Posts Tagged ‘Ben Bernanke’

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The Indian government has just made a rather interesting new appointment. It concerns the man who is to head the country’s central bank. The man is… well, he is rather clever and well regarded across the world. But what makes this one so very interesting, is that talk is that Barack Obama’s choice for the next boss of the Fed is rather controversial. And what is really really interesting is that amongst the critics of Obama’s choice is the man who is set to take over at India’s central bank.

Okay let’s name some names. The man who is to take over at India’s central banks is Raghuram Rajan – former chief economist of the IMF and the author of ‘Fault Lines’. In his book, Mr Rajan postulated the theory that surging house prices were used by western governments as a way to kind of compensate for the fact that real wages were rising only very slowly. So, during the boom years, the gap between the super-rich and everyone else grew, profits to GDP rose while wages to GDP fell, and median workers in many countries found that over a period of many years – years of boom that is – their real disposable income didn’t grow at all. These were not good developments. We should have had recession when demand was suffocated from the economy. Instead, the money that companies were not spending sloshed around the system, eventually leading to lower interest rates, more credit, more mortgages, higher house prices, more household debt, and a consumer boom based on leverage.

Mr Rajan was one of the most prescient of the world’s economists and his theories to explain what was charging the boom and then the crash are probably spot on.

Now to change the mood a little: consider the Fed. The Fed’s deputy chair is Janet Yellen, and she is the person many want to see take over from Ben Bernanke next year. Talk is that Barack Obama wants Larry Summers to have the job. Now Summers was US treasury secretary under Bill Clinton – a massive critic of QE – and was the man whom many hold responsible for loosening the stranglehold of the Glass–Steagall Act, which separated investment and retail banking. Summers is not liked by Republicans and quite a lot of Democrats have their doubts about him, but he is a heavy weight in the world of international finance and politics – there is no doubt about that.

Many of the world’s top economists are critics of Summers, including the likes of Paul Krugman and Joseph Stiglitz, and Raghuram Rajan of course. Let’s say it happens and next year Summers and Rajan are both central bankers. For once when India’s central bank meets up with the Fed, many will see it as a meeting of equals – that will come as quite a shock for a US that is used to having things its way.

As for India, the appointment of Rajan may yet prove to be a key moment as the country attempts to re-establish itself as one of the world fastest growing economies.

© Investment & Business News 2013

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“I think I should warn you,” said Ben Bernanke, “if you think I am making myself clear, then that means you have probably misunderstood me.” Witty, and a tad daft. It is just that actually those words were not spoken by Mr Bernanke at all; rather they were spoken by his predecessor as the Fed chairman Alan Greenspan.

In fact, when Ben took over at the Fed he went to great lengths to say he was not one for cryptic remarks. He would say it as he saw it. He promised to be something of a blunt speaker. (Ay up lad, I say wat I mean tha noes). Last week, however, he seemed to do an impressive impersonation of Mr Greenspan. His lips and eyes, or his statement and his inference, seemed all seemed out of sync.

Don’t get confused,” said the Fed Chairman, “The overall message [from the Fed’s rate setting committee] is accommodation.”

His words had been eagerly awaited. Last month Ben suggested the Fed may be tightening monetary policy soon. This time he said they will be doing no such thing. Rather that we may see a “gradual and possible change in the mix of [monetary] instruments.”

So what does that mean? A change in mix suggests the details are different but the overall thrust the same.

So that’s the headline.

What about the substance?

The latest minutes from the Fed said that many members of the FOMC – that’s the Federal Open Market Committee – “indicated that further improvement in the outlook for the labour market would be required before it would be appropriate to slow the pace of asset purchases.” Again this needs translating. “Many” is supposed to be code for slightly over half. Subsequent to the meeting of the FOMC to which these minutes relate, job data on the US has seen another big improvement. That rather suggests that more than half of the men and women who determine monetary policy are on the cusp of agreeing to “slow the pace of asset purchases.”

So Ben says one thing, and the minutes say something else.

The minutes also said that ‘some members’ wanted to see evidence that GDP growth was picking up before they agreed to tighten policy. So let’s decode that. In this case, “some” means fewer than half. The data on GDP is not expected to be so good in Q2. In other words, fewer than half are not ready to tighten policy.

Would you believe it? The markets loved all this. Somehow they concluded that the Fed is not going to tighten monetary policy as quickly as they had feared, so they went out and bought, pushing the Dow and S&P 500 to new all-time highs.

Capital Economics took a look at the Fed’s words and concluded that they suggest QE will be reduced somewhat in September, will cease altogether in 2014 and rates will rise in 2015. This is actually pretty much the same as what it was saying before the Fed released its minutes.

In other words, all that has really changed is that the Fed is saying much the same thing as it was a few weeks ago; it is just using more ambiguous words to say it.

And that was enough to get the markets all bullish again.

© Investment & Business News 2013

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The pound fell to a three year low against the dollar last week, and predictions of doom emanated from the UK’s more cynical press. ‘Oil will go,’ they cried, ‘the cost of holidaying abroad will shoot up,’ they moaned, ‘oh woe is us,’ they lamented. There are indeed strong disadvantages to having a cheaper currency. But there are advantages too, and there are reasons to think that the pound may fall a lot further yet – at least relative to the dollar.

There is one thing that Mark Carney, the Bank of England’s new governor, and Haruhiko Kuroda, the newish governor of the Bank of Japan, have a lot in common. Actually they probably have a lot in common but let’s just focus on this one obvious point today. They both seem to be in the process of enacting policies to weaken their respective currencies. In Japan where the governor has been in his post for a few months longer, the policy is advanced; in the UK it is only really being hinted at.

But recently Mark Carney made it just about as clear as was possible. Even if the Fed starts to tighten monetary policy sooner rather than later, and the dollar rises as a result, putting the pound under pressure, the Bank of England will not necessarily follow suit.

The pound fell sharply on the news. At one point last week there were less than 1.49 dollars to the pound. That was a three year low. But then Fed chairman Ben Bernanke appeared to do something of a backtrack, and the pound rose back up, finishing last week with an exchange rate of 1.51, which actually was nothing out of the ordinary – not over the last year or so, anyway.

It may be worth making a few comments at this point. Firstly, the Fed’s attempt to clarify last week, and reassure us about monetary policy was about as unambiguous as a disco dancing sloth. Frankly, Bernanke didn’t really appear to say anything new, and it is clear that opinion is divided amongst his colleagues at the Fed. The timetable for the Fed tightening its policy – namely reducing QE later this year, removing it altogether next and upping rates in 2015 – seems to be unchanged. But because Ben used some nice reassuring words, the markets seemed to love his comments. Equities lifted, pushing the Dow and S&P 500 to new all-time highs and alleviating pressure on the pound, as they somehow concluded that there was something new in the Fed’s words and that monetary policy will not be tightened as quickly, after all.

Secondly, the pound may have fallen against the dollar, but the UK press missed the wider story. This was not so much a case of a falling pound as a rising dollar. The euro pound exchange rate has done nothing spectacular. However, look deeper, and it appears there are reasons to expect sterling to fall.

For one thing, a comparison of UK unit labour costs with the rest of the world suggests sterling is overvalued. The real effective exchange rate (based on IMF data) is 7 per cent above the level seen in the mid-1990s and 20 per cent above the level in the mid-1970s, or so says Capital Economics.

For another thing, something a little disturbing has happened to the UK’s balance of payments. We are used to seeing a deficit on trade in goods and services, but at least income from investments flowing into the UK tends to be greater than income flowing abroad. But there are signs that this is changing. The UK’s net investment income has been negative in three out of the last four quarters. The story here is complicated. The value of investments held by foreigners, but relating to the UK, is much greater than British investments abroad. But UK investments held abroad tend to be higher risk, and generally provide a much higher return. There are signs that this is changing, however, and that is a worrying development. To be clear, if net investment income continues to be negative this will put pressure on sterling relative to most foreign currencies, not just the dollar.

While is it the case that the real currency story of the last few weeks has been one of the dollar versus the rest of the world, across much of the global economy central banks have responded by upping interest rates themselves. For example, they rose last week in Brazil. China’s central bank is tightening, and rates were recently increased in Indonesia. The story is not clear cut – these things never are, but as rates rise in the US, leading to a stronger dollar, many other countries will probably follow suit. If the UK and Japan loosen monetary policy at such a time, they will be in the minority putting both the yen and sterling under pressure against a basket of international currencies – not just the dollar.

On the other hand, the prospects for the UK economy have been improving of late, and it would be odd if sterling tumbled just as UK plc began to show signs of pulling out of its downturn.

But supposing it happens and the pound falls much further, what then?

At a time when there are signs of improving exports, especially to the US and outside Europe; at a time when some anecdotal and some hard evidence (see car exports) points to a mini renaissance in the UK manufacturing industry and its exports, a cheaper pound will give exporters even more of a lift. On the other hand, a falling pound may lead to rising inflation, and in this respect the UK has previous. Think of 1967 and the pound being devalued and the then Prime Minister Harold Wilson saying it will “not affect the pound in your pocket.” In fact sterling’s devaluation did – UK inflation shot up soon afterwards.

And that brings us to the UK’s big dilemma.

Yes we need exports to help lead recovery, but we also need increases in average wages to start outstripping inflation again. A cheaper pound may help us achieve the former, but most certainly not the latter.

What the UK really needs is productivity to rise, and that needs more investment; more investment in business, in entrepreneurs, infrastructure and education – and, it may seem like a cliché, investment in education in creating more engineers, because that is where the real labour market shortage is likely to be.

There is a danger, however, and to read about that, see  What will happen to households as rates rise? 

© Investment & Business News 2013

It is not often that we get a chance to test theories, at least not when it comes to the economy. But we have such a chance right now, and it relates to China, and whether or not China is experiencing its own credit crunch, or something altogether less serious.

Critics of Mervyn King and Ben Bernanke said that they misread things before the crisis of 2007/08 erupted. These critics say that during the build-up of the credit bubble, central banks should have hit the brakes, and upped interest rates. In short, like the very best party pooper, take away the punch bowl just as things start to get going.

Right now, in China, it appears that the central bank – presumably under instructions from the government – has taken away the punch bowl. The markets don’t like it, but then maybe on this occasion that is how it should be.

The interbank rate in China – that is the interest rates at which banks lend to each other –has soared. Déjà vu say those who recall what it was like in 2007 and 2008 in the West, when the words credit and crunch first started to appear in the same sentence.

It is just that some say China is not at that stage yet. Sure, signs of a credit bubble are clear, but it is not like the UK and the US during the height of their bubble – not yet.

The People’s Bank of China, or PBC, published a note last week saying: “Liquidity for the banking system as a whole remains at a reasonable level.” And since the PBC tends to follows the dictates of government, it is generally assumed that is the view of China’s government too.

China’s State Council recently stated: “We must promote financial reform in an orderly way to better serve economic restructuring.” Again, this suggests the government wants to rein back all that borrowing.

There is one major difference between China’s credit bubble and the one we experienced in the West. In the economy behind the Great Wall, it is local government and state owned companies that are hitting the credit button.

What China needs is for less money to be thrown at investment projects and more to trickle down into wages. In the case of China, squeezing credit may boost consumer spending – in the long run at least. It is all part of the process of adjustment China must go through as it shifts from investment to consumer led growth.

China’s government appears to understand this.

Interest rates are going up – at least that’s the way it looks. They are going to go up in the US, as the Fed has suggested, and they appear to be rising in China, as the government wants.

In the case of the US, if rates rise it will be because of good news on the US economy. If they rise in China, it is because the government is trying to learn from the lessons of Alan Greenspan and Ben Bernanke.

© Investment & Business News 2013

Yesterday was a day for selling. But it is noticeable that while gold fell to a 34 month low, and US government bonds to a 22 month low, on the whole equities merely fell to a one month low.

At the time of writing gold is trading at $1,295. To put that price in context, back in September last year it was going for $1,778. The last time it was so cheap was September 2010.

Some say they are puzzled by the falls, but gold really is one of those riddles wrapped in an enigma – a golden enigma, in fact.

Gold rose in the aftermath of the finance crisis, and then again in the aftermath of the aftermath, because many feared a major meltdown as countries raced to devalue, and it was being said that QE created the danger of hyperinflation.

Talk of QE creating hyperinflation always was nonsense. As this column has said before, what matters is the broad money supply, and at a time when banks didn’t want to lend, while households were trying to repair their balance sheets, there was little chance of the broad money supply rising significantly, whatever central banks did.

Now the US economy is showing signs of real recovery, and the Fed chairman Ben Bernanke has suggested QE will be easing up soon and interest rates are likely to rise in 2015, everything looks different.

When real interest rates are negative, the fact that gold offers no yield is a trivial concern. But now that rates seem set to rise, that lack of yield seems to matter a great deal.

As for bonds, the yield on US 10 year treasuries has risen from 1.38 per cent last July to 2.39 per cent at the time of writing.

Markets are moving away from so-called safe harbour assets. During the era of QE, many feared currency wars, as loose monetary policy pushed down on the dollar, and other countries tried to devalue so as not to lose their competitive edge. Now the era of loosening is approaching an end; currency wars have moved to currency peace, and the new fear is that some currencies are in danger of becoming too weak.

As for equities, they too have fallen sharply, but just remember that the falls are not as drastic as recent rises. The FTSE 100 started 2013 on 5,898, rose to 6,840 last month, going close to the all-time high set in 1999, before falling to 6,159 last night.

Look at how equities have fallen since the end of May, and the sell-off looks drastic. Look at equities this year, and the market still looks attractive.

Above all, just remember that it is good news on the US economy that lies behind markets selling.

As rates rise, there will be losers, and for a while the markets may even punish those with strong fundamentals, but a resurgent US consumer is a good thing, and once the dust has settled we will see plenty of winners. But watch the Eurozone, emerging Europe, and maybe Brazil, for the real woe.

© Investment & Business News 2013

“I guess I should warn you,” once said Alan Greenspan, chairman of the US Federal Reserve before Ben Bernanke held that position, “If you think I am making myself clear, that probably means you have misunderstood me.” Ben Bernanke doesn’t say things like that. When he took over at the Fed he vowed to say it straight, tell it like it is, and avoid launching into jargonese whenever possible. And that is how it has panned out. Take monetary policy, for example.

Ben had spelt it out in terms a child could understand, (well at least a child that had studied economics): monetary policy would be tightened under certain circumstances. He then defined what those circumstances were and they now appear to be emerging. This is not new; the data had already been set before us in the full light of media scrutiny. Mr Bernanke has reacted the way in which he always said he would, and the markets react as if the Fed chairman has grown two heads, or taken on an alter ego.

As has been pointed out here many times, the news out of the US has been good of late. Notwithstanding the fact that in Q2 the US is likely to see less growth than in Q1, signs are afoot that the US economy is slowly returning to normal: to pre 2007, or even pre 2004 type conditions.

This is not bad news. It is good news. The US consumer, so long the central hub in the global economy, looks set to be moving back to the centre stage. Companies that export their wares to the US, and US companies that sell their wares to the US consumer can celebrate. There may be a knock on effect too, as companies benefit from a resurgent US themselves see growth rise, giving their suppliers reason for hope.

What do the markets do? They panic.

They panicked because when Ben Bernanke announced that the Fed will be forking out $85 billion a month purchasing bonds – otherwise known as QE – (QE3, or maybe 4, depending on how you define these things), he said that once the economy improves, and unemployment falls to a certain level, the QE campaign will be cut down, and eventually stopped.

They panicked because Mr Bernanke confirmed that he hasn’t changed his mind and that if things carry on improving, QE will be reduced later this year (September being the expected month).

He also confirmed that if things carry on improving next year and the year after that interest rates may rise in 2015.

Certain things in life are predictable, Mr Bernanke’s comments yesterday, or at least their inference, falls in this category.

But the markets are nervous. They fear that in a world where interest rates are higher and US consumers have less debt, more jobs and spend more, certain assets – propped up as they are by bubble-like money flows – may fall or even crash.

The obvious candidates for such falls are US and UK bonds; equities too, but to a lesser extent. The markets themselves are worried about emerging market debt.
Why they are worrying now, over something that was always inevitable is a puzzle. It just goes to show that the markets are as wise as a wise man who has had a lobotomy.

And talking about wise, the latest wisdom out of the Eurozone is that the crisis is nearly over.

Certainly the latest PMI, produced by Markit, suggests the region is now merely in recession, as opposed to being in deep recession.

But here is a tip to the wise; maybe as bond yields rise, as QE comes to an end, it will be indebted Europe that suffers the real woe.

Of course if the ECB launches QE when the Fed stops, that may just be enough to allow the euro area to follow the US into recovery (two years or so behind, but follow nonetheless).

But the ECB is far too wise to do that. Remember Mario Draghi once said the ECB will do whatever it takes to save the euro. But just in case you think Mr Draghi was making himself clear, just remember that he actually said: “Within our mandate, the ECB will do whatever it takes to save the euro.” The markets probably misunderstood what that meant.

© Investment & Business News 2013

10CC had the right sentiments; you just need to swap the word cricket for QE. “I don’t like QE, oh no, I love it”, or so they might have sung. “I was walking down the street,” said the Brazilian Finance Minister, “I heard this dark voice behind me, and I looked around in a state of fright…” But when he turned around he did not see “four faces, one mad; a brother from the gutter”, instead he saw Ben Bernanke and Mervyn King: “They turned to each other.”

“They looked him up and down and”, alas, that is where the rhyme stops. “We need quantitative easing, man,” they said. And they then did, they made it, money from the gutter flowed across the world.

The Brazilian Finance Minister called foul; he called it a currency war.

It is not like that now. As the Fed hints that QE may be coming to an end, as good news on the US and UK economy erupts from the bellies of Purchasing Managers Indices, markets fear what will happen if the era of cheap money, or magic money created from the dust, comes to an end.

The FT quoted Marcelo Salomon, an economist at Barclays, who said, “The [Brazilian] government is getting concerned that global liquidity conditions are changing really fast and that this could push the real to a much weaker level.”

So what to do? First off, Brazil has cut its equivalent of a financial transactions tax, which is to say its tax on overseas investment and which is called IOF, from 6 per cent to zero.

Brazil’s Finance Minister, Guido Mantega said, “With the market normalising and the movement of the [US] Federal Reserve to reduce its expansionist policies, we were able to remove this barrier.” But the FT sees the move as more dramatic than that and said that the Brazilian government feared a weakening currency could spark off inflation.

Indeed,  US QE may have been good for Brazil because it kept Brazilian inflation in check.  For that matter, in as much as QE led to higher commodity prices, and Brazil exports commodities, QE may have been very good for Brazil.

Maybe it is time Brazil’s Finance Minister comes clean by admitting, “I don’t like QE, oh no, I love it.”

© Investment & Business News 2013