Category: Uncategorized

A Perfect song for the post Brexit Economy

Im loving Katy Perrys new song! As a songwriter myself (www.superfreakmusic.com) Ive written a handful of ‘resilience ‘ songs, but I think she has nailed it word for word!!!
Rise
I won’t just survive
Oh, you will see me thrive
Can’t write my story
I’m beyond the archetype

I won’t just conform
No matter how you shake my core
‘Cause my roots they run deep, oh

Oh, ye of so little faith
Don’t doubt it, don’t doubt it
Victory is in my veins
I know it, I know it
And I will not negotiate (errr, perhaps this line isnt quite so appropriate lol!)
I’ll fight it, I’ll fight it
I will transform

When, when the fire’s at my feet again
And the vultures all start circling
They’re whispering, “You’re out of time”
But still I rise

This is no mistake, no accident
When you think the final nail is in
Think again
Don’t be surprised
I will still rise

I must stay conscious
Through the madness and chaos
So I call on my angels
They say

Oh, ye of so little faith
Don’t doubt it, don’t doubt it
Victory is in your veins
You know it, you know it
And you will not negotiate
Just fight it, just fight it
And be transformed

‘Cause when, when the fire’s at my feet again
And the vultures all start circling
They’re whispering, “You’re out of time”
But still I rise

This is no mistake, no accident
When you think the final nail is in
Think again
Don’t be surprised
I will still rise

Don’t doubt it, don’t doubt it
Oh, oh, oh, oh
You know it, you know it
Still rise
Just fight it, just fight it
Don’t be surprised
I will still rise

When Markets just wont do what they’re told

This morning I took a very short break from my current pastime of crushing  on Mark Carney to check on the yields of UK gilts after yesterdays QE auction. The thought had crossed my mind at the weekend- ‘what if no one wants to sell?’  So I thought Id have a quick look at them  to see how its all going.

I don’t think were going to be seeing that devastatingly beautiful smile any time soon.

This week Ive been thinking about just how much revision and re studying I have to do before I can make any decent meaningful analysis ( because I did my degree a while back but am now getting back into it in a big way ), hence the slowdown in blog posts. I really want to know what Im talking about before I jump in and start going on about things and then come to a totally wrong conclusion. As Sherlock Holmes says, ‘I cant form a theory with no facts!!. ‘

So I thought Id leave it a while before I aired my views on QE and low interest rates and how I feel it may ultimately lead to more instability in the financial system. Because unlike those amazingly clever (not to mention sexy-well one of them anyway) and talented people at the BoE, I don’t have my own formal model that maps out exactly how the economy will react when you do something like QE to it. (Yet. One day I will have a model oh yes!)

So surely they know way more about it than me. Of course they do. As an inexperienced graduate getting to grips with applying theory to the real world, its easy to fall prey to the fear of getting it wrong.

So its quite comforting to see that even the experts get taken completely by surprise sometimes. I guess they just didn’t see it coming. That in times of uncertainty, gilts are the one thing that people wont want to get rid of. Hardly rocket science when you think about it. Bonds will always pay you x amount unless youre in a really dodgy country that reneges on its agreements. Yes, those returns will be lower than other, more exciting and risky investments, but in times of uncertainty people want boring and predictable. Wouldnt you? Especially if youre a pension fund that uses that income stream  to pay out to your current customers.

Yesterday the Bank planned (hoped) to buy £1,170mn of long term government bonds from non banking institutions using ‘printed’ money (although they like to call it ‘central bank reserves’.)

These institutions are then supposed to take this money and spend it on more risky assets, thus increasing investment and getting all that new money out there. Plus, in the process of yelling, ‘PLEASE SELL US YOUR BONDS FOR GODS SAKE!!’ the increasing desperation of the Bank to buy them pushes up their price as the Bank makes higher and higher offers, thus lowering the actual yields- which is then reflected in a lower cost of borrowing-Hooray! So its effectively another way to reduce interest rates, except its more indirect than the official Bank rate, over which they have full control.

But yesterday, only 2 days into a 6 month programme of QE, for the first time since its inception, they could not find enough sellers and missed their target. (Albeit only by 4%-so perhaps this isnt the huge disaster everyone is making it out to be. The BBC tends to overdo it a bit at times!)

And I think that’s the reason why I love economics so much-it never plays by the rules. As soon as we make them up, those rebellious, troublemaking markets break them.

Sometimes, the more you try to fix something the worse it gets. Kind of like that woman who tried to restore the picture of Jesus ( I cant resist posting the link because it is truly a catastrophe of epic proportions! )

Worst. Restoration. Ever. Elderly Woman Botches Touch-Up Job on 19th Century Church Fresco

Mark Carney has stated previously that he is not a fan of negative interest rates but oops, the gross return yield (regular yield plus any gains made from buying it at a lower price than its face value) were negative on a handful of short(ish) UK gilts this morning.

Perhaps this shows what an impotent corner the Bank is now backed into. The interest rate cut is so low that the Bank has to lend money to banks longer term (the official Bank rate is only for overnight loans) so they can pass the cut on to customers. (As if! Have I had a letter from my mortgage provider yet? Noooo!). In other words, the rate cut alone simply isnt enough. And now QE isnt even working!

Perhaps the bank should think about buying things that people actually want to sell. Makes you wonder what the next incarnation of QE will be-Helicopter money? (where the government or banks are basically given new money in exchange for newly created bonds, as opposed to existing ones like in regular QE.) The bank investing in other assets like real estate? Or maybe they should just use their central bank reserves to buy stuff from Ebay. £70 billion worth! Wont change interest rates on bonds but it would get the money out there! (UK based sellers only though of course because we want all that money to stay in the UK!)

But perhaps yesterday was just a weird quirk-in todays auction of medium term bonds they were all too keen to get their hands on Mr Carneys stimulus package, having nearly 5 times as much offered as they needed. Mondays auction was also presumably a success, given that no one mentioned any epic failures on Monday.

So that leaves me with the question- why are people quite happy to sell their short to medium bonds, but not their long term ones, and why didn’t the Bank see it coming?

Unfortunately I will have to wait until I get to the chapter on bonds to find the answer to the first question (although I think I already have a pretty good idea.)* The second, Ill leave in the capable ( and slightly glittery) hands of the oh so lovely Mr Carney.

Until next time (whenever that may be)

 

*OK so I think its this: if youre a pension fund you know youre always going to have liabilities i.e. money you have to pay out. If you have a bond that isnt going to mature until a new species has actually evolved, then that’s a very nice, safe, long term income stream that you will want to hang on to. Now if you have shorter term ones, sooner rather than later they are going to mature and you will have to replace them with new income streams, probably more bonds.  But you wont know how much you’re going to have to fork out for these new cash cows until you go to market to get some. So this may lower you profit levels overall. Plus, if someone like the Bank of England is willing to pay a high price for them, you can make a nice profit if you bought them for a lower price.If I had a choice between a guaranteed income that Id already paid for and having to go out and buy one, I know which Id prefer.

Hmmm- Interesting!

boe_2952199b

I woke up this morning quite excited. Today was the big day! The day we would find out whats going to happen to interest rates. I even had it in my outlook calendar (yes, perhaps only an economics geek would get this excited.) But this was no ordinary MPC meeting-you know, the type where nothing ever actually changes.

The markets waited with baited breath. Would it be .25? 0? Or even a rather trendy negative? Hey, if its good enough for the Japanese…

There have been a few voices calling for such insanity, but most, including me, expected a cut to 0.25%. Given the eagerness to intervene in recent weeks- by reducing the counter cyclical buffer so that  banks can lend out more money- and the hints of a rate cut and QE, combined with the less than positive emerging data on consumer  and business confidence, it seemed a fair bet.

So I was surprised and pleased to see that they had decided by a vote of 8-1 to…wait for it….

‘maintain Bank Rate at 0.5%‘

Business as usual then-but not for long.

The Pound jumped up against the dollar-in fact there was a gap of  as it launched itself from $1.3235  to the  relatively heady heights of $1.3463.

But the FTSE 100 and 250 looked none too pleased, falling 1.23% 0.8% respectively. I guess the FTSE100 fared worse because many of the companies earn money overseas so the and so a weaker pound means they get more of them when their foreign earnings are converted.

Brexit certainly hasn’t been short of surprises and today was no exception.

Markets were ‘disappointed’ and Governor Mark Carney was accused of dithering and changing his tune. Well, it wouldn’t be the first time. I cant help wondering if maybe he hinted at rate cuts to see how the markets might react to a real rate cut. Or perhaps he was just buying some time until the economic situation became clearer.

Now if I was a market I might possibly take this as a good sign that at least for now most of them aren’t convinced that things are really bad enough yet to justify a cut.

Yet.

So why was I pleased? Well it looks like monetary policy actions are a bit like buses. Not much happens for a while and then suddenly three come along all at once.

The bank has a careful balancing act between acting too soon and possibly running out of ammunition before anything (much) has really happened (more on this in a later  post), and waiting until its bad enough to act upon. But by then people have been hurt. Jobs have been lost, houses repossessed.

The main reason for todays inaction is that they feel that they simply don’t have enough data to make an informed decision. So however disappointed the markets might be, it is a sensible one. Don’t try to rescue something until youre sure it needs rescuing.

It probably wont last though. The Bank will know way more in August when they publish their latest GDP forecast and the MPC have hinted strongly that a rate cut is likely to happen then.

But hey, if they are in doubt about how bad it could get, they could always consult the Bank of England’s Q2 inflation report-you know, that report! The one that scared everyone.

 

How to Win Friends and Influence People

When I was a teenager, my parents would often try to ‘help’ me make my own decisions. ‘Theres option a,’ theyd say. ‘And it’s a really great one because of xyz. Or you could do option b but that would be really horrible-but of course the decision is entirely yours.’

Ah such happy memories!

Now forgive me if Im wrong, perhaps Im mistaken in thinking that a referendum is where you give people a choice and then let them decide.

But apparently, the way it works in the UK is ‘we’ll have a referendum but we’ll tell everyone how we want them to vote. And if that doesn’t work we’ll get our friends in high places to dish out some scary forecasts-‘see look! They agree with us, now isn’t that a funny coincidence!’

While doing a rather tedious but necessary task at work today, instead of reaching for my usual remedy to keep my mind focused (which is normally listening to My Chemical Romance or any good chart songs I like the sound of), I tuned in to the live stream of the Treasury Select Committee grilling senior members of the Bank of England about their latest Financial Stability report.

I wasn’t actually watching it, I was just listening, but I swear I could hear the cogs frantically whirring as Bank of England Governor Mark Carney was asked about some ‘private meetings’ hed had with Chancellor George Osborne.

Ironically, these committee hearings are there to promote transparency.‘Sure were transparent-but please! For Gods sake don’t publish the minutes of our private meetings!’ When asked by the committee if they could see the notes from these meetings, Mr Carney said  ‘he would not want to create a situation where those conversations were “minuted, recorded, tweeted in real time, that is not in the interest of monetary and financial stability.’ (Neither is issuing  dire forecasts Mr Carney!) But just to ease your mind, Ill tell all those people lurking behind the curtains secretly tweeting your every move to go away.  I can see his point however-one word from him can send the markets tumbling or rising, as has been seen in recent weeks.

He reluctantly agreed, but I cant help wondering whether there will be a full compliment of notes handed over. Reminds me a bit of when you were a teenager,  and your parents demanded to see your record collection, and you quickly hid all the ones with explicit lyrics under the bed and produced the most innocuous set of albums you could find.

When asked whether any politicians had ever tried to influence him, Mr Carney said that when he was the Governor of the Bank of Canada he couldn’t remember that ever happening. Good to know. And so…. how about now?He insisted that no one had tried to influence him, merely to ‘inform’ him. Because of course, the head of an institution that publishes reams of (fascinating in my opinion) data on the UK economy, needs to be informed.

A few weeks ago everyone was blaming Boris Johnson, conservative MP and former mayor of London, who led the Leave campaign. After pulling out of the Tory leadership race he was accused of ‘abandoning a sinking ship,’ ‘unleashing intolerance’ ( there was a rise in racial abuse crimes immediately following the result), ‘knocking billions off the value of the nations savings’, practically bringing down the government, –basically singlehandedly bringing the country to its knees. Quite an accomplishment for one man. Never mind  all those other people who voted Leave.

Ah well, people love a scapegoat. So while everyone was busy pointing the fingers at Boris (not to mention shoving a few knives into his back), Mr Osborne gets to back away quietly hoping that no one will realise this mess is actually all his fault.So confident was he that wed never actually vote to leave, that he didn’t even plan for it. At least the Bank of England did, albeit in secret ( I guess all those people frantically tweeting every word were successfully rooted out.)

With a reckless disregard for the consequences, as well as threatening us with tax rises and spending cuts, he warned that  interest rates would go up. Odd, given all those meetings he had with Carney and yet he still appeared to have no clue about the action he  would likely take in the event of a leave vote. I mean seriously, Mark Carney putting interest rates up? ‘Well I was gonna get round to it at some point…’

 I cant help wondering what things would be like now if we hadnt had all those dire warnings. Now, everyone thinks there will be a recession because everyone thinks there will be a recession. Sure, there are a few tangible risks in the future but Ill talk more about them in an upcoming post. But a lot of this is just based on fear.

Its interesting  to note that it was only after the result that other analysts, those without any close links to the government (not that Im aware of anyway), began to downgrade their forecasts. Perhaps they were just slow off the mark-oops! We really didnt see that coming-better revise the forecasts down!

Or perhaps we are just seeing a real life episode of Yes Minster being played out in reverse.

Oh well, looks like Mr Osborne wont have the privilege of ‘informing’ civil servants for much longer.

First blog post

Welcome to the sister site of Diary of a Superfreak. As an economics graduate with a passion bordering on obsession for the subject, here is where Ill be sharing my insights and opinions on the rather unsettling times facing the UK.

There is a lot going on in the UK right now- a maelstrom of fear with a few hopeful voices trying to be heard over the raging torrent of money fleeing our country. Everyone is trying to make sense of it all and everyone has an opinion-so here’s mine.