Yesterday’s GDP disappointment makes the case for a tax cutting Emergency Growth Budget even stronger.  Policy Makers have got to go for growth, you can’t tax your way to prosperity.  Or else the cat gets it…

Graphic : Taxloss via Alphaville

Annual consumer price inflation increased by its greatest ever amount in a single month in December, that is well well above the Bank of England’s 2.0% target and consensus economist’s expectations that it would come in nearer 2% today.

Get your wheelbarrows out, stock up on gold and baked beans. Here comes inflation…

See also : Coming Soon : Double Digit Inflation, Double Digit Inflation is a Black Swan, Bank of England Pension Fund Surges Betting on Inflation, Yo Dude, Where’s the Deflation?

At 10.30 this morning we will have the first auction of government debt this year.  Gilts are ticking down* a little as the market awaits the outcome of the sale.  Mandelson is being wheeled out today to say that – shock, horror – the First Lord backs government policy; emphasising spending reductions, tax increases and reducing the deficit, all to reassure the bond markets.

At the same time Alastair Darling is introducing a Fiscal Responsibility Bill, to be debated  today, in the latest effort to reassure investors after Darling in 2008 scrapped rules to contain the deficit, he now repents:

“Whatever the economic circumstances, whatever the government, we need rules and objectives to govern fiscal policy… It is important we have that discipline.”

You can say that again.  Spending prolifically in the credit-boom years wasn’t prudent, it was reckless fiscal madness.  It was Brown’s delusion.  We really need to go further and introduce a balanced budget law, forcing the government to live within its means.  Today’s auction of £4 billion of gilts will cover a week of government overspending under the Brown and Balls economic plan.  The reality is we need to control spending as soon as possible. 

Creating spend / cut dividing lines is crass partisanship, not working in the national interest…

*Guido is short the market.

In the right hand column of this blog below the book ads there is a spot updated in realtime showing Guido’s portfolio position. For the readers who are interested (there are a few) this is the portfolio report for the second half of this year (first half here).

The huge pink drop on the chart is when Guido decided that the U.S. stock-market was getting carried away to the upside and shorted U.S. Dow futures.  He was at the time sat in a deckchair in France drinking rosé in the August sun.  When over the next few days the trade started to go wrong, and the Dow pushed well past 9000, Guido drank more rosé and doubled up his short.  Who said rosé was cheap?

By the time Guido sobered up and exited the trade it had wiped out all the profits from the first half of the year (and some) putting the portfolio in the red.  So Guido stuck to jobbing the gilt market from the short side and dodging the QE bidding, then figured out that it was possible to join the QE bidding.  Next trade mess-up was trying in November, despite being a huge gold bull, shorting a technically over-bought gold market.  Except it wasn’t really over-bought fundamentally as India’s central bank had bought 200 tonnes.  Net-net the year’s trading of gold didn’t really make any money as a result.  Made small profits jobbing oil and getting long the euro.  The portfolio was mostly flat with no positions or risk during the year (68 trades were made all year, mostly held for less than a week).  Guido was too busy doing other things and has removed the trading software from his Blackberry to prevent himself from trading financial markets under the influence.  Nevertheless the portfolio is up 40.82% on the year versus a stock-market up about 23%.

The portfolio’s high leverage and sharp moves in Net Asset Value* are due to having a target of making a 100% annualised return.  Guido was 78% up at one point in early November before giving back profits.  Next year Guido can see no reason to hold gilts, if the markets sense a close election it will spook the gilt market and there is going to be a continuing flood of supply no matter what.  The exit from QE will probably be horrendous.

*Eagle eyed readers might spot a discrepancy in the NAV figures, the final figure is based on NAV versus the start of the year and the NAV changes throughout the year are based on trade by trade changes.

If you haven’t got any gold, stock up on baked beans, because inflation is coming back.  Data released this morning from the Office for National Statistics showed inflation in the UK rose for the second month in succession to 1.9% in November, jumping from 1.5% in October. This rise in inflation is far stronger than consensus economists were expecting.  Guido will bet a large amount of money that the Governor of the Bank of England will have to write to Chancellor Osborne next year telling him why inflation is over-shooting target.

Not hard to figure out why when the government has printed the money to buy all the billions in government gilts offered this year. Take that in, the net effect of printing all that money via quantitative easing was to prop up the government’s debts.  Andrew Lilico at Policy Exchange is equally as pessimistic as Guido, he is predicting 2 quarters of anemic growth, followed by 2 quarters of contraction next year and double digit inflation to follow by early 2012 – a double dip. Double digit inflation and probably a recession in 2013 – stagflation.

Lilico calls the failure of Darling to use the PBR to tackle the deficit sooner rather than later a “nihilist fiscal policy”.  There has been some argument made by left-wingers that the ‘AAA’ rating is not really under threat and that it is just political scaremongering by George Osborne to claim otherwise.  The fact is that the markets have already removed the triple ‘A’ rating before the ratings agencies.  In terms of the interest rate paid and implied risk premium for UK debt, gilts trade like double ‘A’ countries – Japan, Portugal, Ireland – rather than triple ‘A’ countries like Germany.  As a result, the cost of servicing UK debt is already 20% higher* than it is for Germany despite £200 billion having been thrown at keeping short-term rates down, not surprising when the UK leads the G20 in having the highest inflation and worst indebtedness.

See also : Yo Dude, Where’s the Deflation?, Bank of England Pension Fund Surges Betting on Inflation, Double Digit Inflation is a Black Swan.

*Market rates today for UK 10 year gilts 3.90% against 3.24% for German 10 year bunds.

The boss of the mighty Deutsche Bank Josef Ackermann is laughing that Downing Street and the Elysee Palace are shooting their financial centres in the foot.  He is acclaiming that Germany has a “comparative advantage” over other financial cities due to the fact that Britain and subsequently France will be taxing bonuses at penal rates.  “To strengthen the financial hub of Germany I think is a very wise move” he sarcastically mocks with that crazy German sense of humour for which they are famous.

It has come to something when boring Frankfurt, home of the European Central Bank, is rubbing its hands with glee at the prospect of London’s bankers heading towards them.  Cheers Darling…

UK government debt took a whack yesterday, the gilt market dropped heavily on what the FT describes as ‘fiscal fiction’. The FT is blunt:

Investors took fright on Thursday at the timidity of the government’s plans to balance the books with one of the biggest sell-offs of British gilts this year.

The fiction will continue, the Bank of England will print more money and buy take billions more gilts on to its books to prop up the market.  The Moodys bond rating agency warned that the ‘AAA’ rating on UK sovereign debt was good for now, but within a few years that could be history.  The day of reckoning will be postponed, only to be worse when it comes…

Peston is at it again, the cocky hack claims he has “confirmed” matters thus:

“It has been confirmed that the Chancellor Alistair Darling will impose a one-off super-tax on city bonuses when he unveils his Pre-Budget Report today”.

Shouldn’t the Speaker demand of the Chancellor why Peston and not parliament was the first to know of his plans? The PBR is important and may contain market sensitive information.  Peston has previous on this, causing mayhem with share prices and arguably creating a false market.  Bercow made a big thing of insisting on the primacy of parliament when he was running for office. Prove it today.

It didn’t take long for Will “we don’t do attack dog” Straw of Left Foot Forward to, errm, go on the attack.  The editor of the well funded “evidence based” blog dismissed Guido’s story (“Economics for 7 Year Olds“) about the UK being the only G20 country left in recession by quoting the figures from the back pages of an out of date copy of the Economist.

He even made a little dunce’s hat and wittily headlined his piece “Economics for Gui-d’oh  Fawkes”.

Will might have checked a back-copy of the Economist, but it seems he missed the news yesterday that Canada grew 0.1% in Q3, Mexico grew 2.93% in Q3, South Africa grew 0.9% annualised in Q3, and so did Russia. The story was driven by the new data released.  Guido isn’t sure what Will is smoking, but the icing on the cake was the citing of Spain as an example of a G20 country still in recession.  Spain isn’t even in the G20 Will.

Will’s blog is usually pretty good, provocative and produces original content, he really should stick to evidence based positive stuff, the last mysteriously funded high profile left-wing blogger who tried to take Guido on head-to-head made a huge fool of himself.  Will should also know (from his years of spinning for HM Treasury) that you need evidence that is up-to-date. Guido’s story was based on news, not old data or wishful thinking…

Above is an easy to understand venn-diagram for readers who are not into the dismal science.  The big circle shows all 20 members of the G20, the left-hand set comprises those members who are out of recession, the small right hand set contains those countries still in recession.  This is one chart you won’t see on Will Straw’s Left Foot Forward…

Embarrassingly for Gordon Brown, who sees himself as financial saviour and leader of the world, the only member country of the G20 still in recession is the UK.  Gordon is currently chairing the G20, which adds to the embarrassment.  The Times of India blames the UK’s debt burden for the divergent performance.  Who do we blame for the the debt burden?