The UK government plans to rip us all off

This morning has seen the publishing of some news which feels like it has come from another world.

The all items CPI annual rate is 1.7%, down from 1.8% in January…….The all items RPI annual rate is 2.5%, down from 2.7% last month.

Previously we would have been noting the good news and suggesting that more is to come as we look up the price chain.

The headline rate of output inflation for goods leaving the factory gate was 0.4% on the year to February 2020, down from 1.0% in January 2020. The price for materials and fuels used in the manufacturing process displayed negative growth of 0.5% on the year to February 2020, down from positive growth of 1.6% in January 2020.

There is something that remains relevant however as I note this piece of detail.

Petroleum products made the largest downward contribution to the change in the annual rate of output inflation. Crude oil provided the largest downward contribution to the change in the annual rate of input inflation.

That is something which is set to continue because if we look back to February the base for the oil price ( Brent Crude) was US $50 whereas as I type this it is US $27.50. So as you can see input and output costs are going to fall further. This will be offset a bit by the lower UK Pound £ but I will address it later. In terms of consumer inflation the February figures used are for diesel at 128.2 pence per litre whereas the latest weekly number is for 123.4 pence which is some 7.7% lower than a year ago. So there will be a downwards pull on inflation from this source.

There is a bit of an irony here because the Russo/Saudi turf war which began the oil price fall on the supply side has been overtaken by the large falls in demand we are seeing as economies slow. According to The Guardian we may run out of spaces to put it.

Analysts at Rystad estimate that the world has about 7.2bn barrels of crude and products in storage, including 1.3bn to 1.4bn barrels onboard oil tankers at sea.

In theory, it would take nine months to fill the world’s remaining oil stores, but constraints at many facilities will shorten this window to only a few months.

The Rip-Off

The plan hatched by a combination of HM Treasury and its independent puppets the UK Statistics Authority and the Office for National Statistics is to impose a type of stealth tax of 1% per annum. How?

In drawing up his advice, the National Statistician considered the views of the Stakeholder Advisory Panel on Consumer Prices (APCP-S). The Board accepted his advice and that was the basis of the proposals we put to the Chancellor to cease publication of RPI and in the short term to bring the methods of CPIH into RPI.The Chancellor responded that he was not minded to promote legislation to end RPI, but that the Government intended to consult on whether to bring the methods in CPIH into RPI between 2025 and 2030, effectively aligning the measures.

The emphasis is mine and the plan is to put the fantasy Imputed Rents that are used in the widely ignored CPIH into the RPI. There is good reason that the CPIH has been ignored so let me explain why. In the UK the housing market is a big deal and so you might think what owner-occupiers pay would be a considerable influence on inflation. But in 2002 a decision was made to completely ignore it in the new UK inflation measure called CPI ( Consumer Prices Index).

Putting it in was supposed to be on its way but plans took a decade and the saga took a turn in 2012 when the first effort to use Imputed Rents began. It got strong support from the Financial Times economics editor Chris Giles at the time. He stepped back from that when it emerged that there had been a discontinuity in the numbers, which in statistical terms is a disaster. So the fantasy numbers ( owner-occupiers do not pay rent) are based on an unproven rental series.

Why would you put a 737 Max style system when you have a reliable airplane? You would not, as most sensible people would be debating between the use of the things that are paid such as house prices and mortgage payments. That is what is planned in the new inflation measure which has been variously called HII and HCI. You may not be surprised to learn that there have been desperate official efforts to neuter this. Firstly by planning to only produce it annually and more latterly by trying to water down any house price influence.

At a time like this you may not think it is important but when things return to normal losing around 1% per year every year will make you poorer as decisions are made on it. Also it will allow government’s to claim GDP and real wages are higher than they really are.

Gold

There is a lot going on here as it has seen its own market discontinuity which I will cover in a moment. But we know money is in the offing as I note this from the Financial Times.

Gold continued to push higher on Tuesday as a recent wave of selling dried up and Goldman Sachs told its clients the time had come to buy the “currency of last resort”. Like other asset classes, gold was hit hard in the recent scramble for US dollars, falling more than 12 per cent from its early March peak of around $1,700 a troy ounce to $1,460 last week.  The yellow metal started to see a resurgence on Monday, rising by more than 4 per cent after the Federal Reserve said it would buy unlimited amounts of government bonds and the US dollar fell.

So we know that the blood funnel of the Vampire Squid is up and sniffing. On its view of ordinary clients being “Muppets” one might reasonably conclude it has some gold to sell.

Also there have been problems in the gold markets as I was contacted yesterday on social media asking about the gold price. I was quoting the price of the April futures contact ( you can take the boy out of the futures market but you cannot etc….) which as I type this is US $1653. Seeing as it was below US $1500 that is quite a rally except the spot market was of the order of US $50 below that. There are a lot of rumours about problems with the ability of some to deliver the gold that they owe which of course sets alight the fire of many conspiracy theories we have noted. This further went into suggestions that some banks have singed their fingers in this area and are considering withdrawing from the market.

Ole Hansen of Saxo Bank thinks the virus is to blame.

Having seen 100’s of anti-bank and anti-paper #gold tweets the last couple of days I think I will give the metal a rest while everyone calm down. We have a temporary break down in logistics not being helped by CME’s stringent delivery rules of 100oz bars only.

So we will wait and see.

Ah, California girls are the greatest in the world
Each one a song in the making
Singin’ rock to me I can hear the melody
The story is there for the takin’
Drivin’ over Kanan, singin’ to my soul
There’s people out there turnin’ music into gold ( John Stewart )

 

Comment

Quite a few systems are creaking right now as we see the gold market hit the problems seen by bond markets where prices are inconsistent. Ironically the central banks tactics are to help with that but their strategy is fatally flawed because if you buy a market on an enormous scale to create what is a fake price ( lower bond yields) then liquidity will dry up. I have written before about ruining bond sellers ( Italy) and buyers will disappear up here. Please remember that when the central banks tell us it is nothing to do with them and could not possibly have been predicted. Meanwhile the US Federal Reserve will undertake another US $125 billion of QE bond purchases today and the Bank of England some £3 billion. The ECB gives fewer details but will be buying on average between 5 and 6 billion Euros per day.

Next we have the UK deep state in operation as they try to impose a stealth tax via the miss measurement of inflation. Because they have lost the various consultations so far and CPIH has remained widely ignored the new consultation is only about when and not if.

The Authority’s consultation, which will be undertaken jointly with that of HM Treasury, will begin on 11 March. It will be open to responses for six weeks, closing on 22 April. HM Treasury will consult on the appropriate timing for the proposed changes to the RPI, while the Authority will consult on the technical method of making that change to the RPI.

Meanwhile for those of you who like some number crunching here is how a 123.4 pence for the price of oil gets broken down. I have done some minor rounding so the numbers add up.

Oil  44.9 pence

Duty 58 pence

VAT 20.5 pence

What can the UK do in the face of an economic depression?

We are facing quite a crisis and let us hope that we will end up looking at a period that might have been described by the famous Dickens quote from A Tale of Two Cities.

It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us.

The reason I put it like that is because we have examples of the worst of times from food hoarders to examples of an extreme economic slowdown. On a personal level I had only just finished talking to a friend who had lost 2 of his 3 jobs when I passed someone on the street talking about her friend losing his job. Then yesterday I received this tweet.

Funny, Barclays quoted me 18% interest on a £10k business loan this morning to keep my employees paid, unfortunately the state will now need to pay them. Bonkers! ( @_insole )

If we look at events in the retail and leisure sector whilst there are small flickers of good news there are large dollops of really bad news. Accordingly this is a depression albeit like so many things these days it might be over relatively quickly for a depression in say a few months. Of course the latter is unknown in terms of timing. But people on low wages especially are going to need help as not only will they be unable to keep and feed themselves they will be forced to work if they can even if they are ill. In terms of public health that would be a disaster.

Also I fear this from the Bank of England Inflation Survey this morning may be too low.

Question 2b: Asked about expected inflation in the twelve months after that, respondents gave a median answer of 2.9%, remaining the same as in November.

Whilst there are factors which will reduce inflation such as the lower oil price will come into play there are factors the other way. Because of shortages there will be rises in the price of food and vital purchases as illustrated below from the BBC.

A pharmacy which priced bottles of Calpol at £19.99 has been criticised for the “extortionate” move.

A branch of West Midlands-based chain Jhoots had 200ml bottles of the liquid paracetamol advertised at about three times its usual price.

The UK Pound

If we now switch to financial markets we have seen some wild swings here. The UK Pound always comes under pressure in a financial crisis because of our large financial sector and as I looked at on Wednesday we are in a period of King Dollar strength. Or at least we were as it has weakened overnight with the UK Pound £ bouncing to above US $1.18 this morning. Now with markets as they are we could be in a lot of places by the time you read this but for now the extension of the Federal Reserve liquidity swaps to more countries has calmed things.

Perhaps we get more of a guide from the Euro where as discussed in the comments recently we have been in a poor run. But we have bounced over the past couple of days fro, 1.06 to 1.10 which I think teaches us that the UK Pound £ is a passenger really now. We get hit by any fund liquidations and then rally at any calmer point.

The Bank of England

It held an emergency meeting yesterday and then announced this.

At its special meeting on 19 March, the MPC judged that a further package of measures was warranted to meet its statutory objectives.  It therefore voted unanimously to increase the Bank of England’s holdings of UK government bonds and sterling non-financial investment-grade corporate bonds by £200 billion to a total of £645 billion, financed by the issuance of central bank reserves; and to reduce Bank Rate by 15 basis points to 0.1%.  The Committee also voted unanimously that the Bank of England should enlarge the Term Funding Scheme with additional incentives for SMEs (TFSME).

Let me start with the interest-rate reduction which is simply laughable especially if we note what the business owner was offered above. One of my earliest blog topics was the divergence between official and real world interest-rates and now a 0.1% Bank Rate faces 40% overdraft rates. Next we have the issue that 0.5% was supposed to be the emergency rate so 0.1% speaks for itself. Oh and for those wondering why they have chosen 0.1% as the lower bound ( their description not mine) it is because they still feel that the UK banks cannot take negative interest-rates and is nothing to do with the rest of the economy. So in an irony the banks are by default doing us a favour although we have certainly paid for it!

QE

Let us now move onto this and the Bank of England is proceeding at express pace.

Operations to make gilt purchases will commence on 20 March 2020 when the Bank intends to purchase £5.1bn of gilts spread evenly between short, medium and long maturity buckets.  These operations will last for 30 minutes from 12.15 (short), 13.15 (medium) and 14.15 (long).

But wait there is more.

Prior to the 19 March announcement the Bank was in the process of reinvesting of the £17.5bn cash flows associated with the maturity on 7 March 2016 of a gilt owned by the APF.

As noted above, and consistent with supporting current market conditions, the Bank will complete the remaining £10.2bn of gilt purchases by conducting sets of auctions (short, medium, long maturity sectors) on Friday 20 March and Monday 23 March (i.e. three auctions on each day).

So there will be a total of £10.2 billion of QE purchases today and although it has not explicitly said so presumably the same for Monday. As you can imagine this has had quite an impact on the Gilt market as the ten-year yield which had risen to 1% yesterday lunchtime is now 0.59%. The two-year yield has fallen to 0.08% so we are back in the zone where a negative Gilt yield is possible. Frankly it will depend on how aggressively the Bank of England buys its £200 billion.

The next bit was really vague.

The Committee also voted unanimously that the Bank of England should enlarge the Term Funding Scheme with additional incentives for SMEs (TFSME)……

Following today’s special meeting of the MPC the Initial Borrowing Allowance for the TFSME will be increased from 5% to 10% of participants’ stock of real economy lending, based on the Base Stock of Applicable Loans.

Ah so it wasn’t going to be the triumph they told us only last week then? I hope this will do some good but the track record of such schemes is that they boost the banks ( cheap liquidity) and house prices ( more and cheaper mortgage finance).

We did also get some humour.

As part of the increase in APF asset purchases the MPC has approved an increase in the stock of purchases of sterling corporate bonds, financed by central bank reserves.

Last time around this was a complete joke as the Bank of England ended up buying foreign firms to fill its quota. For example I have nothing against the Danish shipping firm Maersk but even they must have been surprised to see the Bank of England buying their bonds.

Comment

There are people and businesses out there that need help and in the former case simply to eat. So there are real challenges here because if Bank of England action pushes prices higher it will make things worse. But the next steps are for the Chancellor who has difficult choices because on the other side of the coin many of the measures above will simply support the Zombie companies and banks which have held us back.

Also this is a dreadful time for economics 101. I opened by pointing out that unemployment will rise and maybe by a lot and so will prices and hence inflation. That is not supposed to happen. Then the UK announces more QE and the UK Pound £ rises although of course it is easier to state who is not doing QE now! I guess the Ivory Towers who so confidently made forecasts for the UK economy out to 2030 are now using their tippex, erasers and delete buttons. Meanwhile in some sort of Star Trek alternative universe style event Chris Giles of the Financial Times is tweeting this.

In a moment of irritation, am amazed at how little UK public science has learnt from economics – making mistakes no good economist has made in 50 years Economists have been beating themselves up for a decade Shoe now on other foot…

Podcast

 

Welcome to the oil price shock of 2020

Today is one where we are mulling how something which in isolation is good news has led to so much financial market distress overnight and this morning. So much so that for once comparisons with 2008 and the credit crunch have some credibility.

And I felt a rush like a rolling bolt of thunder
Spinning my head around and taking my body under
Oh, what a night ( The Four Seasons)

Just as people were getting ready for markets to be impacted by the lock down of Lombardy and other regions in Italy there was a Mexican stand-off in the oil market. This came on top of what seemed at the time large falls on Friday where depending on which oil benchmark you looked at the fall was either 9% or 10%.Then there was this.

DUBAI, March 8 (Reuters) – Saudi Arabia, the world’s top oil exporter, plans to raise its crude oil production significantly above 10 million barrels per day (bpd) in April, after the collapse of the OPEC supply cut agreement with Russia, two sources told Reuters on Sunday.

State oil giant Aramco will boost its crude output after the current OPEC+ cut deal expires at the end of March, the sources said.

Whilst they are playing a game of who blinks first the oil price has collapsed. From Platts Oil

New York — Crude futures tumbled roughly 30% on the open Sunday evening, following news that Saudi Aramco cut its Official Selling Prices for April delivery. ICE front-month Brent fell $14.25 on the open to $31.02/b, before climbing back to trade around $35.22/b at 2238 GMT. NYMEX front-month crude futures fell $11.28 to $30/b on the open, before rising to trade at around $32.00/b.

The Real Economy

Let us get straight to the positive impact of this because in the madness so many are missing it.

We find that a 10 percent increase in global oil inflation increases, on average, domestic inflation by about 0.4
percentage point on impact, with the effect vanishing after two years and being similar between advanced and developing economies. We also find that the effect is asymmetric, with positive oil price shocks having a larger effect than negative ones. ( IMF 2017 Working Paper )

There is plenty of food for thought in the reduced relative impact of lower oil prices for those who believe they are passed on with less enthusiasm and sometimes not passed on at all. But if the IMF are right we will see a reduction in inflation of around 0.6% should oil prices remain here.

As to the impact on economic growth the literature has got rather confused as this from the Bank of Spain in 2016 shows.

Although our findings point to a negative influence from oil price increases on economic growth, this phenomenon is far from being stable and has gone through different phases over time. Further research is necessary to fathom this complex relationship.

Let me give you an example of how it will work which is via higher real wages. Of course central bankers do not want to tell us that because they are trying to raise inflation and are hoping people will not spot that lower real wages will likely be a consequence. To be fair to the IMF it does manage to give us a good laugh.

The impact of oil price shocks, however,
has declined over time due in large part to a better conduct of monetary policy.

That does give us the next link in the story but before we get there let me give you two major problems right now which have links. The first is that the oil price Mexican stand-off has a silent player which is the US shale oil industry. As I have pointed out before it runs on a cash flow business model which has just seen likely future flows of cash drop by a third.

Now we get to the second impact which is on credit markets. Here is WordOil on this and remember this is from Thursday.

NEW YORK (Bloomberg) –Troubled oil and gas companies may have a hard time persuading their bankers to keep extending credit as the outlook darkens for energy, potentially leading to more bankruptcies in the already-beleaguered sector.

Lenders evaluate the value of oil reserves used as collateral for bank loans twice a year, a process that’s not likely to go well amid weak commodity prices, falling demand, shuttered capital markets and fears of coronavirus dampening global growth. Banks may cut their lending to cash-starved energy companies by 10% to 20% this spring, according to investors and analysts.

That will all have got a lot worse on Friday and accelerated today. I think you can all see the problem for the shale oil producers but the issue is now so large it will pose a risk to some of those who have lent them the money.

US oil/junk bonds: busts to show folly of last reboot ( FT Energy )

I am not sure where the FT is going with this bit though.

There will be no shortage of capital standing ready to recapitalise the energy sector….

Perhaps they have a pair of glasses like the ones worn by Zaphod Beeblebrox in The Hitch Hikers Guide to the Galaxy. Meanwhile back in the real world there was this before the latest falls.

More than one-third of high-yield energy debt is trading at distressed levels. Oil and gas producers with bonds trading with double-digit yields include California Resources Corp., Range Resources Corp., Southwestern Energy Co., Antero Resources Corp., Comstock Resources Inc., Extraction Oil & Gas Inc. and Oasis Petroleum Inc. ( World Oil)

Central Banks

As the oil price news arrived central bankers will have been getting text messages to come into work early. Let me explain why. Firstly we know that some credit markets were already stressed and that the US Federal Reserve had been fiddling while Rome burns as people sang along with Aloe Blacc.

I need a dollar, dollar a dollar is what I need
hey hey
Well I need a dollar, dollar a dollar is what I need
hey hey
And I said I need dollar dollar, a dollar is what I need.

Whoever decided to taper the fortnightly Repo operations to US $20 billion had enough issues when US $70 billion was requested on Thursday, now I guess he or she is not answering the phone. Anyway the role of a central bank in a crisis like this is to be lender of last resort and splash the cash. At the same time it should be doing emergency investigations to discover the true state of affairs in terms of solvency.

This is because some funds and maybe even banks must have been hit hard by this and may go under. Anyone long oil has obvious problems and if that is combined with oil lending it must look dreadful. If anyone has geared positions we could be facing another Long-Term Capital Management. Meanwhile in unrelated news has anyone mentioned the derivatives book of Deutsche Bank lately?

The spectre of more interest-rate cuts hangs over us like a sword of damocles. I type that because I think they will make things worse rather than better and central banks would be better employed with the liquidity issues above. They are much less glamorous but are certainly more effective in this type of crisis. Frankly I think further interest-rate cuts will only make things worse.

Comment

I have covered a lot of ground today but let me move onto home turf. We can also look at things via bond yields and it feels like ages ago that I marked your cards when it was only last Thursday! Anyway we have been on this case for years.

Treasury 10-Year Note Yield Slides Below 0.5% for First Time ( @DiMartinoBooth)

Yes it was only early last week that we noted a record low as it went below 1%. Meanwhile that was last night and this is now.

Overnight the US 10-year traded 0.33%, under 0.44% now. The longbond traded down to 0.70% overnight. The bond futures were up over 12 points. Now trading 0.85%. Note how “gappy” this chart is. Liquidity is an issue. ( @biancoresearch )

This really matters and not in the way you may be thinking. The obvious move is that if you are long bonds you have again done really well and congratulations. Also there is basically no yield these days as for example, my home country the UK has seen a negative Gilt yield this morning around the two-year maturity.

But the real hammer on the nail will not be in price ( interest-rates) it will be in quantity as some places will be unable to lend today. Some of it will be predictable ( oil) but in these situations there is usually something as well from left field. So let me end this part Hill Street Blues style.

Let’s be careful out there

Podcast

I have not mentioned stock markets today but I was on the case of bank shares in my weekly podcast. Because at these yields and interest-rates they lack a business model.

 

 

 

Where next for the economy of India?

A subject we returned to several times in 2019 was the economy of India. There were two main drivers here which were interrelated. One was the economic slow down and the second was the wave of interest-rate cuts we saw from the Reserve Bank of India. At the moment India is back in the news on two fronts. Firstly President Trump is in town although by his pronounciation of Sachin Tendulkar he had a lot to learn about the national sport. Second and much more sadly there are riots in Delhi continuing a recent theme of unrest in India. For our purposes though, we need to switch back to the economic situation and how India can deal as best as it can with the economic effects of the Corona Virus.

Where do we stand?

The latest minutes from the Reserve Bank of India tell us this.

Moving on to the domestic economy, the first advance estimates (FAE) released by the National Statistical Office (NSO) on January 7, 2020 placed India’s real gross domestic product (GDP) growth for 2019-20 at 5.0 per cent.

Whilst these would be considered fast numbers for elsewhere they are really rather underwhelming for India. Indeed numbers for the past are being revised down as well.

 In its January 31 release, the NSO revised real GDP growth for 2018-19 to 6.1 per cent from 6.8 per cent given in the provisional estimates of May 2019. On the supply side, growth of real gross value added (GVA) is estimated at 4.9 per cent in 2019-20 as compared with 6.0 per cent in 2018-19.

The RBI also gave us a reminder of how much has cut interest-rates in response to this.

As against the cumulative reduction in the policy repo rate by 135 bps since February 2019, transmission to various money and corporate debt market segments up to January 31, 2020 ranged from 146 bps (overnight call money market) to 190 bps (3-month CPs of non-banking finance companies).

It will be happy to see greater impacts than its move and India’s government will be grateful for this impact too.

Transmission through the longer end of government securities market was at 73 bps (5-year government securities) and 76 bps (10-year government securities).

Although caution is required here as bond markets have been rallying anyway so it is hard to determine the exact cause of any move. However amidst the cheerleading there is something we have seen elsewhere.

Transmission to the credit market is gradually improving. …….. The weighted average lending rate (WALR) on fresh rupee loans sanctioned by banks declined by 69 bps and the WALR on outstanding rupee loans by 13 bps during February-December 2019.

This is a familiar feature of the credit crunch era where interest-rate cuts get lost in the banking system and do not reach the borrower be they individual or business.

Know Your Onions

These are a staple part of the Indian diet and back on December 2nd this was the state of play.

Households and restaurants in India are reeling under pressure as onion prices have surged exponentially  across the country. A kilo of onion is retailing at Rs 90-100 in most Indian states, peaking at Rs 120-130 per kilo in major cities like Kolkata, Chennai, Mumbai, Odisha, and Pune.

This hurt consumers and especially the poor adding to the economic difficulties faced by Indians. Well according to the Times of India things are now much better.

PANAJI: After burning a hole in the pockets of the common man for over three months, prices of onions have come down to  ..Rs 29 per kg at the outlets run by the Goa State  Horticulture Corporation Limited (GSHCL).

Whilst the onion crisis has faded from view the inflation situation has got worse with the annual rate rising to 7.59% in January. In spite of the fall in Onion prices it is being pulled higher by food (and drink) inflation which is 11.79% as the inflation shifts.

On the other hand, the recent pick-up in prices of non-vegetable food items, specifically in milk due to a rise in input costs, and in pulses due to a shortfall in kharif production, are all likely to sustain. ( RBI)

Looking back we see an index set at 100 in 2012 is now at 150.2 so India has seen more inflation than in many other places. I will let readers decide for themselves about housing inflation at 4.2% because in other countries we would consider that to be high but for India perhaps not.

Copying the Euro area

Firstly let us give the RBI some credit ( sorry) as we note that it got ahead of the US Federal Reserve which stumbled in this area last autumn.

Since June 2019, the Reserve Bank has ensured that comfortable liquidity is available in the system in order to facilitate the transmission of monetary policy actions and flow of credit to the economy.

Although that does rather beg a question of what it was doing in the years and decades before then! Also we seem to need more liquidity after all the monetary easing in India and elsewhere which is much more in line with my arguments that it is not working than the official claims of success.

The model was taken from the Euro area.

As announced in the Statement on Developmental and Regulatory Policies on February 06, 2020, it has been decided to conduct Long Term Repo Operations (LTROs) for one-year and three-year tenors for up to a total amount of ₹ 1,00,000 crores at the policy repo rate.

Yesterday’s one-year operation saw plenty of demand.

The total bids that were received amounted to `1,23,154 crore, implying a bid to cover ratio (i.e., the amount of bids received relative to the notified amount) of 4.9.

So the system is keen on what Stevie V called cold hard cash, dirty money and we see that there was even more demand for the longer version earlier this month.

The response to the LTRO has been highly encouraging. The total bids that were received amounted to ₹ 1,94,414 crore, implying a bid to cover ratio (i.e., the amount of bids received relative to the amount announced) of 7.8. The total amount of bids has, in fact, exceeded the aggregate amount of ₹ 1,00,000 crore proposed to be offered under the LTRO scheme.

We can add “highly encouraging” to my financial lexicon for these times. After all if LTROs are the triumph they are officially claimed to be the Euro area economy would not be where it is.

Comment

Today has been a journey through the problems faced by the economy of India. If we start with economic growth then it was weakening anyway and I have my doubts about the first bit from the RBI below.

the easing of global trade uncertainties should encourage exports and spur investment activity. The breakout of the corona virus may, however, impact tourist arrivals and global trade.

So far whilst the letter I has been over represented in the Corona Virus outbreak India has thankfully been quiet, but it cannot escape the wider economic effects.

Next comes the issue of inflation as India’s workers and consumers have been suffering from a burst of it just as its inflation targeting central bank has cut interest-rates substantially. So there will have been hardship which is fertile breeding ground for the unrest we are seeing.

Also there seems to be a thirst for liquidity in the financial sector in India. We have looked in the past at the problems of the banks there and it would seem that like in the Euro area they are in something of a drought for liquidity. The RBI deserves credit for so far avoiding the way the US central bank has ended up like a dog chasing its tail. But we return as so often to wondering why ever more liquidity is required? Which leads to whether it is merely masking underlying solvency issues.

Meanwhile The Donald is in full flow.

Trump in India: If I don’t win, you’ll see a crash like you’ve never seen before ( Maria Tadeo of Bloomberg)

The Investing Channel

 

Are falling real wages the future for us all?

The issue of wage growth is something we have found ourselves returning to time and time again. The cause is in one sense very simple there has been a lack of it. There are two components of this of which the first is just simply low numbers but the second is another reversal for the economics establishment . This is where we have seen employment gains and in some cases record low levels of unemployment but the wage growth fairy has turned out to be precisely that. As an example if we look back we see that the UK Office for Budget Responsibility opened with equations that would have UK wage growth above 5% in today’s environment rather than the 3% we have.

Japan

The leader in the pack in this regard continues to be Japan so let us go straight to the data released at the end of last week.

The inflation-adjusted average monthly wage fell 0.9 percent from a year earlier in 2019, dragged down by an increase in part-time workers, the labor ministry said Friday.

Average monthly cash earnings per worker, including bonuses, fell 0.3 percent to ¥322,689 ($2,900) on a nominal basis, the first decline in six years, according to preliminary data by the Ministry of Health, Labor and Welfare. ( Japan Times)

If we for the moment stick with the fact that wages fell we can then note that this happened in spite of this.

The unemployment rate was unchanged in December from the previous month, at 2.2 percent, reflecting an ongoing labor shortage due to the rapidly graying population, government data showed Friday.

In the reporting month the number of unemployed was 1.45 million, down 140,000 from a year earlier, according to the Internal Affairs and Communications Ministry. ( Japan Times January 31)

Although they do not mention it this equals the record low for the unemployment rate and we get more detail on the labour shortage below.

The number of people with jobs grew for the 84th straight month, up 810,000 from a year earlier at 67.37 million in December. Of those, 30 million were women, up 660,000 from a year earlier, and 9.02 million were 65 or over, up 470,000.

This is a success for the Japanese economy which has reached I think what economists used to call “full employment”. Actually if they saw the numbers below they would be predicting it would be party time for wage growth.

Separate data from the Health, Labor and Welfare Ministry showed that the job availability ratio in December stood at 1.57, unchanged since September. The ratio indicates that there were 157 job openings for every 100 people seeking jobs.

But reality has not been kind to that particular and it has discombobulated some Ivory Towers so much that they believe in it regardless. A case of Restaurant at the end of the Universe thinking.

Reality is frequently inaccurate

If we go back to the wages data we started with there were two components beginning with a real fall but also a nominal one. The latter I point out because when we look at Japan’s public debt burden it is not going to be solved with income taxes with nominal incomes falling. It is the opposite of what we call inflating away the debt.

The situation is so troubling that a scapegoat is required which are part-time workers.

The proportion of workers that are part-time reached a record 31.53 percent, up 0.65 percentage point from the previous year.

For those who want to know how much the Japanese get paid here you are.

Average monthly wages for full-time workers increased 0.3 percent, to ¥425,288, while those of part-time workers stayed flat at ¥99,758.

December wages are especially important in Japan as they are the main bonus season meaning they are around 175% of the average. So bonuses are low and whilst we do not get much of a sectoral breakdown we see that total manufacturing wages were 2.6% lower in December in real terms.

The index for real wages is now 99.9 or slightly lower than the 2015 average. This is quite a critique of the official policy of Abenomics which was supposed to raise wages in both nominal and real terms but as you can see has not done so.

Regular readers will know I have been concerned since the advent of Abenomics that it was really just another version of Japan Inc under the covers. Well in that scenario Japanese companies would be doing well but not raising wages.

The retained earnings of Japanese companies combined hit a record ¥463 trillion last year. Corporate earnings — which remain near record levels despite the setbacks of the past two years — have clearly not been invested enough in manpower.  ( Japan Times )

Whereas according to the Nikkei Asian Review the longer-term picture is this.

The growing ranks of nonregular workers puts pressure on average nominal wages, which remain 13% below their peak in 1997. From 2012 to 2018 nominal wages grew only 2.6%, labor ministry figures show.

United States

Friday lunchtime in the UK produced this.

Total nonfarm payroll employment rose by 225,000 in January, and the unemployment rate was little changed at 3.6 percent, the U.S. Bureau of Labor Statistics reported today. Notable job gains occurred in construction, in health care, and in transportation and warehousing.

This continued a pretty strong picture especially at this stage in the cycle.

After revisions, job gains have averaged 211,000 over the
last 3 months.

Now if we switch to wage growth we see this.

In January, average hourly earnings for all employees on private nonfarm payrolls rose by 7 cents to $28.44. Over the past 12 months, average hourly earnings have increased by 3.1 percent. Average hourly earnings of private-sector production and nonsupervisory employees
were $23.87 in January, little changed over the month (+3 cents).

In nominal terms this is much better than in Japan but if we switch to real terms then we need to compare with this.

From 2018 to 2019, consumer prices for all items rose 2.3 percent.

I am taking the numbers as a broad sweep because we do not have the January data yet, But we see that whilst there is some real wage growth it is a bit under 1% per annum so not much.

Comment

The difference between the US and Japan is that there is some real wage growth in the former there is none in the latter. Can we explain that? There are two possible causes of which the first is demographics where Japan has a shrinking and ageing population whereas the US is growing. Also there is a structural issue where the Japanese are very resistant to price rises which in a reversal of the wages and prices spirals of the 70s and 80s in my home country seems to have infected wage growth too. The fear as Lily Allen would put it might be a case of the vapors.

I’m turning Japanese, I think I’m turning Japanese, I really think so
Turning Japanese, I think I’m turning Japanese, I really think so
I’m turning Japanese, I think I’m turning Japanese, I really think so
Turning Japanese, I think I’m turning Japanese, I really think…

For the economics establishment there is only pain because they continue to plough ahead with “output gap” style theories. Even worse because they failed in the GDP or economic output arena they switched to the labour market. It has turned out to be like playing 3 at the back in football and losing 3-0 and thus switching to 4 at the back and losing 5-0. That is because the labour market has is some places gone beyond what was called full employment and yet real wage growth is weak at best and has gone backwards in Japan which has a stellar employment situation at least according to conventional metrics.

Moving to the UK we finally got some real wage growth but we need to cross our fingers and there is still some distance to travel before we get right back where we started from. Hopefully we can at least regain the previous peak.

Podcast

 

UK housing market policy is becoming an even bigger mess

Today has opened with a flurry of news on the UK housing market. So let us start with the latest from the Halifax Building Society.

House prices kicked off the year with a modest monthly increase, rising by 0.4% in January following the
stronger gains of 1.8% and 1.2% seen in December and November respectively. As a result, annual growth
remained relatively stable at 4.1%, up just a fraction from the end of 2019.

If we stay with the annual growth number we see that it has been falling last year as the 2.8% of March was replaced with the 0.9% of October. However it then picked up driven by the latest three months.

In the latest quarter (November to January) house prices were 2.3% higher than in the preceding
three months (August to October)

Those of you who follow this situation will see the irony here as the Halifax made some methodological improvements to its series because it was producing an annual number of 4-5% when the other house price indicators were much lower. Now it finds it is back at a similar number! However whilst it is again the highest some of the others have shown a similar pattern this time around.

A concerning part from my point of view is that such house price growth is above wage growth and we are losing ground at a rate of around 1% per annum here, after a period of gains, which now seem all too short.

The Halifax has a go at being upbeat.

A number of important market indicators continue to show signs of improvement. We have seen a pick-up
in transactions with more buyer and seller activity consistent with a reduction in uncertainty in the UK
economy. However, it’s too early to say if a corner has been turned.

Although they worry that it may just be a function of a Boris or if you prefer Brexit Bounce.

The recent positive figures may actually represent activity that would ordinarily have been expected to take place last year, but was delayed by economic uncertainty. So while housing market activity has undoubtedly increased over recent months, the extent to which this persists will be driven by housing policy, the wider political environment
and trends in the economy.

I see they perhaps continue to hold out hope for an interest-rate cut from the Bank of England.

The environment for mortgage affordability should
stay largely favourable.

Although there may be some self praise here because if we go to Moneyfacts we see this.

 Halifax also continued to top the five year fixed chart this week, offering a rate of 1.46% (3.2% APRC) fixed until 31 May 2025, reverting to 4.24% variable thereafter.

You need 40% equity for this and there is a fee of £995 so it particularly benefits larger mortgages. The best 5-year fix for first time buyers ( 5% equity ) is 2.75% from Barclays and has no fee.

There is an interesting swerve at the end of the Halifax piece.

However with the growth in rental costs accelerating, many first-time buyers will continue to face a significant challenge in raising necessary deposits.

Somebody needs to tell the UK Office for National Statistics who have picked up nothing of the sort.

Private rental prices paid by tenants in the UK rose by 1.4% in the 12 months to December 2019, unchanged since November 2019.

I have written before about concerns that it is of the order of 1% per annum too low and thus is another reason to ignore the lead indicator called CPIH. That has not deterred the Chair of the UK Statistics Authority David Norgrove who wants to replace house prices in the RPI with imputed rents in spite of this from the Economic Affairs Committee of the House of Lords.

We are not convinced by the use of rental equivalence in CPIH to impute owner-occupier housing costs.

Still if he gets this through I guess he will be in the House of Lords himself!

First Homes

According to the Financial Times the government has a new plan.

Developers would have to fund the construction of more discounted homes for first-time buyers at the expense of other forms of new-build social housing under plans floated by the government on Friday. Robert Jenrick, the housing secretary, will announce a consultation on a new programme called “First Homes” today under which first-time buyers will be able to purchase new-build properties at a discount of £100,000 on average.  Military veterans and key workers such as nurses, police officers and firefighters will get priority access to the scheme.

Huey Lewis and the News sang about something like this.

I want a new drug, one that won’t spill
One that don’t cost too much
Or come in a pill
I want a new drug, one that won’t go away
One that won’t keep me up all night
One that won’t make me sleep all day
One that won’t make me nervous
Wonderin’ what to do

It is hard not to laugh at the next bit, after all what could go wrong?

The proposed scheme would lock the discount in for perpetuity. The government said this would require the owner to get a valuation from a surveyor and sell the property at 70 per cent of that figure to another first-time buyer.

I can just see some surveyors being more popular than others. Indeed other parts of this seem rather magical.

Mr Jenrick said that the initiative would mean people could buy new homes with a lower deposit and mortgage without having to move to cheaper areas.

It is a bit like the adverts for the travel company Trivago where someone has paid £150 for a hotel room whereas the rather delightful woman from Trivago has paid £100. Except in the advert they show the original customer as being unhappy with this. I can see the equivalent happening here. Other travel companies are available.

“I know that many who are seeking to buy their own home in their local areas have been forced out due to rising prices,” he said. “A proportion of new homes will be made available at a 30 per cent market discount rate, turning the dial on the dream of home ownership.”

This area is, however, ridden with what we might call slips between cut and lip.

The National Audit Office report ‘Investigation into Starter Homes’ released in November 2019, found that — despite the Conservatives’ promise to build 200,000 starter homes for first-time buyers in 2015 — not a single starter home had yet been built.

Comment

We see a situation a bit like an old fashioned railway signal box where the signaller keeps pulling another lever. We started with interest-rate cuts, then QE, then the Funding for Lending Scheme, Help To Buy,Term Funding Scheme and now this. They have reduced the price then raised the quantity of money around and these days seem to have moved onto in effect giving out “free money”. Will it be too long before some are gifted houses?

In some ways this reply to the FT article sums it up.

How does transferring wealth to a random set of a few individuals solve the housing crisis? ( MarkCats)

Also that each move makes the position even worse overall.

The average Help to Buy first-time buyer price has risen 50% since 2013 (outside of London).   As usual Government introduces a policy, and then introduces another to counter the effects of the former.

But the plan to remove house prices from the one UK inflation measure that includes them is a clear hint at the long-term establishment plan. Inflate them and then claim it as wealth effects because with wage growth struggling rents especially using the flawed official measure will likely miss it.

 

How official inflation measures are designed to mislead you

Over the past year or two even the mainstream media seems to have had flickers of realisation about the problems with official inflation measures. Perhaps their journalists wondered how things could be so expensive with recorded inflation so low? I recall even Bloomberg publishing pieces on exactly that looking at problems in the housing situation in Germany which expressed exactly that with those experiencing reality questioning the official numbers and in more than a few cases suggesting they came from a place far,far away.

Yesterday a member of the Executive Board of the ECB expressed his worries about this area, So let us look at what Yves Mersch had to say.

A prolonged loss of trust in the ECB risks undermining the broad public support that is necessary for central bank independence.

I think he is going a bit far with “broad public support” as most people will only have a vague idea about what the ECB does but let us indulge Yves for now. He goes onto ground which is about as near as central bankers get to admitting the amount of mission-creep that has gone on.

This is of particular concern when the range of non-conventional measures brings monetary policy closer to the realm of fiscal policy and the institutional effects of these policies are becoming more pronounced.

House Prices

This follows a section where he points out this.

The risks arising from strong housing price inflation extend beyond financial stability.

Indeed although the Euro area had lots of problems for financial stability as pre credit crunch house prices in Ireland, Spain and the Baltic States boomed and later bust, which also undermined many banks. However in spite of this he confesses that one way of guarding against this happening again has been ignored.

At present, owner-occupied housing costs are not included in the Harmonised Index of Consumer Prices (HICP) that is used to formulate our inflation aim of below, but close to, 2% over the medium term.

I mean why would you put in something which for many is their largest monthly expenditure? The next sentence covers a lot of ground but the latter part is very revealing.

There are a number of technical explanations for this exclusion, but it is clear that households view the cost of housing as an important part of their lifetime expenditure.

“View”?! The truth is that if we switch to describing it as shelter it is a basic human need. Of course central bankers have a track record in downplaying basic human needs in the way that food and energy are left out of so-called core inflation measures, but this takes things a step further as many of the costs of shelter are completely ignored rather than downplayed. As to the “technical explanations” let us just mark them for now as I will cover them later.

Next we get another example of the central banking obsession with rents.

 Rents represent around 6.5% of the basket used for measuring inflation.

Let me explain why. This is because in their Ivory Tower world people consume housing services whatever they do. This works for those who do rent as their (usually) monthly payment fits with that theory. Actually in practice there are more than a few problems with measuring this accurately as I noted earlier in the reference to Bloomberg Germany in particular. Also there are a lot of complaints concerning Ireland too. So even where it should work there are troubles,

But when you apply consumption of housing services to people who buy their own home be it outright or via a mortgage there is trouble. If someone is fortunate enough to buy outright then you have one large payment rather than a stream of services. Even the highest Ivory Tower should be able to spot that this simply does not work. You might think that using mortgages would work much more neatly after all a monthly payment does have some sort of fit with consuming housing services. But for a central bank there is a problem as it is the main player in what the monthly mortgage costs is these days. In the case of the ECB its negative deposit rate of -0.5% and its QE bond buying operations ( currently 20 billion Euros per month) have reduced mortgage rates substantially.

So there is the “rub”. Not only are they reducing the recorded level of inflation with their own policy which is of course trying to raise inflation! But even worse they are raising house prices to do so and thus inflation is in fact higher. It is not the misrepresentation or if you prefer lying that bother them as after all they are practised at that but even they think they may struggle to get away with it. In a way the speech from Yves reflects this because the background to all this is below.

House prices rose by 4.1 % in both the euro area and the EU in the third quarter of 2019 compared with the same quarter of the previous year.

You see why they might want to keep house prices out of the inflation index when we note that the official HICP measure recorded 1% (twice) and 0.8% in that same quarter.

Yves continues the official swerve with this.

Indeed, the United States, Japan, Sweden and Norway already integrate owner-occupied housing into their reference inflation indices.

You see both Japan and the United States use rents as a proxy for owner-occupied housing costs in spite of the fact that no rents are paid. You might think when Yves has noted the influence of house prices he would point that out. After all using fantasy rents to measure actual rises in house prices will only make this worse.

The gap between perceptions and official measures of inflation can complicate the communication of policy decisions. If households believe that inflation is rampant then they will see little justification for unconventional measures, in particular negative interest rates.

There is no little arrogance here in “believe that inflation is rampant” to describe people who have real world experience of higher prices and hence inflation as opposed to sticking your head in the sand for two decades about an important area.

Comment

Even Yves is forced to admit that the omission of owner-occupied housing costs has made a material difference to recorded inflation.

If it were to be included in the HICP, it could raise measured inflation rates in the euro area by around 0.2 to 0.5 percentage points in some periods. Taking that into consideration, core inflation would lift from its current 1.3% to its long-run trend, or even higher, thereby having a bearing on the monetary policy stance.

You can bet that the numbers have been absolutely tortured to keep the estimate that low. But this also hides other issues of which Eurostat provides a clear example below.

 the annual growth rate of the EU HPI reached a maximum of 9.8 % in the first quarter of 2007

Pre credit crunch Euro area house prices did post a warning signal but were ignored. After all what could go wrong? But more recently let me remind you that the ECB put the hammer down on monetary policy in 2015.

Then there was a rapid rise in early 2015, since when house prices have increased at a much faster pace than rents.

Or to put it another way the Euro area HICP is full of imagination.

Could it be that it’s just an illusion?
Putting me back in all this confusion?
Could it be that it’s just an illusion now?
Could it be that it’s just an illusion?
Putting me back in all this confusion?
Could it be that it’s just an illusion now?

I promised earlier to deal with the technical issues and could write pages and pages of excuses, but instead let me keep it simple. The consumer in general spends a lot on housing so they switch to consumption where purchase of assets is not included and like a magic trick it disappears. Hey Presto! Meanwhile back in the real world ordinary people have to pay it.