QE Or Not QE?, That is the Question

Today on Threadneedle Street in the City, the Monetary Policy Committee meets to decide the Bank of England’s base rate and whether or not to keep the printing presses running   The base rate is currently of symbolic importance (unless you have a base rate tracker mortgage), because prevailing real world market rates are far higher than the official 0.5%.

Has QE worked? We will never be able to answer that question definitively.  Economists will argue forever about what would have happened if things had been done otherwise.  We can however point to unintended consequences of the Anglo-American monetary splurge. Commodity price inflation, a non-trivial £200 billion unwinding problem in the UK, a yet more burdensome government debt disaster.  The evidence is that QE has largely allowed the Bank of England to buy the government’s new debt giving foreign investors an exit route.  Pimco, the world’s biggest bond investor has taken that exit route from gilts and says they are now resting on nitro-glycerine.

For £200 billion we got growth of 0.1%, the longest recession in history and a 6% drop in output that saw Britain as the last major country out of recession.   Most worryingly of all, inflation is now ready to rip.

The recession came to a technical end last week.  With that QE should come to an end.  Policy makers need to perform a trick never accomplished before anywhere in the world at any time in history, turn off the monetary liquidity flood without lagging inflation jumping, sterling collapsing or the economy seizing up. Mervyn’s memoirs will make interesting reading.

Dead Cat Bouncing into Double Dip?

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

+ + + UK Dec CPI Posts Largest Jump On Record to 2.9% + + +

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?

Mandy Back to Reassure Gilt Market

MandyAt 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.

Guido's Portfolio 2009

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.

Coming Soon : Double Digit Inflation

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.

Danke Darling

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…

Investors Flee Fiscal Fiction

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 historyThe day of reckoning will be postponed, only to be worse when it comes…

Speaker Should Demand Darling Explain Peston "Confirmation"

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.

Two Left Feet : What is Will Straw Smoking?

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…

Economics for 7 Year Olds

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?

Quote of the Day

Barclays Capital told clients 3 weeks ago…

“We recommend a long position in Dubai sovereign credit and see today’s negative price actions as an opportunity to buy.”

Yo Dude, Where's the Deflation?

Guido was more than sceptical when politicians and Labour luvvie economists like Gavyn Davies started talking up the bogeyman of deflation at the same time as the government was running up massive fiscal deficits.  It seemed too handy a coincidence that they would print money on a scale never seen before at the same time as issuing debt on a scale never seen before.  They subsequently, coincidentally, bought the debt using the money they had just printed.

This we were told was to stave off deflation which it was emphasised was very bad.  Goods becoming less expensive was somehow worse than goods becoming more expensive.  If we got deflation it would be the end of the good times for ever according to even monetarist economists.  Guido was sceptical that deflation was necessarily bad, history shows that there have been times of increasing prosperity that coincided with deflation.  Deflation happened several times in the nineteenth century.  During that era of rapid economic development there were no central banks and money was calculated as a certain quantity of gold or silver.

Deflation was not necessarily a threat to our prosperity, in a situation where the money supply is stable it is the manifestation of prosperity and pensioners know that their standard of living would have improved.  With inflation now upticking this experiment in Mugabenomics* has to be reversed without setting off hyper-inflation or collapsing the government debt market.  The policy authorities have figured out how to prop up the gilt market – they are changing the regulations to force banks to buy government debt to the tune of hundreds of billions. It remains to be seen if they can avoid an inflationary catastrophe, surging record gold prices suggest the markets suspect not…

*©Vince Cable, who was against QE before he was in favour of it.  God knows what he thinks now.

Cameron References the Jonah Jinx

Yesterday in the chamber Cameron made a jibe that Tony Blair’s campaign to become EU president was going well until the moment the Prime Mentalist backed him, ensuring the “curse of the one eyed son of the manse” doomed Blair’s ambitions.

The more significant evidence of the curse and something that is symbolic of the end of the twentieth century Anglo-American dominance of the world, is the purchase by the Indian Central Bank of  200 tonnes of gold from the IMF.  The Indian Central Bank paid an average of $1040 per ounce, Gordon and Balls sold the Bank of England’s gold at an average of $275 an ounce.  So cack-handed were the gold sales that Brown and Balls gave advance notice to the gold market and the trade is now famously known as “the Brown Bottom”.  It was an act of short-term, self inflicted imprudence that has cost untold billions.

As quantitative easing drives the dollar and pound down in value the cost of that blunder becomes clearer.  India is heading towards becoming the new English speaking superpower and Britain is heading towards becoming a bankrupt state with a devalued currency.   Gordon has jinxed generations to come with government debt…

Osborne's Command and Control Economics

osborne_lecternGeorge Osborne is off to Canary Wharf this morning to make anti-Banker noises at the Reuters HQ.   His speech will call for the successful to be penalised as an act of collective punishment for the mistakes of senior management.  No word as to what punishment the Bank of England Governor and Chairman of the FSA will face, Guido suspects none.

The argument is that now the government is the owner of banks it should set the pay and conditions of staff to satisfy the democratic will.  Shareholders are of course entitled to exercise control.  However if Guido was a proprietary trader at RBS contractually promised 10% of the profits he wins for the firm, only to be told that the Chancellor wants to breach the contract and unilaterally cut the bonus, Guido would first call his lawyer.  Secondly, Guido would start looking at renting office space in Dubai or another financial centre with a zero rate of income tax.

Bonuses are taxed, so next year half the £6 billion bonus pool could be lost to the exchequer.  The successful traders who make profits for their firms help the banks re-build their balance sheets, why drive them overseas?   Punishing successful City folk after the event is a displacement activity when they should be punishing those responsible for the crisis – central bankers, regulators and those few bankers who actually had direct responsibility for the crisis.

Bonuses are a form of deferred performance related pay, no profit, no bonus.  The easiest way to clamp down on bonuses is to have a moribund economy…

UPDATE : Labour’s Lord Myners, who really ought to know better, is now (Thick of It style) pushing a rival plan this morning.  Forcing investment banks to reduce their fees for capital raising.  He seems to want to further erode bank profits. How are the banks expected to rebuild their balance sheets?

Pound Whacked After Mervyn King Admits : QE Isn't Working

Mervyn Wacks PoundThe pound is getting whacked after Mervyn King implicitly admitted that despite printing £175 billion of he might still need to cut rates or even effectively charge banks for putting cash on deposit with the central bank.

We are entering into a monetary policy twilight zone where the governor of the Bank of England, in the words of the FT, has to “entertain more outlandish concepts like negative rates”The QE disaster unfolds…

Suckering Sid?

SidThe FT reckons the Tories are eyeing up a shares sale of some of some of the UKFI Ltd portfolio, this follows Myners on the weekend claiming to Adam Boulton that the taxpayer was sitting on a little nest egg investment in the banking system.  Perhaps, if you ignore the financial black hole that is Northern Crock.

Don’t get too excited.  Moodys has just released research suggesting we will see further losses of around £130 billion from the loan books and securities portfolios of rated UK financial institutions.  The UK economy is nowhere near out of the hole yet:

  • We are in a fifth consecutive quarter of recession.
  • Real GDP fell 0.8% quarter-on-quarter.
  • Output has fallen 5.6% year-on-year, the worst since records began in 1955.
  • The Bank of England base rate at 0.5%, is the lowest rate since the central bank was founded in 1694.
  • The Old Lady has eased £125 billion of new electronic money into the economy to create a false market in government gilts.
  • Nevertheless, the efforts thus far have met with little success: net bank lending to individuals fell to a fresh record low in June, net lending to U.K. businesses has slipped into negative territory in recent months, as repayments exceeded new loans. Sid is saving to pay down debt – unlike Gordon.

Guido’s advice to Sid: buy a little gold for insurance, invest in inflation linked securities  and neither the great British pound or the U.S. dollar are great places to be. Pop one of Gordon’s happy pills, we ain’t out of it yet…

Double Digit Inflation is a Black Swan

The Bank of England and most consensus economists, including most right-of-centre monetarists, are stoking deflation fears. The MPC voted to print £50 billion more this month.  Which is very convenient for Gordon Brown and Alastair Darling, it allows them to justify printing money, which they can then use to buy their own escalating government debts.  Which is a little like eating your own leg to stop you starving.

The economic debate on this is confusing, the data is mixed and to some extent depends on your time frame.  The drop in oil prices and other commodities post-crunch had a deflationary effect.  Against this you have U.S. and U.K. government debt levels which are extraordinary.  Terrifying.  Gilt yields (interest rates) are being held down by the Bank of England printing billions of pounds to buy gilts from the Treasury and artificially hold up gilt prices.

The Bank of England’s own pension fund however is heavily invested in inflation protected securities – which is odd given their public stance is that deflation, not inflation is the threat.  Consensus economists are sheep and we need not worry too much about their bleating, more surprisingly some right-wing monetarist economists, such as those on the IEA’s shadow monetary policy committee (who tend to work in the City for investment banks) are also believers in deflation.  Guido’s theory is that the reason they have supported expanding the money supply so drastically is they panicked, remember all those articles in the Guardian and the FT about the “end of capitalism”and the end of investment banking as we know it?  Their morale was low, they were afraid.  Printing money and flooding the market with liquidity would be a short term fix that would shore up the banks and save their jobs.  Hence all these right-wing economists became born again Keynesians and could be found all over the Square Mile screaming at the Bank of England to turn on the printing presses.

Well capitalism survives and thrives.  Some of those economists are now wondering about the wisdom of printing all that money.  Nigel Lawson’s biographer, Eamonn Butler of the Adam Smith Institute, changed his mind on quantitative easing a few months ago, the IEA’s shadow MPC is no longer unanimously in favour of quantitative easing.

black-swanNassim Nicholas Taleb yesterday warned of the inflation threat, Cameron conceded the possibility of a British debt crisis.  Guido thinks it highly unlikely Britain would ever default on it’s debt so long as it has a sovereign currency – we would just devalue and pay foreigners in devalued pounds.  Though Britain could have, as Cameron said, foreign investors demanding higher risk premia, higher yields.  That could see mortgage rates above 10% again – both here and in the U.S.

Warren Buffet yesterday was quoting John Maynard Keynes’ road map for political survival amid an economic disaster of just this sort: “By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens…. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

Protect yourself from the coming inflation.  Like the Bank of England’s pension fund…

Drunk Trading

Guido had lunch a couple of weeks ago with a reader who had promised to buy him a decent bottle for slotting Damian McBride.

This co-conspirator happens to be one of the most successful traders in the City and a wine buff, so when he says a “decent bottle of wine” we are talking a bottle that you can get a mortgage on.

Over lunch he said that his big break in the early days was trading drunk, a few drinks gave him the confidence to take risk. Guido explained that his drunk trading merely got him carried out the back door of the dealing room by worried co-workers back in his investment banking days.

Anyway, this Friday after a few bottles of rosé* Guido finally steeled himself to short the stockmarket rally via U.S. stock futures. They subsequently rallied into the close taking about 20% of this year’s trading profits with them. Damn the Bloomberg for Blackberry app, damn being able to enter trades from your Blackberry when tipsy.

Anyway the holiday has not been completely blighted, stock markets are going south today. Who knows, Guido might even make a profit…

*People knock rosé wine, including the farmer who is our neighbour here. There are some cracking underestimated varieties which suit Guido’s palate – they go very well with salads. Honestly. Not too bad on their own, in a deck chair, in the shade.

Half-Year Portfolio Report

For the seven or so readers who are interested in Guido’s financial market trading (and you seem intensely interested) here is the half-year report.

The portfolio was up 30.6% at the half-way mark for the year, not too shabby considering the FTSE was off some 10% over the same period. […] Read the rest

+ READ MORE +

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Quote of the Day

Peter Mandelson tells Emma Barnett…

“I think that Jeremy Corbyn himself should search his conscience and ask himself whether he’s the best person to lead the Labour Party into the general election with the best chance of success for the party.”

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