Posts Tagged ‘qe’

file4741270417603The UK can be thankful it has experts at the Bank of England, because its seems that they are all that stand between the UK economy and recession.

Ever since the result of the EU referendum was revealed, economic forecasters have been warning of the possibility, and in many cases the probability, of a UK recession later this year.

Indeed, before the referendum, Bank of England governor, Mark Carney, warned of precisely that danger. But then Mark Carney, along with the rest of the economic forecasters, is a so called expert, and as we all know in this post referendum era, they know nothing.

But maybe, we can ignore experts and instead look at the data.

The monthly purchasing managers’ indices, or PMIs, covering UK manufacturing, construction and services are a reasonably reliable guide to the state of the economy at any one time. They are not perfect, but then again nothing is, and when they pick-up, the UK economy seems to pick-up soon afterwards and when they fall, the UK economy usually dips soon afterwards.

The latest batch have been released in the last few days, and they were awful.

The good news is that of the three PMIs, the first to see the light of day, the PMI covering manufacturing, wasn’t too bad. The index rose to 52.1, a five month high.  It was good to see the index rise, but even so, by historical standards, it was a pretty lacklustre score.

Bear in mind, that when it comes to PMIs, the magic number is 50. Any score over is meant to suggest expansion, any score below is meant to suggest contraction.

And that takes me to the PMI tracking construction. In June, the index crashed, falling from 51.2 in May, which itself was seen as pretty woeful, to 46.0, that’s the lowest reading since December 2012.

Then, finally we got the PMI for services. The Business Activity Index which experts tell us is the index that matters – not that they know anything – fell from 53.5 in May to 52.3 In June, the lowest reading since December 2012.

Collectively, and based on past findings, the three PMIs point to growth of just 0.1 per cent in Q2. A recession is defined as two successive quarters of negative growth, so if the PMIs are accurate, then the UK only needs to slow very slightly from the June level and it’s in recession territory.

Most worrying of all, the three PMIs relate to a period before the EU referendum.   It seems likely that the UK economy has slowed more than slightly since then.

But not all are fretting.

Take Standard and Poor’s. It has taken time off from downgrading the UK’s credit rating, to suggest that the UK will avoid recession. It said that the fall in the pound will support exporters, that the UK chancellor, a certain George Osborne, will relax on his austerity drive, but most important of all, the Bank of England will cut interest rates and go for another burst of QE.

But the story of pound devaluations giving the UK economy a lift is mixed. Besides, sterling’s falls against the euro have been more modest.

George has already confirmed that he will go back on his pre-election promise to create a budget surplus by the end of the decade.

But it seems to me that the fate of the UK economy in the short term, and whether it can avoid recession, is dependent on the experts at the Bank of England. Let’s hope that really do know something after all.

Article originally posted on Fresh Business Thinking:  http://www.freshbusinessthinking.com/can-the-uk-avoid-a-brexit-recession/

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It was November 2012 when Jens Weidmann, President of the Bundesbank, likened quantitative easing, or QE, to a Faustian pact with the devil.  But it was even earlier, back in 2010, when Brazil’s finance minister talked about currency wars.

It was during that era that QE was seen as leading a kind of race to the bottom, as countries fell over themselves to try and achieve a cheaper currency.  It didn’t work out like that, of course. It is no more possible for every country to have a cheaper currency then it is for every Premiership football team to win on the same day.

The critics of QE were legion. They said QE was behind currency wars, and that the inevitable result would be hyperinflation. And they saw the words of Jens Weidmann as a kind of official endorsement of that view.

It was in this environment that the buy gold bandwagon got moving. BUY GOLD, they said. It was the only safe refuge in a world gone mad under QE.

They overlooked that across the world there was a chronic shortage of demand, a savings glut and that the west was suffering from a balance sheet recession.

There are lots of things wrong with QE, the main critique might be that it is a blunt weapon. But it was never likely to lead to hyperinflation, not in a world starved of demand.

But what it did do was lead to a cheaper dollar. And when the dollar fell, so gold rose.

Back in 1999, when UK chancellor Gordon Brown sold the UK government’s gold supply, the yellow metal was trading at less than $300 an ounce. In the summer of 2009 it was trading at just shy of $900. Those two years stood either end of the great gold market, when it rose in value by around 300 per cent.

Gold continued to rise in the aftermath of the crisis of 2008. In September 2009 it was trading at $1,000 and in August 2011 it finally passed $1,900. That was when the gold hype was at its peak.

But in 2015, currency wars has turned to currency normality and inflation stands at close to zero across the developed world. QE didn’t create hyperinflation, it was not even enough to fight the threat of deflation.

In 2015 the US economy began to improve, the Fed made noises about increasing interest rates, the dollar rose, the euro fell, and gold went out of fashion.

As of this moment (21 July 2015) it is trading at $1,108 an ounce.

Why didn’t gold rise above $2,000, or even $3,000 as was once predicted? The reason is simple. QE was the not the devil’s tool it was made out to be, the global economy suffered from lack of demand.  The risk of hyperinflation was built upon a myth.

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The IMF is a critic. It reckons the US has hit the brakes too fast, and wants to see more stimulus measures. As for the UK, it wants to see more short term borrowing to fund investment into infrastructure. The Bank of International Settlements (BIS), often called the world’s central bank, is a critic too, but for almost the opposite reasons.

Time to stop doing whatever it takes.

In a report out today, the BIS began by referring to Mario Draghi’s famous words when he said: “We will do whatever it takes to save the euro.” The BIS said: “But we are past the height of the crisis, and the goal of policy today is to return to strong and sustainable growth. Authorities need to hasten structural reforms so that economic resources can more easily be used in the most productive manner. Households and firms have to complete the repair of their balance sheets.

Governments must redouble their efforts to ensure the sustainability of their finances. And regulators have to adapt the rules to an increasingly interconnected and complex financial system and ensure that banks set aside sufficient capital to match the associated risks. Only forceful efforts at such repair and reform can return economies to strong and sustainable real growth.”

This is pure austerity economics, right out of the Austrian school of economics.

Then the BIS laid into what are often called the zombies.

It said: “Productivity gains and employment in the major advanced economies have sagged in recent years, especially where pre-crisis growth was severely unbalanced. Before they can return to sustainable growth, these countries will need to reallocate labour and capital across sectors. Structural rigidities that hamper this process are likely to hold back the economy’s productive potential. Both productivity and employment tend to be weaker in economies with rigid product markets than in ones with more flexible ones.

Similarly, employment rates tend to be lower where labour markets are more rigid.Conversely, countries with flexible labour markets recover more quickly from severely imbalanced downturns. They also create more jobs. Reforms that enhance the flexibility of labour and product markets could be swiftly rewarded with improved growth and employment.”

So what is it really saying?

Firstly, that QE has run its course, and monetary policy needs to return to normal. Secondly, that we need to see more creative destruction; let businesses fail, because the vacuum that is created can be filled by more efficient firms, and productivity will start to improve.

But is that really right? The BIS might be saying that QE has done its job, and now it is time to go back to normal, but frankly it never was a fan of QE in the first place. It may say that now is the time for governments to pay back debts, but then it also said that last year and the year before.

It is suggesting that as the economy changes, now is the time to implement the changes that it wanted to see implemented even before the economy had changed.

Do we really need to see create destruction? Take one sector, as an example, the UK High Street. This has seen rather a lot of destruction to date, precious little creativity has followed.

Then again, the recovery does appear to be starting in the US, and say one thing for the US, it does have an extraordinary ability to reinvent itself.

Being a cynic is fun. It is a good laugh, finding the flaws in any hint of optimism. And many have had a ball of a time laughing at the argument that it is good news on the US economy that lies behind the Fed announcing plans to ease back on QE.

But actually, there really has been good news coming out of the US of late. And with signs that US manufacturing is finding new opportunities, even that 3D printing may create new jobs, we could even be at the early stages of seeing something of a reversal of what we have seen in recent years of the trend of growing inequality.

The BIS might be right to say we are approaching the time when the US needs to see monetary policy return to normal – but that is happening anyway.

But the euro needs is own version of QE, proper QE that is, not Draghi playing with words. Japan’s experiment in Abeonomics needs to be given more time, and QE needs to be used more imaginatively to directly fund investment in the UK.

History tells us, that monetary policy has often been reversed too soon while an economy recovered from a depression recession/depression. Right now, there is a real danger that monetary policy will be tightened too soon. And the BIS seems to be oblivious to this risk.

© Investment & Business News 2013

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As we slowly move towards a post QE world, or at least post US QE world, things start to look very different. Countries that seemed unstoppable a few years ago look vulnerable. Perhaps the three countries to suffer the biggest knocks in recent days have been Brazil, Turkey and South Africa – all have seen their currencies fall sharply. In two of these countries we have also seen street protests.

Yesterday it was Brazil’s turn to be seen in an unpleasant limelight, as Brazilians took to the street to protest over a multitude of woes – among them the cost of hosting the forthcoming World Cup and the Olympics. Meanwhile credit ratings agency S&P has downgraded Brazil’s sovereign debt outlook – it is still rated as BBB, but now it is under a negative outlook.

Look beneath the surface and the threats to Brazil look worrying indeed.
For one thing, Brazil’s current account has fallen from a small surplus in 2007 to a deficit worth around 2.3 per cent of GDP in 2012. What Brazil needs is more investment, higher domestic savings to partly fund the investment, and a cheaper currency to give exporters an advantage. Alas it also needs much lower inflation. The IMF has forecast Brazilian inflation at 6.1 per cent this year. Interest rates are currently at 8 per cent. To fight off inflation, Brazil needs a strong currency. Do you see the dilemma?

The savings ratio in Brazil is the lowest amongst both the BRICS and in Latin America. Part of the problem is a very generous state pension scheme. This needs to be reduced, but street protestors may not be too happy with that idea.

At face value, government debt in Brazil does not seem so bad. In fact net debt is 35 per cent of GDP. Wouldn’t the US and the UK love it if their equivalent measure was so low? It is just that net debt is made up of gross debt minus assets, and many of the assets that count towards Brazil’s net debt are highly illiquid and risky. Capital Economics reckons a better measure of net debt would be around 50 per cent of GDP.

Brazil is posting a primary budget surplus, meaning government receipts are greater than expenses before interest on debt – but, thank to high interest rates, Brazilian public debt is rising.

And there is a much deeper woe. Commodity prices have been falling of late, and many, including the World Bank for example, are now forecasting a new phase in what’s called the commodity super cycle, as the massive levels of investment into commodities during the up phase of the super cycle leads to greater supply.

The last few years have been characterised by high commodity prices, poor economic performance in the developed world, and cheap money. As we enter a post QE world, it appears we may also enter a phase of lower commodity prices. For Brazil this may be a perfect storm.

This does not mean that the Brazilian growth story is over, but remember markets tend to overreact and Brazil may be one of the big victims of post QE over-reaction.

© 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

QE is drawing to a close; that is reason to panic. QE is set to be ramped up; that is reason to panic. That is what some say who see any news as bad news, including news that is totally contradictory.

The US is back, and the economic crisis is drawing to a close. ‘Celebrate,’ say the optimists. QE is coming to an end, ‘Celebrate,’ they say. ‘QE is set to accelerate, ‘Celebrate,’ they say. The pessimists pretty much say the opposite.

That is the nature of the markets. The news contradicts itself, the markets fall into their two camps whatever it says. They interpret everything as conforming to their pre-existing views.

Just to remind you, in the US, the Fed is dropping hints that its QE programme is drawing to a close.

In Japan, QE has been reignited, but this time in really big fashion. In the euro area, interest rates have been cut to half a per cent. In the UK, there is a feeling that once Mark Carney steps into Mervyn King’s shoes at the Bank of England, we will see a lot more QE.

So that is both more and less QE.

Bond prices have fallen. In the US the yield on US government ten year bonds has risen from 1.6 per cent at the beginning of May to 2.13 per cent by the last day of the month – that was a 14 month high, by the way.

The BIS, which is a lot like the world’s central bank, says this is a taste of things to come. In itslatest quarterly review it talked about the markets living under the spell of QE.

It says that the road will be bumpy as conditions return to normal.

But is that really a reason to fret? Over the last few years the economy has been in crisis mode and low bond yields have been a symptom of that. As we return to normal, surely bond yields will rise, and that is good.

Except, of course, who knows whether we are returning to normal, and indeed markets panic, even when times are good.

If the good times return, markets may well panic over bonds and we may yet see a crash. There is more reason to worry over emerging market bonds. So that’s ironic, impriving economy may be a reason for market turmoil.

But perhaps the fear is that bonds yields rise, even if conditions have not returned to normal. See:The Great Reset

© Investment & Business News 2013

The markets like QE. You could say that in much the same way as you could say the sun is quite hot – that is to say the sun the star, not the ‘Sun’ the newspaper. But what will happen when QE is finally stopped, even reversed? Yesterday may have seen a dry rehearsal for such a moment, when markets across the world fell sharply, and with the Nikkei 225 losing 7.5 per cent.

But oddly enough, the main catalysts for their fall may have been based on contradictory comments out of the Fed.

Yesterday afternoon the latest Minutes from the FOMC – that’s the Federal Open Market Committee, which is responsible for setting US monetary policy – stated that: “Despite some softness in recent economic data…a number [of FOMC members] expressed willingness to adjust the flow of purchases downward as early as the June meeting.”

Those comments send a shiver of fear down the markets’ spine.

But earlier in the day, Fed Chairman Ben Bernanke spoke to the US congressional Joint Economic Committee. He said: “A long period of low interest rates has costs and risks,” but “a premature tightening of monetary policy could lead interest rates to rise temporarily but would also carry a substantial risk of slowing or ending the economic recovery and causing inflation to fall further.”

So what was that then? Bernanke warning against relaxing QE too soon! That sent a shiver of excitement down the markets’ spine.

So what happens when shivers collide? Based on yesterday’s findings fear trumps excitement.

Here is your question: if markets tumble as a result of ambiguous words – with some saying QE is coming to an end and some saying it won’t – what will they do when the news is unambiguous, and the Fed puts an end to QE?

© Investment & Business News 2013