CPI) rose by 0.5 percent from June to July 2017

If we look back to the July Minutes we see that the forecasting skills of the Riksbank are unchanged.

several board members emphasised that it was not sufficient for inflation to temporarily touch the 2 per cent mark.

Actually they are considering a switch of target but in fact that poses even more of a problem.

The inflation rate according to the CPI with a fixed interest rate (CPIF) was 2.4 percent in July, up from 1.9 percent in June. The CPIF rose by 0.6 percent from June to July 2017.

So let us leave the Riksbank to explain why it has an interest-rate of -0.5% and is adding to its QE bond purchases with inflation as above and the economy growing at an annual rate of 4%? This inflation rise added to the rise in India yesterday and in terms of detail was driven by package holiday (0.3%) and air fare ( 0.2%) price rises. Transport costs rises are a little ominous on the day that we find out how much UK rail fares will rise next January.


This is the new UK inflation measure and is described thus.

CPIH is our lead measure of inflation and offers the most comprehensive picture of how prices are changing in the economy.

As it uses imputed rents for the housing sector I have challenged them on the use of “comprehensive” so far without much success but you may note the use of “lead” where I have had more success. Efforts to call it “headline” or “preferred” have been extinguished. Meanwhile this happened at the end of July.

On behalf of the Board of the Statistics Authority, I am pleased to confirm the re-designation of CPIH as a National Statistics.

I wish to challenge this by concentrating on the issue of rents. There are two issues here the first is the fantasy economics  that owner-occupiers rent out their homes and the second is the measurement of rents has problems.

  1. There is an issue over the spilt between new lets and existing ones which matters as new let prices tend to rise more quickly.
  2. There is an issue over lags in the data which has been kept under wraps but is suspected to be as long as 18 months so today’s data for July is actually last year’s.
  3. There is the issue that we are being reassured about numbers they confess to not actually knowing.

    “. I acknowledge the efforts by ONS staff to provide reassurance around the quality of the Valuation Office Agency (VOA) private rents microdata, which are currently unavailable to ONS. “

There are alternatives which dissidents like me are pressing such as Household Costs Index designed originally by John Astin and Jill Leyland under the auspices of the Royal Statistical Society. This aims to measure what households experience in terms of inflation and thereby includes both house prices and interest-rates rather than fantasy calculations such as imputed rents. Officially it is in progress whereas in practice an effort is underway to neuter this such as the suggestion from the Office for National Statistics ( ONS) it would only be produced annually.

Why does this matter? Well look at the numbers and below is the housing section from CPIH.

The OOH component annual rate is 2.0%, unchanged from last month.  ( OOH = Owner Occupied Housing costs)

Now here are the ONS house price numbers also released today.

Average house prices in the UK have increased by 4.9% in the year to June 2017 (down from 5.0% in the year to May 2017). The annual growth rate has slowed since mid-2016 but has remained broadly around 5% during 2017.

As you can see they are quite different in spite of the slow down in house price rises. Also we took the CPI numbers to align ourselves with Europe which is using house prices in its own plans for a new measure. This is a familiar theme where rationales are pressed and pressed but then dropped when inconvenient a bit like the RPIJ inflation measure.

Today’s data

We learnt something today I think.

The all items CPI annual rate is 2.6%, unchanged from last month…….The all items CPIH annual rate is 2.6%, unchanged from last month.

Firstly we have detached a little from the recent international trend which may well be because we have been seeing higher inflation here. Also you may note that the fanfare of CPIH is currently rather pointless as it is giving the same result! Added to this there is a completely different picture to Sweden.

Transport, in particular motor fuels. Fuel prices fell by 1.3% between June and July 2017, the fifth successive month of price decreases. This contrasts with the same period last year, when fuel prices rose by 0.7%.

I checked air fares too and they fell.

Looking Ahead

There was a continuation of the good news on this front from the producer price indices.

The annual rate of inflation for goods leaving the factory gate slowed for the third time this year, mainly as a result of 2016 price movements dropping out of the annual comparison.

Much of the effect here comes from the change in the exchange rate where the post EU leave vote is beginning now to drop out of the annual data comparisons. Below are the latest numbers.

Factory gate prices (output prices) rose 3.2% on the year to July 2017, from 3.3% in June 2017, which is a 0.5 percentage points decline from their recent peak of 3.7% in February and March 2017……Prices for materials and fuels (input prices) rose 6.5% on the year to July 2017, from 10% in June 2017; as per factory gate prices, the drop in July’s rate is due to 2016 price movements dropping out of the annual comparison.

In the detail there is something which will only be welcomed by farmers and central bankers ( who for newer readers consider food and energy inflation to be non-core)

Food production continued to be the main source of upward contributions to input and output price inflation fuelled by rising prices for home food materials and food products respectively.

We get a little more detail but not much.

Within home food materials the largest upward contribution came from crop and animal production, with prices rising 12.3% on the year to July 2017.


We see a welcome development in that the pressure for UK inflation rises has faded a bit. But commuters and rail travellers will be noting that my theme that the UK is a country with administered inflation is in play here.

The all items RPI annual rate is 3.6%, up from 3.5% last month.

You see the “Not a National Statistic” Retail Prices Index is suddenly useful when setting things like rail fares or mobile phone contracts. A rough summary is that the ordinary person pays using the higher RPI but only receives ( pensions, tax allowances indexation) the lower CPI. This reminds me that the gap is 1% which gets little publicity. Indeed the gap between our old inflation measure and the new one continues to be much wider than the change in the target.

The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs) index, is 3.9%, up from 3.8% last month.

As a final note UK new car prices edged higher as used car prices nudged lower. I mention this because there are falling prices in the US leading to worries about the car loans situation.