Blog

Perscrutating the Hoisington hypothesis

2 June 2021 |  by Peter Warburton

In the face of mass defections to the inflationary camp, two (private sector) names stand in resolute defiance: David Rosenberg and Lacy Hunt. While these gentlemen have overlapping views, their approaches are distinct and worthy of separate discussions. This blog will address the ‘Hoisington hypothesis’, the mechanistic analytical framework expounded by Lacy Hunt. Over the past 30 years or so, Lacy Hunt has surfed the towering wave of decelerating nominal GDP growth with confidence and aplomb, earning the gratitude of the many fixed income investors who stuck with him. However, Hunt, undeterred by the unfolding dramas in the bond market in 2021, seems oblivious to the shifting political, economic and institutional foundations on which his framework rests. The trend is your friend … until it bends.    
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Beware the power of structural change

18 May 2021 |  by Peter Warburton

The UK economy is undergoing a structural transformation due to pandemic-related shutdowns. A large swathe of corporate activity and employment will not survive this protracted disturbance. While the macroeconomy will rebound strongly over the next few months, for many small businesses and sole traders, the die was cast when the second lockdown was announced last November. Their savings are depleted, their trade has dwindled, and their franchise has evaporated. Maybe we should no longer worry about Haldane’s “long and lengthening tail of lower-productivity firms”: lockdown has lopped it off. This extraordinary interruption to activity has crafted the opportunity and granted permission for a radical re-shaping of the economy. Metaphorically, a lot of balls have been thrown up into the air and as they fall, longer and stronger arms will reach up to catch them.

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The state is the dominant actor

6 May 2021 |  by Peter Warburton

In Russia, and elsewhere, profits are earned (and more often, not) strictly by state permission. Since the global financial crisis, this has also become true for many financial institutions in the West.  The pickup in private credit demand, the widening of net interest margins and the release of loan loss provisions that we associate with economic upturns have proved patchy and weak, while the legacy costs from the crisis – write-offs, penalties, fines, restitution and legal costs – have expanded in scope, scale and duration. Banks have largely abstained from mainstream credit intermediation, with respect to households and enterprises. Recognising that banks would not voluntarily provide the assistance needed to survive lockdowns, the state has taken the matter of credit creation into its own hands, guaranteeing bank loans and borrowing on its own account. Rapid broad money growth is a manifestation of the de facto nationalisation of new credit.  

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US inflation outlook in 3 charts

21 April 2021 |  by Peter Warburton

The US is facing an inflationary danger that is both credible and imminent. By its outrageous interventions and extravagant promises, the US government has underwritten a cost structure that is materially richer than that prevailing at the end of 2019. Unit labour costs are running around 200 basis points higher than a year ago, while profit margins have widened. Retail businesses have no incentive to rebuild inventory, preferring to keep longer order backlogs than usual and to collect scarcity premiums. International trade continues to languish, and supply bottlenecks are taking longer than expected to resolve. The escalation of US-China tensions ahead of the June G7 summit is distinctly unhelpful: Asian export price inflation is positive and rising. The Biden fiscal package adds fuel to a fire that is already burning.      

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Monetary Policy without anticipation

25 March 2021 |  by Peter Warburton

“If the outlook for inflation weakens, the Committee stands ready to take whatever additional action is necessary to achieve its remit.” Mantras, such as this one from the Bank of England, have become the threadbare apologetics that substitute for a coherent, forward-looking, monetary policy. Imagine a night-time rally driver, deciding to turn off the auxiliary lights because she knows the road so well. Or a solo yachtsman, deciding to dispense with the GPS and follow his instincts. Central banks, casting aside a century-old correlation, are asking us to trust their judgment – and their models – rather than provide sound arguments and analysis to support their decisions.

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The UK’s broken supply side

11 March 2021 |  by Peter Warburton

The UK has made a disastrous start to 2021 in terms of international trade and supply transmission. Hard data is still thin on the ground, but it is becoming clear that significant segments of the UK economy are battling to re-engineer their supply chains in the wake of Covid-19 disruptions and departure from the European Union. I have long held the view that, in economic terms, Brexit would be a negative sum game: negative for both the UK and the EU27, probably in perpetuity. Some of this may simply be described as teething problems, but rather more is down to structural dislocation and the breakdown of trust. The brokenness of the supply side is likely to become more obvious and important when the engines of demand are firing on all cylinders again.

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After the US money boom, the US earnings boom

25 February 2021 |  by Peter Warburton

As the US legislature prepares to throw its citizens another US$775bn in cash payments, it is reasonable to ask whether the new administration has thought this through. Despite the pandemic, personal incomes rose by 6.3 per cent last year, buoyed by a 36 per cent uplift in current transfers.  The fourth quarter personal saving rate of 13.4 per cent remains 6 full points higher than a year ago.  As consumers prepare to resume a wide range of activities that necessitate physical movement, nominal income and spending growth will converge on the explosive rate of M2 money supply growth. The collapse in the velocity of money (jump in the saving rate) has reflected a deficit in personal mobility. As social and travel activities resume, the plunge in money velocity will stabilise and partially reverse.  Adding more fuel to the fire looks like a dangerous misjudgement.

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QE inquiry calls the Bank of England to account

11 February 2021 |  by Peter Warburton

The House of Lords Economic Affairs Committee recently launched a wide-ranging inquiry into the Bank’s ever-expanding Asset Purchase Programme, otherwise known as QE. This inquiry is long overdue, and my hope is that it will expose the fragility of the premise on which the Bank has acted since it resumed QE in 2016. The official justification for QE has mutated repeatedly since its inception in 2009, rather like the coronavirus. The most recent formulation is that additional QE is necessary to enable the Bank to hit its inflation target, which is currently undershot in terms of the preferred CPI measure. Yet the failure to unwind any of the previous bouts of QE breeds a deep suspicion that QE is part of a covert and unsanctioned strategy of financial repression.

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Enhancement to Social Contract is a launchpad for inflation

28 January 2021 |  by Peter Warburton

The catchphrases at virtual Davos this year are “Reviving the Social Contract”, “the Great Reset” and “Building Back Better”. The one I couldn’t find on the Davos website was: “Welcoming the return of inflation”! These thoughts are inextricably linked. The Covid-19 crisis has provoked some extraordinary public policy responses in advanced economies that look to have overturned the status quo ante. The expedient interventions of states to shield their citizens from the harsh realities of the pandemic have established new benchmarks in the provision of healthcare, social care and welfare payments. In the Anglo-Saxon countries at least, it is almost inconceivable that we will see a return to the profiles of early-2020. Whether this seismic shift justifies the epithet of a Great Reset remains an open question: this will depend, in part, on whether it materialises as a massive income redistribution within a sound fiscal and monetary framework or within an inflationary framework. My money is on the latter.

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THE UK ECONOMY: THE GAME IS UP!

14 January 2021 |  by Peter Warburton

Over the next 4 years, the advancing impact of de-globalisation on the UK economy, and London in particular, will hit home and hit hard. Departure from the EU has introduced frictions that will discourage trade, deter foreign investment and diminish London’s market share in global financial services. In the face of a general disinterest in removing barriers to international trade, the UK will struggle to monetise its new-found freedoms outside the EU. While 2021 is still likely to feature an interval of economic euphoria, presuming that the vaccines get ahead of the virus, this will be cut short by the return of inflation and by the government’s attempt to collapse the sky-high budget deficit. It is quite conceivable that the UK economy will still be 5 per cent smaller at end-2024 than before the pandemic struck.




 

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THE BIG LIE

17 December 2020 |  by Peter Warburton

For 25 years, fondly described as the Great Moderation, we were spun a line that better macroeconomic management (or monetary policy) had secured a permanent reduction in output and inflation volatility, for which the reward was lower interest risk premiums. In turn, this permitted balance sheets to become more highly leveraged, safely, and real asset prices to be higher in perpetuity. These bold assertions were savaged by the global financial crisis, but the force of this reality check has waned materially since 2014. The same proud assertions are in common currency again, prompted not by a belief in sound economic management but emboldened by the rear guard actions of increasingly fearful public authorities and central banks.  The Big Lie is that yesterday’s and today’s credit-financed promises will be honoured tomorrow in today’s money.

 

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THERE IS NO EXCESS OF GLOBAL SAVINGS

3 December 2020 |  by Peter Warburton

According to Gavyn Davies, chairman of Fulcrum Asset Management and distinguished Keynesian commentator, writing in the FT: “The forces of secular stagnation have created a further excess of global savings over investment, reducing equilibrium real interest rates and inflation.” Leaving to one side the contentious references to secular stagnation and a pre-existing global savings glut, this assertion cannot go unchallenged:  while household saving soared in the second quarter, this has been more than offset by public sector dis-saving. National saving rates have tumbled in 2020, as they did in 2009.  There is no excess of global savings. 




 

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GOVERNMENT: THE DUMMY CLIENT

19 November 2020 |  by Peter Warburton

In the wake of Covid-19, the UK central government - beyond that of other G7 nations - has thrown caution to the wind, raising expenditure by 33 per cent, comparing April to September 2020 with a year ago. Paradoxically, this extravagance has coincided with a drop in the volume of services delivered by the public sector, notably a 20 per cent fall in the number of GP appointments compared to January. This infers that there has been a massive increase in the cost of public sector services, which is glaringly obvious from the updated national accounts. Financial markets have dismissed this extraordinary public sector inflation as a statistical artefact that will unwind automatically, but there are good reasons to be sceptical. Government has inserted itself as a dummy client into the UK economy, making unconditional financial transfers and providing services at exorbitant cost to the taxpayer. Its exit strategy is far from clear.
 

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Wastefulness is inflationary

5 November 2020 |  by Peter Warburton

Wastefulness is the opposite of productivity: doing less with more, as compared to doing more with less. The public policy response to Covid-19 in the US and UK has bypassed budgetary controls and the usual audit process, paving the way for extraordinary state interventions and expenditures. “Whatever it takes” has been augmented by “whatever the cost”. During the 2008-10 slump, some employers agreed to pay their workforces in advance for hours that they would contract to work when activity recovered. Government furlough schemes have asked for nothing in return. The impact of “something for nothing” schemes is to lower productivity and inflate costs. Preliminary US data for the third quarter provides an early glimpse of the inflationary consequences.
 

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Entertaining NIRP: the beatings will continue!

23 October 2020 |  by Peter Warburton

Andrew Bailey, governor of the Bank of England, has ordered the UK commercial banks to demonstrate their preparedness for the possible introduction of a negative interest rate policy (NIRP). From one perspective, this is merely a prudent step that enhances the central bank’s policy toolkit. From another, it is a further unwarranted and ill-advised step towards the complete abandonment of monetary control.  Only in an analytical model can it be argued that negative nominal interest rates have beneficial long-term economic effects. Rather than arbitraging reality to the model, we recommend the opposite course of action. 
 

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Winter is coming for the SP500

8 October 2020 |  by Yvan Berthoux

In the past few weeks, in the run-up to the elections, the US equity market has been showing signs of ‘fatigue’. Most of the equity gains we have seen in the past 6 months have been associated with the massive liquidity injections by the Fed in conjunction with US fiscal support aimed at preventing the economy from falling into a deflationary depression. As government aid expires and the Fed has called a halt on balance sheet expansion, can equities overcome the political and financial headwinds? 
 

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Poor B****y inventory!

9 September 2020 |  by Peter Warburton

The recorded value of inventories in US and UK plunged in the June quarter as consumers cleared the shelves and fractured supply chains could not cope. However, there is no estimate of the inventory that was rendered worthless by the shuttering of factories and shops. The commercial losses sustained and the threat of further Covid-19 lockdowns has created an environment of extreme caution regarding re-stocking. Tight inventory conditions will allow profit margins to be restored and inflation rates to jump. 
 

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Has silver run its course?

27 August 2020 |  by Yvan Berthoux

One of the less celebrated beneficiaries of the massive infusion of central bank liquidity over the past few months is silver: its price has enjoyed a breathless ascent to within touching distance of US$30/oz, rising by almost 50 per cent in a matter of weeks. Even considering the recent 12 per cent consolidation, silver remains the best performer this year, up over 125 per cent since its March lows. However, in a climate of increasing uncertainty over the enduring effects of Covid-19, equities trading at historical highs and an extremely oversold US Dollar, the balance of risk has soured. Beware, silver price consolidations can be fierce.
 

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Whither US inflation, whither the Dollar?

18 August 2020 |  by Peter Warburton and Tom Traill

About 4 years ago we stumbled across an intriguing inverse correlation between the real return on US deposits to an overseas investor and the current rate of US inflation, as measured by the CPI. This correlation started to appear around 2006-07 and has persisted. As a rule of thumb, for every 1 percentage point that inflation falls short of 2 per cent, a foreign investor could expect 5 percentage points of annual real return. Our hypothesis of a near-term spike in US inflation has correspondingly adverse implications for returns to Dollar deposits. We contend that US inflation has embarked on a wild ride that overseas investors in US Dollar assets will find nauseating.
 

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Liquidity is good for gold and mega-cap stocks!

30 July 2020 |  by Yvan Berthoux

In the past few weeks, sell side institutions have shown interesting charts looking at the performance of the top 10 mega-cap US stocks and the ‘bottom 490’. While these titans are currently trading at comfortably higher values than their respective February peaks, the stock prices of the remaining 98 per cent of the S&P 500 have gone nowhere since April and are still currently trading at a 15 per cent  discount relative to their February highs, on average.  
 

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Getting the inflation lowdown after lockdown

16 July 2020 |  by Tom Traill

In these turbulent times, there is a premium on accurate measurement. Many a government policy has been launched mid-crisis, based on false or incomplete information, leading to disappointment and regret. Vast commitments of taxpayer funds can thus be lost to waste, fraud and incompetence. The widespread belief that the general price level, proxied by the CPI, is about to crash has prompted some knee-jerk policy moves in recent weeks. 
 

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Weaknesses of the output gap in forecasting inflation

02 July 2020 |  by Peter Warburton

If inflation forecasting were easy, almost everyone would succeed in this endeavour. The record shows otherwise. Simple models of the inflationary process are essential teaching tools but have serious deficiencies when deployed as forecasting tools. Neither money supply growth (however defined) nor the Keynesian output gap is a reliable guide to the inflationary outlook amidst monetary regime change. The output gap framework would have failed miserably in its predictions of inflation in the 1930s and the 1970s. 
 

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No New Normal for Inflation

18 June 2020 |  by Peter Warburton

The crass repetition of this unfortunate epithet has inducted “New Normal” into the realm of cliché-dom. It loosely translates as: “the good old days are gone, so we had better come to terms with something less”, as in slower economic growth, lower interest rates, lower investment returns. Yet “New Normal” also smuggles in the assertion of a new stability, a settled state, at the new, impoverished, level. There is no New Normal in sight for inflation. As much as governments and central banks would love to tether inflation to a stake, this wolf has broken loose. 
 

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CNY: a hedge against political uncertainty in the west?

04 June 2020 |  by Yvan Berthoux

In stark contrast to the US Federal Reserve, that has expanded its balance sheet by nearly US$3.5tr in the past few months in response to the Covid19 crisis and the potential deflationary pressures, the PBoC ’s balance sheet has remained steady at CNY36tr (US$5.06tr). Logically, the Fed’s aggressive liquidity injections predispose the US Dollar to weakness against a broad spectrum of currencies in the coming months. While the USD has yielded a little ground against major currencies, such as the Euro and the Japanese Yen, it has remained steady against the CNY. 
 

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The inflationary set-up: 2020 is not a case of déjà vu 

18 May 2020 |  by Peter Warburton

If the large-scale asset purchases (QE) undertaken by the US Federal Reserve in 2009-13 failed to propel the US economy in an inflationary direction, why should we expect a different outcome today?  Isn’t this the definition of insanity? In refuting this charge, it is necessary to understand more clearly why the central bank interventions provoked by the GFC did not foster an inflationary environment. Essentially, the GFC was a car crash in which the vehicle’s dimensions were compressed. Think of the Fed as the driver’s airbag and the government as the emergency services attending the scene. 
 

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Banks seek reinvention as good guys

6 May 2020 |  by Tom Traill and Peter Warburton

No-one wants to play the bad guy anymore. Despite rapid escalation in unemployment, there are loads of vacancies for mean judges, tough cops, heartless landlords, dispassionate bailiffs and debt collectors and so on. Everyone wants to play doctors and nurses. Central bankers, no longer trained by pulling the legs off ants, sit down with community leaders to feel their pain. And commercial bankers, so desperate to be readmitted to respectable society after the PR fiasco of the past 12 years, have adopted a different approach to lending in the current crisis - along the lines of “The Milky Bars are on us!”.  Bank lending growth is soaring not slumping.
 

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Investing in the Age of Fiscal Dominance

24 April 2020 |  by Peter Warburton

This week, I recorded an Expert View interview for Real Vision, posted under this title. Fiscal dominance refers to an ordering of economic affairs in which monetary policy is assigned to the defence of the creditworthiness of the sovereign rather than to the achievement of an independent objective, such as low inflation or financial stability. As the government asserts control of a larger and larger share of national resources – for whatever reason – willing buyers of government debt depart, leaving the central bank to provide deficit finance. The challenge of investing in these circumstances is twofold: to protect against the ravages of inflation and the threat of nationalisation and to gain exposure to the expansion of public sector procurement and provision.
 

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The shape of things to come

9 April 2020 |  by Peter Warburton

Incredibly, I have been involved in preparing forecasts of the UK economy for 45 years. I have a reputation for making bearish calls – occasionally successfully – but have never produced, or agonised over, a forecast as terrible as the one below.  We now expect UK GDP to fall by nearly 11 per cent this year, employment to drop by 8 per cent (notwithstanding the Job Retention Scheme) and public sector net borrowing to climb to £110bn. The forecast error margins are very wide and we will take an unusually keen interest in the next Consensus Economics publication to see how differently others perceive the outlook, not just for 2020 but also for 2021. What is the shape of things to come?   

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Careless talk costs lives

30 March 2020 |  by Peter Warburton

The correct use of language may not appear to be a priority in our straitened circumstances, but the misuse of technical terms has a capacity to spread confusion and misunderstanding. This, in turn, leads to poor decision-making and financial loss. One of the popular descriptions of the crisis that engulfed us in 2007-09 is the Great Recession, but it was nothing of the sort. Recession is the name we give to the negative phase of a trade or business cycle. This is to be distinguished from a depression, which is the technical description of the negative phase of a credit cycle. Depressions and recessions are as different as migraines and headaches. The challenge before us, once more, is to stave off a depression.  

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Can the US Dollar stay safe?

12 March 2020 |  by Tom Traill & Peter Warburton

Amid the mayhem of the past couple of weeks, while US Treasuries have become an ever more crowded trade, the US Dollar has surrendered some of its prior gains. As US bond yield spreads have narrowed to Europe and Japan, the US currency has struggled to hold its ground. And as the US administration fumbles its way towards an effective public health response to Covid-19, concerns have deepened over its economic impact, relative to other developed nations. If the political fall-out from Covid-19 also damages President Trump’s re-election chances, then the revocation of Trump’s low tax, light regulation regime looms large on the horizon. Will a portion of the US$14tn in foreign investment that has arrived on US shores since 2011 beat a hasty retreat?    

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Time to worry about the US jobs market?

27 February 2020 |  by Yvan Berthoux

While US labour market statistics remain superficially impressive, there is gathering evidence that the bloom is off the rose. We saw that with a non-farm jobs gains of slightly over 2 million in 2019 (2.096M), the US experienced its weakest pace of job creation since 2011, suggestive of fading momentum for 2020. In addition, average weekly hours for private-sector employees has slipped by 0.2 hours in the past year, which explains part of the recent weakness in weekly earnings growth. Is there a message in here for prospective economic growth?

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Copper: short-term recovery, but long-term uncertainty!

13 February 2020 |  by Yvan Berthoux

Growing uncertainty around the coronavirus has led to sharp downward revisions in growth expectations in China and thence to the collapse in some commodity prices such as oil and copper. While real GDP growth was expected to flirt with the 6 per cent level before the Covid-19 pandemic, sell-side institutions have marked down their forecasts of economic activity to a mere 1 percent pace in the first quarter in the base case. Worst case scenarios extend to a 4 per cent contraction if Covid-19 is ‘not contained’. A sharp recovery in copper prices should accompany a normalisation of activity, but the longer-term outlook is cloudy.  

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Reaching the point of no (real) return

30 January 2020 |  by Peter Warburton/Tom Traill

In the days before large-scale QE, bank deposits bore positive real returns in most advanced economies. Typically, benchmark government bond yields offered even higher real and nominal returns than bank deposits. Savers, large and small, enjoyed access to capital-safe investments in ‘hard’ currencies which would accumulate over time to build real wealth. In the post-apocalyptic landscape of 2020, the real yield on advanced economy deposits is zero at best and few governments in the developed world offer positive real bond yields. This blog explores just how scarce real yields, in respected sovereign debt markets, have become.   

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Global recovery: the consumer isn't buying it

15 January 2020 |  by Peter Warburton/Tom Traill

The good news is that real annual retail sales growth is running at around 10 per cent in Armenia and Ukraine and at around 5-6 per cent in Hungary, Serbia, Malaysia and Vietnam. The bad news is that almost everywhere else, retail sales volumes are dribbling along. In Hong Kong, Chile and Venezuela, sales are plummeting. Outside of emerging market economies, there is very little evidence of the consumer recovery that we routinely associate with central bank easing. What are the likely explanations of consumer reticence and risk aversion?

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Is all technology deflationary?

11 December 2019 |  by Peter Warburton

Generalised technical progress that shows up as enhanced productivity in contested markets is equivalent to a price fall. However, where this condition is not met, the notion that “technology is deflationary” cannot go unchallenged. There are at least three avenues of objection to this assertion, which is usually cast in terms of the powerful global company that swallows up the franchises and profits of existing firms, removing intermediate cost and handing a saving to the consumer, or alternatively providing a service to the consumer at no charge. One, individual firms can only alter relative prices. Two, we don’t believe in altruistic oligopolists, much less, benevolent monopolists. Three, when the retailer shifts a cost burden to the consumer, it is reasonable for the consumer to pay less.

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Chinese Banking System under fire!

27 November 2019 |  by Yvan Berthoux

China has the world’s largest financial system as assets reached US$40 trillion in 2019, twice the size of the US. Elevated economic uncertainty combined with growing counterparty concerns have significantly raised Chinese repo rates, forcing small and medium-sized banks to rely entirely on wholesale deposits for funding, making bank failures more probable.

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Net debt and the debt net

14 November 2019 |  by Tom Traill

Corporate debt can be an accelerant for growth when used appropriately but can all too easily drag a company down when it gets out of control. The stockmarket rarely punishes a company for leveraging its balance sheet in a positive phase of the economic cycle, especially if the debt proceeds are used to shrink the equity base. If the company’s profitability is improving then there is little to suggest that a rising level of net debt is a hindrance to performance. However, the US record shows that companies with net cash on the balance sheet outperform those with net debt, come rain or shine. 

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Dealing with higher uncertainty and opportunities in 2020

31 October 2019 |  by Yvan Berthoux

If uncertainty starts to ease in the UK and in the US following smooth negotiations around Brexit and an agreement between US and China in order to walk back tensions in the trade war dispute, demand for ‘safe havens’ should decrease and the US Dollar should start to weaken. Our two favourite candidates that can offset some of the USD weakness in 2020 are the Euro and Sterling. Check out the link to the entire interview with Yvan Berthoux on Real Vision within the article. 

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Is the strong Dollar becoming a drag?

16 October 2019 |  by Tom Traill

The strength of the US Dollar weighs heavily on many investors’ minds. The trade-weighted Dollar index has appreciated for seven years, shaking off the weakness in 2017. Despite many factors that suggest there should be weakness ahead – excess government borrowing, implying an abundant supply of Dollars, the fragility of US corporate credit and the rich international valuation of the US equity market – there are few signs that this trend is ready to break.

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Corporate credit: Humpty Dumpty exudes optimism

3 October 2019 |  by Peter Warburton

Next Thursday (10 October) we offer a breakfast seminar cheerily titled “The coming collapse of corporate credit.” A dark cloud has descended on the corporate sector due to the coincidence of labour-related and materials cost acceleration and top-line revenue deceleration. Overlaid on the macro picture is a progressive rightward-skew in corporate profitability and a leftward-skew in net debt. While highly profitable companies have retained healthy earnings momentum, a long fat tail of underperforming business is suffering disproportionate damage to profits and cashflows. Meanwhile, S&P’s credit upgrades to downgrades ratio of US corporate debt sinks down the page.  Humpty Dumpty still gives a good interview, but the cracks are unmistakable. 

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The myth of structural disinflation

10 September 2019 |  by Peter Warburton

Global fixed income managers, aided and abetted by central bankers, have been seduced by a thesis of structural disinflation. This contends that inexorable forces of demography and technology exert a gravitational pull on the rate of inflation in mature advanced economies which conflicts with the arbitrary objective of a 2 per cent inflation rate. It argues, try as they might, central bankers will ultimately fail in their quest to regenerate inflation, unless they reach for the forbidden tools of monetary debasement. This is a distorted characterisation of the inflationary narrative and the policy context. The path to higher inflation will be straightforward once a political determination is made.

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Negative yields drive pensions to despair

05 September 2019 |  by Yvan Berthoux

The assumed long-term average return of US pension funds, typically around 7 per cent, has changed little in 20 years. The detachment of pensions funds’ projected returns from reality has become acute in recent years as their tentative diversification into alternative assets has backfired and government bond yields have plunged once more. Worse, pension funds have followed investors of every heft and hue into higher-yielding, but less capital-certain investments. The income shortfall is so severe that, increasingly, pension funds will be required to liquidate capital to fund their pension commitments, undermining the valuation of financial assets.

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Velocity of money drives core inflation?

22 August 2019 |  by Tom Traill

Monetarism’s glory days are long gone, but in some quarters there is a nostalgic presumption that money supply data is still a useful leading indicator of inflation. This is emphatically not the case, so much so, that over the past 20 years, money velocity has established its own credentials in this role. Using US data as an illustration, a simple model predicts that core inflation will head higher over the coming months.

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Central bank socialism: a primer

7 August 2019 |  by Peter Warburton

Many years ago, speaking at a conference organised by the Institute for Economic Affairs, I hit upon the phrase “killing us with kindness” to describe the actions of a central bank unwilling to take appropriate and justifiable, if unpopular, action in support of its legal mandate. As events unfold, this expression has increasing resonance. 

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Inflation or Stagflation? And how will it occur?

29 July 2019 |  by Peter Warburton

Erik Townsend and Patrick Ceresna welcome Dr. Peter Warburton to MacroVoices:
Erik and Peter discuss the prospect that the policy framework that is common to most western liberal democracies will be ‘blown up’ or otherwise dismantled in the near future, a drama that could play out as soon as the 2020 US presidential election.

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Will Chinese excess liquidity spare the Aussie?

25 July 2019 |  by Yvan Berthoux

Just when it seemed that China was set on a course of unremitting credit tightening, help has finally arrived. The uptick in credit growth and excess liquidity is modest and recent, but it brings welcome relief to its trading partners, not least Australia.  Excess liquidity in China has led movements in Australian house prices for the past 15 years...

Whatever happened to oil demand destruction?

10 July 2019 |  by Tom Traill

Why didn’t the surge in oil prices in 2017-18 result in a noticeable cutback in oil consumption? The Brent price surged from US$45 in June 2017 to US$85 in early October last year, but world oil consumption rose 1.3 per cent in 2017 and 1.2 per cent in 2018. Small decreases in European, EMEA and Latin American demand were offset by strong growth in Asia Pacific and North America last year...

Confronting the lazy consensus on debt burdens

1 July 2019 |  by Peter Warburton

The return of crazy lows in government bond yields tempts the thought in some quarters that debt burdens could safely be increased: mortgages on bigger income multiples, higher credit card limits, larger EBITDA multiples for private equity deals. As an antidote to this insanity, in the June Market Focus we have examined developments in debt service ratios (DSRs) for the private non-financial sector in 31 countries...

Has US wage inflation peaked?

13 June 2019 |  by Tom Traill

It is tempting to regard the monthly payroll report as a real-time commentary on the US expansion, but this temptation should be resisted. Monthly payroll changes are erratic and ambiguous in their interpretation, especially when the unemployment rate is down at 3.6 per cent. Arguably, annual wage growth offers a cleaner perspective on the relative strength of the labour market and the recent softening of headline rates may be calling the turn in the US economic cycle....

What catalysts can lift the price of gold?

29 May 2019 |  by Yvan Berthoux

The resurgence of global economic and political uncertainty, following the spike in financial volatility in February 2018, contributed to positive momentum in gold prices in all the major currencies from late last summer. However, the precious metal has been moving sideways since the beginning of the year despite the significant fall in real yields and strong demand from central banks globally. What will it take to send gold prices meaningfully higher?...

A perfect storm of inflation myths

16 May 2019 |  by Peter Warburton

In the past 9 months financial markets have been subjected to a perfect storm of inflation myths.  The global inflation trend is little changed from last summer: the US is not the world. The prospects of an inflationary resolution – in the US and the world – over the medium-term have risen over the past few months, not fallen. The growth of the US GDP deflator is running above private consumption expenditure (PCE) inflation because the contribution from net exports is inflationary and expected to become even more so...

Fifty or hundred Dollar oil: which is next?

2 May 2019 |  by Tom Traill

At the start of the year, the dawning realisation that the global economy was not plunging into recession sparked a relief rally in crude oil prices. The demand destruction scenario, beloved of the deflationists, has not materialised. Our obstinate attachment to premium-grade fossil fuels is unshaken. The 40 per cent increase in WTI is the more remarkable for the coincidence of a strong US Dollar. Which is next: a relapse to US$50/bl or an extended rally to the 2011-14 benchmark of US$100/bl?...

Time to hedge against a (second) equity sell-off?

4 April 2019 |  by Yvan Berthoux

After the aggressive equity sell-off we experienced in the last quarter of 2018, equities have catapulted higher, recovering almost all the lost ground. The S&P500 index was up by nearly 13 per cent in Q1, registering its strongest quarter since Q3 2009. However, many participants are unpersuaded by the recent rally as corporate margins look set to decline and leading indicators point to a weakening of global economic activity...

Copper: prices are set at the margin

21 March 2019 |  by Tom Traill

Copper, famously credited with having a PhD in economics, used to be lauded for its apparent ability to forecast turns in the business cycle. Its wide range of industrial uses meant that slowing economic demand often showed up promptly as weakness in the copper price. That all came to an end when copper became the loan collateral of choice for China’s shadow banking system from around 2012...

The changing character of US Treasury notes

7 March 2019 |  by Peter Warburton

For many years, the US benchmark 10-year Treasury bond has occupied a unique and seemingly unassailable place at the heart of the global financial system. The US has made a virtue of fiscal incontinence, arguing that the world should be grateful for a Niagara-style supply of these lovely liquid coupon-bearing instruments struck in the mighty US currency...

QT impact: has the biting point already arrived?

21 February 2019 |  by Yvan Berthoux

There has been increasing concern that reduction of the balance sheet has already reached a threshold where constraints are binding, inferring that the Fed may struggle to continue the programme when assets fall below US$3.5tr, which is roughly $500bn below the current level. What is the liquidity problem and why are reserves (held at the Fed) falling drastically?...

The Fed: data-dependent or market-scared?

6 February 2019 |  by Tom Traill

The most contrarian trade in the world right now is that the Fed hikes in 2019, according to Bank of America. The Fed's dovish statement and press conference last week marked a decisive shift from the December meeting and strongly suggest a pause in the tightening cycle. This has revived suspicions, even accusations, that the Fed is seeking to protect the markets, rather than the real economy...

How much should we worry about the Yuan?

24 January 2019 |  by Yvan Berthoux

Slowing global growth, quantitative tightening and a slower pace of real money growth weighed heavily on global equity prices in the final quarter of 2018. In addition, unsettling data developments in China coupled with tightening conditions in the corporate bond market have forced the PBoC to cut interest rates and undermined market assumptions about currency stability. How much should we worry about USDCNY in 2019?...

No Golden Globes for the money supply

08 January 2019 |  by Peter Warburton

In terms of their macroeconomic significance, think of the monetary aggregates as the discarded footage on the cutting room floor after the production of a blockbuster film. The erosion in the usefulness of the money supply as a useful macroeconomic indicator began in the 1980s but suffered a hammer blow when the US established a new monetary policy regime in the wake of the 1994 bond bear market. As the US Fed’s focus shifted from domestic to global, it assumed the mantle of the guardian of global financial stability...

Taking stock of the inventory contribution to US growth

20 December 2018 |  by Tom Traill

When inventory change makes an outsized positive contribution to quarterly GDP change, it is common to hear the charge that economic growth is exaggerated and will surely be reversed. This view neglects the close offsetting relationship between inventories and net exports, particularly in nominal terms. After netting off the movement in external trade, the resulting GDP growth impact is rarely...

France's unwelcome rise to prominence

13 December 2018 |  by Yvan Berthoux

Forward-looking indicators of French industrial activity have plunged in recent months, leaving president Macron ‘s 7 per cent unemployment target looking insurmountable by 2022.  France’s unreformed economy and effervescent politics have kindled a furious protest movement, whose appeasement threatens a budgetary lapse much larger than Italy’s next year. How long before French OATs suffer a similar market revolt to the one that lifted Italian BTPs 200 basis points higher in the summer?

Corporate caution keeps dividends in check

06 December 2018 |  by Liseth Galvis-Corfe

While a recent Janus Henderson report on global dividends proclaimed that “growing profits and strong cash flow means dividends are well supported”, the prevalence of discretionary share buybacks – especially in the US – has undermined the connection between corporate performance and dividends. This has allowed a gap to open between US Treasury yields and the dividend...

Why the crude oil price won't save US Treasuries

29 November 2018 |  by Peter Warburton

The round trip in crude oil prices back to sub-US$60/barrel will undoubtedly take the wind out of inflationary sails over the next few months. US Treasury breakeven inflation rates have also reacted in a manner consistent with their new-found correlation to the oil price. However, we doubt whether this news will be enough to reverse the bear trend in US bond prices. 

The US Dollar's fading credentials as a place to hide

22 November 2018 |  by Tom Traill

October’s US equity market correction has provided another opportunity to gauge the credentials of so-called risk-off assets. In what has been dubbed “the everything bubble”, the search for hiding places is intensifying: one day, it may even supplant the search for yield. While emerging market assets and commodities have sometimes served as risk

UK cars: the blows keep coming

15 November 2018 |  by Liseth Galvis-Corfe

From the diesel emissions scandal to the post-Brexit Sterling slump, to important vehicle tax changes and post-Brexit uncertainties, the UK auto sector is punch drunk. Just when it may have it seemed that things could only get better, at the end of the year a potentially damning Financial Conduct Authority report will be published on the use of Personal Contract Plans (PCPs), which have become the dominant form of new auto finance in the UK...

Have equities found their low?

8 November 2018 |  by Yvan Berthoux

At Global equity markets appear to be recovering from their second seizure of the year, but there is a wide dispersion of views on the market outlook. Canvassing our contacts, we have found a variety of responses to the latest equity setback...

Gold stocks and the Three Bears

1 November 2018 |  by Peter Warburton

At our 3 October breakfast seminar, I identified three bear scenarios for the global economy and financial markets. While the threats to prosperity and tranquillity that they represent are distinct, they are clearly not mutually exclusive. Bears can’t resist a picnic. The first bear, whose focus is advanced economy government and highly-rated...

US inflation: hiding in plain sight and ready to pounce

25 October 2018 |  by Tom Traill

The slump in headline annual US CPI inflation from 2.9 per cent in July to just 2.3% in September has led some commentators to revert to their script that the inflationary threat remains immaterial.  This would be a false conclusion. Despite the erratic swings in the headline data, a genuine and substantive inflationary threat is hiding in plain sight...

Should we expect an appreciation of the Brazilian Real?

18 October 2018 |  by Liseth Galvis-Corfe

Will Italy be downgraded to junk?

11 October 2018 |  by Yvan Berthoux

Passive investing: staying the right side of insanity

04 October 2018 |  by Tom Traill

The meteoric ascent of passive investment – mainly using mutual funds and exchange-traded funds – confers peculiar status on equity index constituents, leading to increasing market concentration especially where stocks have multiple index memberships. Favoured companies have the opportunity to make acquisitions at low cost...

US Treasury notes: breaking out, breaking bad

27 September 2018 |  by Peter Warburton

Yesterday’s FOMC meeting marks another step along a cliff-top walk amidst low clouds. Jay Powell’s Fed appears sure-footed and united in its pursuit of an undefined, neutral monetary policy stance, but there are hazards ahead. The Fed has pencilled in another 5 doses of 25 basis point funds rate increases and lifted the so-called terminal...

Under-provision: US banks are waking up to a riskier future 

20 September 2018 |  by Liseth Galvis-Corfe

After the financial crisis, US banks increased substantially their loan loss provisions. Since then low interest rates have supported economic growth through leverage. Now that the Federal Reserve has tightened monetary policy, the decrease in loan loss reserves is worrying. Loan loss reserves as a proportion of total loans have dropped...

How exposed are Japanese banks to Antipodean asset values?

13 September 2018 |  by Yvan Berthoux

Japanese bank shares often appear attractive in valuation terms, such as price-to-book, but currently there is the added possibility that the Bank of Japan will relax its yield curve control (YCC) policy this year, leading to a surge in the 10-year JGB yield and in bank profitability. However, there has been an interesting co-movement of...

The African century?

06 September 2018 |  by Tom Traill

Prime Minister Theresa May was recently on a tour of Africa, singing the praises of the host nations, extolling the virtues of UK commerce and the scope for deepening trade. From the relative peace and tranquility of a tour of Africa, she has returned to the war-zone of the House of Commons. While the 21^st century has been dubbed the Asian century...

The tug-of-war over US Treasuries

30 August 2018 |  by Peter Warburton

A fascinating tussle is developing in the US Treasury bond market, where the 10-year yield is oscillating in the range 2.75 per cent to 3 per cent. Bond bulls argue that the global economic expansion is long in the tooth, the yield curve is flattening, signalling the end of the tightening cycle, and that the US bond offers...

Turkey: the new Greece or the new Thailand?

23 August 2018 |  by Liseth Galvis-Corfe

Turkey is the latest in a long procession of countries to accept the international invitation to accelerate its economic development using leverage. The debt ratio for the private non-financial sector in Turkey has risen from 49 per cent of GDP in Q4 2009 to 84 per cent of GDP in Q4 2017. In March 2017 the government reinforced the lending...

Can equities still climb the wall of worry?

16 August 2018 |  by Yvan Berthoux

After the early 2018 equity markets shake-out, equity markets have encountered increasing scepticism under threat of a trade war and related geopolitical concerns. Yet, implied spot volatility in S&P options (the VIX) has retraced impressively, now flirting with the psychological 10 per cent barrier. These are reflected in the lessening...

$100bn discovered down the back of US sofa

09 August 2018 |  by Tom Traill

As sofas go, the one in the US Bureau of Economic Analysis has an impressive capacity to conceal cash. Less of a sofa and more of a portal to a lost world. So, the discovery of almost US$100bn of unrecorded national income must be a cause of national celebration – right? Cash-strapped US consumers will rush to the malls and forecourts...

Do JGB yields contain useful information?

02 August 2018 |  by Liseth Galvis-Corfe

In these dog days of summer, excitement is found in extraordinary places. Three interventions by the Bank of Japan in the government bond market last week lifted expectations of a policy shift at this week’s monetary policy meeting, but this was not delivered. Instead, Governor Kuroda announced a technical change whereby the acceptable range of movement of 10-year JGB yields was widened...

What does the flattening yield curve mean?

26 July 2018 |  by Peter Warburton

There was once a time when the flattening of the yield curve was a reliable – but never infallible – precursor to slowing economic activity. Today, we have bull flatteners (where long-term rates fall relative to short-term rates) as well as bear flatteners (where short-term rates rise to meet long-term rates) and there is no clear economic inference.  The emphasis has shifted from... 

How much trouble for EM corporate borrowers?

19 July 2018 |  by Liseth Galvis-Corfe

There is a shocking lack of perspective in many commentaries on EM corporate debt, with special reference to US Dollar exposures. According to IIF, the range of foreign currency denominated non-financial corporate debt, scaled by GDP, runs from China (7 per cent) to Turkey and Chile (36 per cent). While EM corporate debt has been accumulating... 

EM currencies: the ill-fitting cap

12 July 2018 |  by Yvan Berthoux

The dumping of emerging market currencies over the past 2 months is reminiscent of the taper tantrum episode in May-December 2013, but with crucial differences. In 2013, EM currencies of countries with external deficits suffered a depreciation roughly 5 times larger than those of countries with external surpluses.  In 2018, there is hardly any difference. This lack of discrimination suggests an opportunity...

Trade wars or currency wars?

05 July 2018 |  by Tom Traill

To all US Dollar bulls out there, beware the thinly-veiled intentions of the US president to sabotage the currency.  While the Renminbi has weakened quite suddenly, prompting concerns of a deliberate Chinese devaluation strategy, the Renminbi remains in an uptrend. Trump’s disruptive pronouncements on tariffs and trade are designed to have a much more ...

Tariffs: a recipe for supply-side chaos and higher inflation

28 June 2018 |  by Peter Warburton

Donald Trump is not the first US president in recent times to seek to appease a tiny constituency of workers with punitive import tariffs. The presumption of the aggressor in a trade battle is that the potential for welfare gains greatly exceeds the potential for welfare losses. Yet, the reflective studies of both the Bush steel tariffs in 2002 and...

Shock, horror! Megabanks are risky!

21 June 2018 |  by Liseth Galvis-Corfe

In a recent column for the Financial Times, Ben McLannahan showed that 16 of the 39 behemoths classified as global systemically important financial institutions (GSIFIs) have suffered share price falls of more than 20 per cent from their peaks, measured in US Dollars. Chief among them, we find Deutsche Bank, Crédit Agricole, Société Générale and Santander...
 

Why the Euro will come roaring back

14 June 2018 |  by Yvan Berthoux

US Dollar bulls have been on the rampage in recent weeks, with many observers expecting further appreciation of the greenback due to slowing European fundamentals, EM carry trade wipe-outs and rise in US Dollar funding costs, but there are some powerful arguments that support the revival of...

Italy ponders IOU – Inflation On the Up

07 June 2018 |  by Tom Traill

Since 2010, Italy’s nominal GDP growth has tracked Germany’s almost perfectly: but around 200 basis points lower each year. After 8 years, this compounds to a 21 per cent shortfall. We can measure the cumulative income and output loss, after a fashion, but can only imagine the cumulative frustration and anger that has accompanied it...

Bank guidance was a monumental mistake

30 May 2018 |  by Peter Warburton

As the years go by, the significance of the introduction of so-called forward guidance by the Bank of England in August 2013 has come into sharper focus. My initial reaction to this policy innovation was negative and my considered reaction is that it was a monumental mistake. The idea of providing individuals, businesses and financial markets guidance over the probable...

Italian Government Bonds: a 5-star fiasco?

23 May 2018 |  by Liseth Galvis-Corfe

The recent coalition between the Five Star movement and the League raises urgent questions about the sustainability and pricing of Italian government debt. Their proposals focus on tax cuts for companies, pension reforms and welfare spending. However, the parties...

Pedal to the metal

17 May 2018 |  by Tom Traill

If you hadn’t noticed, we’re in the middle of a growth cycle for the global industrial economy, with annual production up 4 per cent and US production up 4.5 per cent (April data). The S&P GSCI commodity price index is up 10 per cent, year to date, as against a measly 2 per cent for the S&P 500. The rising oil price has been...

Putting cov-liter fuel on the flames

10 May 2018 |  by Tom Traill

The tower of US corporate borrowing has grown taller and shakier than ever (figure 1). The credit offer has assumed extremely generous proportions since the financial crisis and that offer has been accepted to an increased extent. The level of new borrowing is 50 per cent higher than in 2007 in nominal terms, and the typical quality of new debt...

Where is the US dollar heading?

03 May 2018 |  by Yvan Berthoux

The recent surge in the US Dollar has been haunting investor’s minds as to its persistence, especially with the 10-year Treasury bond yield flirting with the 3% psychological threshold. Looking at the US$ index on a daily frequency over the past four years, we observe that the Dollar has broken...

The Little Inflation with the Big Bite

26 April 2018 |  by Peter Warburton

We contend that global inflation will continue its upward trajectory for at least one more year, come what may. The last inflationary flurry was in 2010-11 in the context of dramatic increases in energy and commodity prices. It failed to gain much traction then due to the significant under-utilisation of real...

US core inflation: better wait for the encore

19 April 2018 |  by Tom Traill

As far as we are aware, unlike the Fed or the ECB, inflation doesn’t have a favourite number.  We never cease to be amazed by inflation forecasts that stop at 2 per cent, as if the guardians of monetary policy had an instant braking mechanism for inflationary pressures. We find no evidence to suggest...

Indian inflation is bubbling up

12 April 2018 |  by Liseth Galvis-Corfe

Inflationary pressures are building in India. Despite the recent decline in headline CPI inflation from 5.1 per cent in January 2018 to 4.4 per cent in February 2018, the Reserve Bank of India (RBI) in its first bi-monthly policy statement stated that “there are several uncertainties surrounding...

A message to the money-worriers

05 April 2018 |  by Peter Warburton

An unremarkable slowing in various measures of US money supply growth, coupled with concerns that the shrinkage of the Fed’s vast balance sheet and the impending termination of Eurozone QE will aggravate the monetary deceleration, has prompted various economists and commentators to raise a red flag. Its strongest adherents advise...

European Banks: A Strong Buy?

29 March 2018 |  by Yvan Berthoux

This year, a major theme that investors have started to consider since the recent sell-off in global equities is the potential return of volatility. After hitting a historical low of 8.84 last year, the VIX has more than doubled and is now trading above its prior 2008 crisis long-term average of 20. The sudden eruption of risk-off...

What is Bitcoin’s future?

21 March 2018 |  by Yvan Berthoux

Since its high of US$20,000 reached in mid-December last year, Bitcoin’s valuation has more than halved. There is a growing chorus of market participants and commentators predicting the demise of the cryptos. A chart that its detractors like to show is the Bitcoin price overlain with that of historical bubble...

US small-caps find a silver lining in tariffs

14 March 2018 |  by Liseth Galvis

On the first of March Donald Trump announced significant trade tariffs on imports of steel and aluminium – at 25 per cent and 10 per cent respectively. Since then the Russell 2000 has appreciated by 4.4 per cent and the S&P 500 by 3.7 per cent. The Russell 2000 measures small- cap stocks, which have higher...

Why US labour cost inflation is rising - at last

08 March 2018 |  by Tom Traill

While US Treasury Secretary Steven Mnuchin is technically correct in saying that wage inflation need not be mirrored in generalised price inflation, this can only be true if productivity improvements underlie divergent wage growth. Demonstrably, this is very unlikely to be the case for an economy with low unemployment rates...

Meet the Inflationists

01 March 2018 |  by Peter Warburton

Presidents Trump and Xi, prime ministers Abe and Modi, hold in common an urgency of purpose and a disregard for obstacles. Excepting President Xi, who has already moved to consolidate his power and extend his term, these leaders face not-too-distant electoral challenges and the ever-present threat of removal by fair means or foul. They are under no illusions...

6 per cent global nominal GDP growth is a big deal

22 February 2018 |  by Peter Warburton and Tom Traill

Over the past 2 years, the pace of nominal GDP growth has picked up almost everywhere. By our reckoning, weighting the local currency data for 53 countries by economic size, global nominal incomes are 6 per cent higher than a year ago. This compares to a 4 per cent annual gain recorded in the final quarter of 2015...

Us Dollar: is the tide going out?

15 February 2018 |  by Peter Warburton

There is a debate raging over the characterisation of the US Dollar: is it a defensive currency that performs better in a risk-off environment or has it entered a structurally weak phase that may stretch over a number of years? My inclination is towards the latter. I suspect that the high tide for international – especially Asian – participation in US securities markets...

Re-thinking the Yuan

8 February 2018 |  by Liseth Galvis

In January 2018 the People’s Bank of China (PBOC) announced that it will remove the “counter cyclical factor” used to determine the midpoint reference rate for the Yuan (CNY) against the US Dollar. This means that market forces will play a greater role in determining the level of the USD/CNY. Its removal, only a year after this safety measure was implemented, shows a remarkable confidence...

Black gold: getting frothy

1 February 2018 |  by Yvan Berthoux

New year exuberance has enveloped the crude oil markets, such that the front-month contracts of the two crude oil benchmark futures, WTI and Brent, are currently trading at US$64 and US$69 a barrel, both up roughly US$20 over the past 18 months. There are strong reasons to suspect that price momentum has over-reached sustainable levels...

Supply-side tightening brings supply-side inflation<

25 January 2018 |  by Peter Warburton

Balancing the well-rehearsed bewilderment over the weakness of the wage response to tightening in developed country labour markets, is an, opposite, surprised reaction to the strength and resilience of factory output prices over the past two years. In summary, the lack of wage acceleration...

The US investment clock: does anyone have the time, please?

17 January 2018 |  by Tom Traill

Measured against the accuracy of an atomic clock, timekeeping in the investment world is slack. Forget milliseconds; it’s hard enough getting the hour right. A friend, who is an Investment Director, was recently asked to give an overview of the current state of the US economy and financial markets...

US Treasury bonds as high yield securities

11 January 2018 |  by Tom Traill

If the yield on a government bond can be read as an indication of the perceived risk of holding the asset – both the risk of default, and the risk of inflation eroding the value of the bond, then one might expect the US to sit near the top of the tree, as indeed it did until 2012. Barring some technical...

Is Brazil's recovery durable?

03 January 2018 |  by Liseth Galvis

Belief in Brazil’s emergence from the 2014-16 slump has grown substantially over the past year. While the latest growth performance, 1.4 per cent annually in Q3 2017, remains tepid, there are confident expectations of 2-3 per cent growth this year. Business and consumer confidence is booming...

Dog days for small country currencies

21 December 2017 |  by Peter Warburton

These are perilous times for those smaller nations that have clung to their sovereignty and insisted on the retention of a separate currency. The broad context is that the prevailing US-centric world order is being shaken up and countries are jostling for position in the emerging world order...

November Noir in the Swedish Housing market?

13 December 2017 |  by Yvan Berthoux

A haunting theme for some of the developed world’s most successful and thriving cities is the astronomic ascent of house prices in response to an extended period of ultra-low interest rates (ZIRP or NIRP in some countries). These property markets have often been supercharged...

Will US tax reform really pay for itself?

06 December 2017 |  by Liseth Galvis

The Republican party's far-reaching tax reforms – still being hammered out by the legislators – include the bold ambition to reduce the marginal rate of corporate tax from 35 per cent to 20 per cent. Other provisions will simplify the tax code, reducing the number of individual income tax brackets...

The Real Reason Real Rates Are So Low

30 November 2017 |  by Peter Warburton

Central bankers blame structural forces – excessive debt burdens, poor demographics and unequal income distributions, and so on – for the extraordinarily low levels of long-term real bond yields. They neglect to mention the contribution of their own experimental policies and the bold risk...

Hammond organ transplant

23 November 2017 |  by Peter Warburton

Barely a month ago, the Financial Times concluded that the Chancellor of the Exchequer, Philip Hammond, would have no room for manoeuvre in this Budget, due to downward productivity revisions by the Office for Budget Responsibility (OBR). Not a bit of it: the Chancellor found £6bn of stimulus...

Saving rates: inertia rules ok?

15 November 2017 |  by Liseth Galvis

For the UK’s 22 million beleagured savers, the Bank of England’s Bank Rate increase from 0.25 to 0.5 per cent has been a long time coming. However, for those waiting in eager anticipation of an improvement in their deposit rates, the disappointment is not over. According to Moneyfacts...

Working the land: a different look at productivity

09 November 2017 |  by Tom Traill

If a loose definition of the central economic objective is to make the most of what you have, then economically useful land should have a higher profile in the assessment of national productivity. Economically useful land is a tricky concept, but we have a proxy for it in cultivated land...

Japanese equities: can the ‘coffin lid’ be lifted?

01 November 2017 |  by Yvan Berthoux

Over the past 6 years, the Yen-US$ exchange and the Japanese equity market (represented here by the Topix) have moved in a reliably inverse manner. The range of movement has been about 50% greater for the Topix than the currency, meaning that typically two-thirds of equity performance...

Central bank independence: use it or lose it

25 October 2017 |  by Peter Warburton

Former Fed chief Paul Volcker is said to have quipped at a Washington party that “central bankers are brought up pulling legs off ants.” A more reliable quote is from William McChesney Martin, who opined that the job of the Fed was take away the punchbowl just as the party was getting going...

Mending the UK public finances: a Sisyphean task

19 October 2017 |  by Tom Traill

The UK public finances enjoyed a welcome reprieve recently, recording the first July surplus since 2002 and the best August outturn for a decade. These positive outturns follow poor June data, meaning that the cumulative deficit for the current financial year is virtually the same as...

Overdistribution, an alarm signal for the UK stock market?

11 October 2017 |  by Liseth Galvis

The dividend cover ratio for the FTSE100 companies fell below 1 last year, and threatens to fall further when the 2017 results are in. UK quoted companies have come under increasing pressure from institutional investors to grow their dividends and, whenever possible, make additional one-off...

Bursting the central banking bubble

04 October 2017 |  by Yvan Berthoux

The synchronisation of global activity indicators, as illustrated in the chart, over the past few months is a welcome reprieve after the sequential concerns over Chinese, Japanese and European growth. Policy largesse over an extended period has finally raised the water level and floated nearly all boats...

There is no safe exit from unconventional monetary policy

27 September 2017 |  by Peter Warburton

The synchronisation of global activity indicators, as illustrated in the chart, over the past few months is a welcome reprieve after the sequential concerns over Chinese, Japanese and European growth. Policy largesse over an extended period has finally raised the water level and floated nearly all boats...

Hold your nose and buy industrial commodities!

21 September 2017 |  by Tom Traill

There is a fashionable bearishness about commodities that should immediately arouse suspicion. The China slowdown narrative is trotted out as the clinching argument to refute the expectation of further commodity price gains or commodity fund appreciation. The problem here is twofold...

Catalonia: a push for fiscal autonomy, not independence

14 September 2017 |  by Robert Sierra

With just over two weeks to go before Catalonia’s independence referendum, tensions are boiling over once again. Attempts by Madrid to force Barcelona’s hand and abandon its plebiscite appear to have gone nowhere. Such is the determination to proceed...

A short-lived bounce back in Brazil?

6 September 2017 |  by Liseth Galvis

Recent corruption scandals in Brazil, including bribery accusations against President Michel Temer, cast doubts on the durability of the recent improvement in some of the country’s economic indicators. GDP grew by 0.2 per cent in Q2 2017 compared with the previous quarter...

Quantitative Tightening

30 August 2017 |  by Peter Warburton

Any hopes that keynote speeches at Jackson Hole would illuminate the road ahead were comprehensively dashed last weekend. Both Janet Yellen and Mario Draghi steered clear of monetary policy issues and the Fed chair went a stage further...

South-eastern house prices: autumn come early

23 August 2017 |  by Tom Traill

London house prices have led a charmed life for most of the post-financial crisis period, buoyed by international and domestic investors, brisk population growth and disproportionate prosperity, aided by QE-supercharged asset revaluations...

Bolstering Japan’s growth credentials

17 August 2017 |  by Nadya Mihaylova

Japan’s economy is much maligned: its painful progress over the past 25 years has engendered deep distrust in its political leadership in the realm of economic policy. Yet, in summer 2017, it is the upbeat economic news that could revive Abe’s plunging approval ratings...

Preparing for the next inflationary push

09 August 2017 |  by Peter Warburton

At our “Year of the Stag” seminar on 27 June, we set out the arguments for a global stagflationary outlook and warned against reading too much into the relapse of the oil price. We argued that the restraining influences over global inflation – including globalisation – are weakening while the permissive influences...

The bank of England's blindspots

02 August 2017 |  by Peter Warburton

Under Mark Carney’s leadership, the Bank of England has maintained a much higher media profile. These days, the Bank blasts us with messages about the merits of plastic banknotes, its planned US-style town hall meetings and what it is doing to keep us all safe.  The Bank wants to be loved...

Italy: the worst case scenario

26 July 2017 |  by Robert Sierra

Much has been written about Italy’s economic woes in recent weeks. The prospect of tighter monetary policy, in particular, could damage Italy’s shaky debt sustainability dynamics while the rise of anti-euro parties...

Handheld banking: a quiet revolution

19 July 2017 |  by Tom Traill

The adage that you are more likely to get divorced than to switch your bank account may soon be outdated. While the annual churn rate for UK personal current accounts (PCAs) is still less than 2 per cent, there are three drivers...

India’s inflationary twist

12 July 2017 |  by Nadya Mihaylova

After 17 years, the Indian government has finally introduced the Goods and Services Tax (GST) which will subsume multiple indirect state and central taxes into one tax structure with four different rates: 5%, 12%, 18%, and 28%...

Central bankers embarrassment over tightening

07 July 2017 |  by Peter Warburton

“There is a tide in the affairs of men. Which, taken at the flood, leads on to fortune; Omitted, all the voyage of their life is bound in shallows and in miseries. On such a full sea are we now afloat…”
Julius Caesar, Act-IV, Scene-III

Argentina: sale of the century?

28 June 2017 |  by Robert Sierra

Wanted: investors willing to fund a century bond of a Latin American emerging sovereign in the sum of US$2.75bn that has defaulted 6 times since 1950 and has an impressive track record of shafting domestic and foreign lenders...

Taking the ‘flationary temperature

21 June 2017 |  by Tom Traill

The interplay between inflation and real output growth can have huge implications for portfolio allocations and subsequent returns. Continuing our series of blogs on stagflation...

Could stagflation happen in the US?

14 June 2017 |  by Nadya Mihaylova

In the days when average annual inflation and the average unemployment rate were of similar magnitudes, someone dreamed up the misery index, the simple sum of the twin perils...

Stagflation: it’s all in the mix

7 June 2017 |  by Peter Warburton

The deteriorating performance of the UK economy, in terms of its real growth-inflation mix, is symptomatic of supply-side deficiencies and pinch-points. While real GDP growth still registers...

Keeping calm about US auto finance concerns

31 May 2017 |  by Robert Sierra

The expression “sub-prime” still strikes terror in the public mind after the US mortgage debacle a decade ago, as depicted in “The Big Short”.  However, recent reports of a brewing crisis in sub-prime auto loans should...

Online retail sales: stronger than irl

24 May 2017 |  by Tom Traill

Beneath the headlines of an above-expectation growth of retail sales in April, there are two increasingly divergent narratives – online and offline. Despite the unhelpful backdrop of Brexit uncertainty, rising inflation and falling real wages...

A green light to buy the Euro

17 May 2017 |  by Nadya Mihaylova

Bullish sentiment is rising in the Euro area following signs of increasingly solid economic recovery and diminishing presence of geopolitical risks. The outcome...

Riksbank risks another hasty retreat 

10 May 2017 |  by Robert Sierra

In 2010, against the grain of the US Fed, ECB and the Bank of England, the Riksbank decided that the time had come to lift interest rates from their post-GFC lows...

US economy: spring forward or fall back?

03 May 2017 |  by Peter Warburton

Stresses are building in the global financial system, evidenced by weaker performance of US banks and insurance companies....

Profiting from tourism

26 April 2017 |  by Tom Traill

In contrast to world trade volumes, which are little better than stagnant, world tourist volumes are buoyant. For some countries, particularly small island economies...

Vote early, vote often!

19 April 2017 |  by Peter Warburton

A general election in 2015, an EU referendum in 2016 and now, another general election in 2017: the lure of the ballot box is compelling. Is this a stroke of genius or a disastrous misjudgement...

Draghi’s downside risk: Marine Le Pen victory!

12 April 2017 |  by Robert Sierra

With less than two weeks to go, the outcome of the French presidential election has been plunged into uncertainty by the strong showing of radical left candidate Jean-Luc Mélenchon. Japanese investors...

UK TRADE IMPROVEMENT: HOLD YOUR HORSES!

05 April 2017 |  by Nadya Mihaylova

Whoa there! Don’t jump to conclusions about the sharp narrowing of the UK trade gap, announced last Friday. Once trade in oil and erratics has been stripped out, there has been no underlying improvement – indeed the bilateral deficit with the EU has...

STUDENT LOANS: A LESSON IN INFLATION AND COMPOUND INTEREST

28 March 2017 |  by Tom Traill

From September, student loans in England and Wales will accrue interest at a rate of more than 6% per annum. The exact rate depends on the March Retail Price Index inflation rate, released on 11 April. Annual RPI inflation was 3.2%...

JAPAN: PREPARING FOR A WAGE GROWTH 
SURPRISE!

22 March 2017 |  by Nadya Mihaylova

When it comes to economic theory, nothing works in Japan. The latest data points confirm that Japan’s labour market is tight as a drum: the unemployment rate is down to 3% and there are job openings outnumber applicants...

THE HEAD-HEIGHT US DEBT CEILING

15 March 2017 |  by Robert Sierra

We’ve been here before. In 2011, a bitter battle brought the federal government to almost complete standstill as overnight negotiations yielded little compromise from Congressional Democrats and Republicans. Markets were rattled. Banks and companies...

US BUDGET PROPOSALS: CURB YOUR ENTHUSIASM

08 March 2017 | by Peter Warburton

Listening to president Trump’s effusive address to Congress last week, almost anything seemed possible: healthcare reform, corporate tax reform, immigration reform, infrastructure and de-regulation...

FAKE MATHS

01 March 2017 | by Tom Traill

Reportedly 70% of the ‘facts’ that President Trump presents turn out to be inaccurate. There are worrying reports that his habit of misrepresenting the facts could start to become misrecording or institutional misreporting of the national statistics...

PICKING UP PENNIES (IN FRONT OF STEAMROLLERS)

22 February 2017 | by Peter Warburton

“Investors rush to junk bonds in big bet on Trump pledges” ran the headline in the London edition of the Financial Times on 9 February. Just try taking those pledges on economic growth, lower tax burdens and less regulation to the bank...

AN EMBARRASSMENT OF RICHES: GERMANY'S EXTERNAL SURPLUS IS SET TO FALL

15 February 2017 | by Nadya Mihaylova

Germany’s current account surplus has surged over the last few years to reach 8.5% of GDP, accounting for three-quarters of the overall Euro area external surplus. Germany does not consider this to be a problem...

WHEN IS GLOBAL INFLATION NO LONGER LOW?

8 February 2017 | by Tom Traill

Over the past few months the inflationary landscape in advanced countries has been re-drawn. Scepticism surrounding OPEC’s planned output cuts has abated. The extremely weak oil prices of a year ago are a fading memory...

Institutional paralysis at the MPC

1 February 2017 | by Peter Warburton

The Bank of England’s Monetary Policy Committee meets this week and another Inflation Report will be published. Hardly anyone expects a change in policy settings...

A little inflation is good for large supermarkets

25 January 2017 | by Tom Traill

Will the return of inflation be good for supermarkets? Around the world, consumer inflation rates are undergoing a rapid normalisation: in the UK CPI is back to 1.6%, in Germany inflation is 1.7% and the US 2.1%... 

Blame the Messenger

18 January 2017 | by Robert Sierra

As Peter Warburton commented last week, Andy Haldane has triggered a backlash from economists for wearing a metaphorical hair shirt on behalf of the economics profession. Economics has not failed...

Economics In Crisis?

11 January 2017 | by Peter Warburton

Bank of England chief economist Andrew Haldane’s recent remarks in public conversation for the Institute of Government have already caused a minor storm of protest among, mainly, economic professors... 

IS TURKEY THE NEXT BLACK SWAN?

5 January 2017 | by Nadya Mihaylova

Strains on the EU’s immigration deal with Turkey could reach breaking point over the next few months, paving the way for an intensification of the refugee crisis... 

Redefining maximum employment in the age of the gig economy

22 December 2016 | by Peter Warburton and Tom Traill

The US Federal Open Market Committee (FOMC) is famously tasked with a dual mandate: maximum employment and stable prices, although the Federal Reserve Act does contain a third: moderate long-term interest rates...

FOMC unimpressed by Trumphoria

15 December 2016 | by Nick Stamenkovic

Wall Street has marked its growth and inflation forecasts higher since the election of president Trump, but the Fed has not. Despite unchanged growth and inflation projections, FOMC members raised the profile of the “dot plot” for the first time since December 2014...

OPEC’s output cuts are not a done deal

8 December 2016 | by Robert Sierra

The recent OPEC deal lifted oil prices towards US$55pb and emboldened analysts into revising their forecasts for next year towards the US$60bp mark... 

Six key fiscal challenges for Philip Hammond

1 December 2016 | by Nadya Mihaylova

The first Autumn Statement delivered since the June referendum has attempted to support the economy through the challenging and uncertain times that lie ahead...

US Dollar: The only way is up?

24 November 2016 | by Nick Stamenkovic

A gentle upward trend in US Dollar index from its May low turned exponential in October and ballistic since 8 November. All the old reasons to prefer the Dollar have been dusted down...

Trump: influenceable, inflammatory, inflationary

17 November 2016 | by Peter Warburton

The electoral victory of Donald Trump has brought no greater clarity to the economic and financial outlook than Brexit.

Stuffocation

10 November 2016 | by Tom Traill

Have we passed the point of peak stuff? Is social media changing the patterns of our consumption? James Wallman, in Stuffocation, suggests that technology is helping consumerism migrate from conspicuous consumption to the envy of experience.

ECB looking for the exit, any exit?

2 November 2016 | by Robert Sierra

A couple of weeks ago, “unnamed sources” claimed the ECB was thinking of winding down its bond purchases, or tapering, triggering an immediate jump in yields across bond markets. This would be done, it was claimed, in gradual steps of about €10bn a month, broadly in line with the actions of the Fed in 2014. Strategists and the financial market in general were torn between suspicion that...

Super-sizing the Bank’s asset purchase programme: what is to be gained from buying McDonald’s corporate bonds?

27 October 2016 | by Nadya Mihaylova

As part of its strategy to revive the economy following the EU referendum, the Bank of England committed to purchase £10bn worth of corporate bonds in companies which were believed to deliver ‘material contributions to the UK economy’...

Martin Wolf needs a supply side

21 October 2016 | by Peter Warburton

The world bemoans two-handed economists with splinters in their backsides (from spending too much time sitting on the fence). This charge cannot be levelled at the chief economics commentator of the Financial Times. Over many years, Martin Wolf...  

UK Inflation: love it or hate it, it’s not going away

19 October 2016 | by Tom Traill

The UK referendum result has sent a series of shock waves through the currency markets that leaves Sterling 16% weaker on an index basis, 18% weaker against the US Dollar and 15% weaker versus the Euro. It is fanciful to suppose that currency effects of this magnitude can somehow... 
 

Sterling: Have no FEER

13 October 2016 | by Peter Warburton and Nick Stamenkovic

After the initial turmoil of the post-referendum fall out, Sterling appeared to be finding its feet again, buoyed by firmer economic data and the settling of the political dust, post-Cameron. Not a bit of it....

Saudi Arabia's U-Turn: Back-tracking Meets Fracking?

10 October 2016 | by Nick Stamenkovic

Saudi Arabia has finally backed down from it's high horse to seek a cut in OPEC oil output...

Nailing Down the Nominals

28 September 2016 | by Peter Warburton

The painfully slow growth of nominal (current value) incomes and expenditures is a source of great consternation in policy circles...

Target 2: Don’t Panic

22 September 2016 | by Robert Sierra

It is extremely appealing to be able to look at a single chart to know whether the grand European project is succeeding or failing...

WISHFUL THINKING ON UK INFLATION

15 September 2016 | by Peter Warburton and Tom Traill

The New Normal crowd has had it their own way for much too long: the notion that grindingly slow economic growth will be accompanied by the long-term sterility of consumer prices has a powerful grip on Bondworld...

Behind the logic of buying bonds on negative nominal yields

7 September 2016  | by Tom Traill

Once you have battled through his inane introductions, Bill Gross (alias ‘The Bond King’) invariably has something interesting to say and his September Investment Outlook is no exception...

Central banks are killing capex

1 September 2016  | by Peter Warburton

Experimental monetary policy is killing off the business instinct to invest, other than in rapid payback categories such as IT and autos. ...

Negative interest rate apologetics

24 August 2016  | by Federico Corrado

Former Bank of England MPC member (now president of the Petersen Institute of Economic Affairs) Adam Posen has got an FT column in which he writes about negative interest rates. He focuses on what he thinks are two analytical errors routinely made in the discussion ..

Failure to launch – US trend growth and monetary policy normalisation

18 August 2016  | by Graeme Chamberlin

At each meeting of the Federal Open Market Committee (FOMC), members are each asked to provide their projections of US GDP growth and the appropriate path for the Federal Funds rate over the next three years...

MPC sends in the plumbers

10 August 2016  | by Peter Warburton

The package of measures that the Bank announced last week was not designed by Mark Carney. Most of this will have had to have been explained to him, as to the rest of us...

Eurozone fiscal rules and zero percent fines

08 August 2016 | by Robert Sierra

Early in the 2000s, when Germany, France and Italy were running excessive budget deficits the European Commission proposed that fines of up to 0.2% of GDP would be applied to any member state that failed...

Blanchard on currency wars, coordination, and capital controls

28 July 2016 | by Federico Corrado

In 2014 soon to be former India Central Bank governor Rajan famously inveighed against developed markets (DM henceforth) disregard for the effects......

What’s next for UK fiscal policy?

20 July 2016 | by Graeme Chamberlin

It is often said that ‘rules are made to be broken’, but in the case of the UK’s fiscal rules it is more apt to say ‘rules are made to be abandoned’...

9 reasons why George Osborne was right about cutting corporation tax

13 July 2016  | by Tom Traill

George Osborne, the now former Chancellor of the Exchequer, went down fighting for the UK’s business agenda. He was recently in New York, spreading reassurance that the UK is not “withdrawing from the world”. ...

Carney: killing us with kindness

7 July 2016  | by Peter Warburton

Since 23 June the Governor has bombarded us with announcements in support of the UK economy and financial system. Their declared intent is to prepare the economy for the post-Brexit challenges, but their subliminal message is ‘Take cover’. ...

Spain: Yes, we have no Podemos

29 June 2016  | by Robert Sierra

If investors were hoping for an end to political uncertainty in Spain, Sunday’s electoral outcome has failed to deliver. Six months after an indeterminate electoral result, Spain went back to the polls only to produce another one...

The Fed can’t cope with uncertainty anymore!

28 June 2016  | by Federico Corrado

The FOMC kept rates steady last week. Heavy on Governor Yellen’s mind was the lack of a consistent data narrative showing a healthy pace of US growth. This time around, it was mostly May’s soft non-farm payrolls report, but also, arguably, the possibility of severe market disruption related to Britain’s EU referendum that stayed the hand of the Yellen Fed...

How much are UK households really saving?

16 June 2016  | by Graeme Chamberlin

The household saving ratio measures the share of household income that is left unconsumed and is therefore available to fund consumption in the future. In the UK, the official household saving ratio reported by the Office for National Statistics has fallen significantly in recent years, from 11.6% in 2010 to just 4.2% in 2015...

Helicopter money: the fundamental deceit

9 June 2016  | by Tom Traill

There is no escape from the topic of helicopter money. It is like the opening sequence of MASH is on infinite loop. Almost every newspaper columnist and celebrity blogger has offered their opinion on its merits and demerits...

Secular stagnation versus secular reflation

2 June 2016  | by Peter Warburton

Larry Summers has been dining out on some throwaway remarks at an IMF economic forum that included the phrase “secular stagnation” for two-and-a-half years now...

Germany: arch currency manipulator?

26 May 2016 | by Robert Sierra 

Last week’s US Treasury report into potential currency manipulators was fairly predictable in naming Japan and China as countries that in the past have sought to weaken their currencies in aid of their export competitiveness...

Mario Draghi boosts Europe’s economy but his authority is waning

19 May 2016  | by Federico Corrado 

There was a small riot in financial markets last December when ECB president Mario Draghi failed to satisfy expectations of a monetary boost to the Eurozone. ...

Buying online: intense competition is driving down pricing

5 May 2016  | by Tom Traill 

Is the internet to blame for the lower inflation that we have seen in the past few years? Internet usage has grown vastly (in 2015 78% of adults in the UK used the internet every day, or almost every day, up from 35% in 2006), and online shopping has continued to gain popularity...