Sunday, 29 June 2014

Brexit - not an option, even for a fool

The UK appears to be sliding slowly but surely towards an exit from the European Union. Maybe appearances are deceiving, but the UK's vision of Europe - which really boils down to the single market - and the needs of the Euro Zone economies, are increasingly hard to reconcile. I'll no doubt write a lot about this in the day job over the next year, but economically, for the UK to leave Europe is even worse than for Scotland to leave the UK. The Euro is a currency invented to serve a purpose for which it is no longer really needed, but it can't be un-invented and the European Union needs to be aligned around the need to keep it alive. The march towards Federalism is unstoppable and unless the single currency is ditched, it's necessary. There is dwindling political will within Europe to carve out a space for the UK to co-exist, in the Union and out of the currency and the leadership of the UK is woefully lacking in the political skill to gain any support for its position. And so, here we are, slip-sliding further into the periphery of the continent.

This, by Michael Ignatief in the FT does a good job of capturing how I feel about 'country'. I didn't spend much of my childhood in the UK and although Les Alluets Le Roi is closer to London than Carlisle is, anything 'English' had to be imported. So my mother stocked up with Marmite, Golden Syrup, mango pickle and porridge to the bemusement of her French friends, while I embraced a romanticised view of England fuelled by Enid Blyton, CS Forester, PG Wodehouse, Kipling and Roy of the Rovers, made by Airfix. But while I might have been a starry-eyed patriot in the playground in the 1960s, it took very little time before I was also 'European'. The only regret is that the range of places you could get to on a train in Europe in the 70's and 80's was so pathetically small compared to what anyone with time to spare can do now. Hop on the overnight train to Berlin and catch one in the morning to Warsaw. No visas, no hassle. Of course air travel has made it all easier, even if it's less romantic, but if you're 21 and have time on your hands there's a world of places, ideas and people to see, read and meet, just on your doorstep.

Unfortunately, that's just not what Europe as a political entity is about now. I was in favour of a single currency in the 1990s because the ERM was ludicrously flawed and because I'd learnt as a student that there was a cost to dividing my allowance between francs, guilders, marks and pounds. And it's equally clear that once there is a single currency, then along with a single central bank there needs to be closer fiscal union.

The single currency is no longer necessary. I can already use an app on my phone to buy coffee in New York at an exchange rate that is so much better than I am ever offered by a bureau de change, that I could scream. There's only a cartel or two standing in the way of fair exchange rates for using ATMs and credit cards internationally, and at that point the benefits from a single currency are suddenly much reduced for most people. The inflation, competitive devaluation and volatility of the 1970s can be avoided without currency union. But back in the early days of the ERM, no one realised that technology would do any of things it has and here is Europe, with the Euro and with the need to focus its political energy on building much sounder economic foundations on which to support it. Even if anyone in Brussels wishes that they had never invented the Euro, they don't want to go back and doing so would be devastating. So onwards it must be and the Federalists must win. And as they win, so the anti-Federalists in the UK moan.

And it is a shame, because I don't want to choose between a Federal Europe and an isolated, irrelevant economically-challenged England. I don't want either of these things. I want to do what I'm doing tomorrow morning - get on a plane, fly to Athens and sit in a bar discussing the world with people whose perspective is different from mine and from whom I can't fail to learn a great deal. But for what it's worth, if I can't have a single market with free movement of goods, capital, people and ideas, I'll vote for Europe, however I have to take it.


Sunday, 22 June 2014

If a coffee shop can charge honest exchange rates, why can't everyone?

I wrote a post to this blog last autumn with the picture on the right in it, as we were warned of an imminent storm. So I thought I'd upload the same picture today. The beech tree in the middle of the right-hand photo was 'taken out' by a tree which fell from the left.

Anyway, so much for trees! 

I flew back from New York to London yesterday, to be greeted by the best weather of 2014. On the flight back I sat next to an American who, having been sent over  for a 6-month stint four years ago, is finally about to go back to the US for good. He told me how much he had enjoyed London as a place to bring up a young family - far more green space that New York, for starters. And we both agreed that if you earn your living in finance, Europe's is the time zone to be in.  

Language, time zone, the appeal of the city itself to the international traveller/worker, critical mass of talented people to hire: These are all reasons why London can maintain its position as a dominant centre of global finance, if the country wants to. Whether there's the will to promote London as a pre-eminent global city or as a centre of global finance, is a different question. 

Firstly, it's important to think about what being a pre-eminent financial centre actually means, in the new world order. Certainly, the UK should not aspire to resurrect a situation where its major banks are so big that a financial crisis can bankrupt the UK.  Resting the global finical system on the shoulders of the retail deposit-taking banks of a country as small as the UK is dangerously daft. So, making London the global hub for trade in money, needs to be engineered differently.  But the second issue is that if countries don't make the most of of their competitive advantages, they are doomed to live in the economic slow lane. 

I'd offer a few thoughts on the make-up of global finance in the years to come. Firstly, banks are becoming less important for lending. They are going to be dull, heavily-regulated deposit-takers which look after our money and use it to make safe, low-margin loans. The job of the financial industry will, more and more, be to match those who need access to money with those who have money to invest. That's something that the City used to be good at, before Big Bang. Secondly, money is going to go on moving around the world. If interest rates are going to be lower, on average, than they used to be (as suggested by the IMF, Fed Governors, of MPC members for that matter), then anyone saving for a pension will continue to have to take more risk to get the returns they want/expect/need for retirement. More money will be invested in  more exciting, but more volatile markets than UK Gilts, German Bunds or US Treasuries. Not just in the short-term but as long as the 'neutral' level of rates is lower than the 'trend' growth rate of the major economies. And finally, the trend towards globalisation hasn't stopped, and won't soon. Banking may become more balkanised where such lending as a UK bank undertakes, for example, is much more concentrated on the UK, but consumers can and will go on buying goods and service internationally. 

A centre for global non-bank finance; a centre of savings and asset management; a centre for cross-border trade finance, for insurance, for international law and accountancy. These are industries which, surely, London should be nurturing even as the size and risk profile of the banking system is realigned with the reality the UK's size. And if not, then we'd better come up with other industries which can compete internationally on a sufficient scale to create the jobs of the future, and start nurturing them. 

The challenge, is that these industries are changing incredibly fast, all the time. I haven't updated my Starbucks Index this week, because the price of coffee in New York hasn't changed, even if the price of beans has risen. But I did pay for a cup of coffee using an app on my phone, which automatically charged me in sterling. The Starbucks GBP/USD exchange rate last Friday was 1.7020, which to all intents and purposes is the same rate that an FX trading firm would charge its very best and biggest customers. It's a vastly better rate than you'll get if you change pounds for dollars at a bureau de change in Heathrow this morning, that's for sure. I haven't asked Starbucks about their FX charging policy, but I'm guessing they make enough margin a capuccinno to be more interested in selling as many of them as possible, than on fleecing global wandering caffeine  addicts on FX. But if Starbucks understands that getting me to buy coffee in their stores is what matters, how long will it take credit card companies, hotel chains, car rental firms and others to figure it out, too? At some point, even banks are going to work out that the exchange rates they charge in ATMs annoy their customers. 

















Saturday, 17 May 2014

Stumbling around in the dark....

What a wonderful day for a cup final! I spent part of this week in Paris, which was basking in the kind of spring sunshine that helped build its reputation. Shame about the dog mess, the taxi drivers and most of all, the lack of economic recovery, but that's for another day.

Back here in the UK, the FTSE has enjoyed it highest weekly close since 1999. Joy at the UK's spectacular recovery, a vote of confidence in the Chancellor's economic management, or a vote for the M&A boom? I'm no wiser about the outlook for equity markets than I am about anything else but the picture below is my small take on this. The FTSE peaked in 1999 shortly before the US Federal Reserve's main interest rate was increased for the last time in the dot.com boom. The FTSE reached its low as US rates were tumbling in 2002 and reached its 2007 high after the last of the US central bank's rate hikes in that cycle. And yup, UK equity markets have been rallying since US interest rates got to their current near-zero level in 2009. So, if you think that rising share prices are a 'good thing' and you want to thank someone, I reckon you should send a postcard to Ben Bernanke and Janet Yellen, rather than Mark Carney or George Osborne.



The same, by the way, is probably true of UK house prices.  Part of the UK house price 'problem' is that London's become a global city and house (or flat) building is lagging way behind the migration into the city. Sure, there's a problem with a handful of billionaires who have decided to buy Mayfair in a game of monopoly for the super-rich. But the attention the press pay those folks is far greater than they deserve. Just as the focus on the 'wrong kind' of immigrant is greater than it deserves. Most of the people who arrive in London, whether from the suburbs of London or the suburbs of Paris, Milan or Budapest are young, educated and hungry for success. And the reason they pay too much to buy or rent somewhere to live, is not because a few properties are empty but because there aren't enough of them.

But the second reason they pay too much is that the cost of money is too low. Not just low in the UK, but low everywhere where the US Federal Reserve's influence is felt. And that's where the similarity with share prices is greatest. Low global interest rates push investors into shares rates than government bonds. They encourage large companies to borrow cheap money to buy back their equity, or to buy their competitors in the name of efficiency. And when share prices lose touch with the economy, it is only temporary, because a company can only ever be worth the discounted value of future dividends. If there are more people who want to live in London than there are rooms for them, prices can stay high for a long time. But no-one is that desperate to win the shares of any company if it doesn't make much money.  

In recent weeks however, the cost of money has been coming back down. This time last year, American central bankers started to warn that it was only a mater of time before they stopped pumping ever more money into the economy by buying government bonds. And only a matter of time after that before they started to push interest rates up. That warning caused a huge re-think by people involved in markets about where interest rates would be, not in the next few months but in the next few years. A year ago today, an American bank could borrow or lend money for one year, starting in 5 years' time, at a rate of 2 1/2%. That is roughly the same as saying that the best guess of the financial markets in five years' time, the Federal Reserve would have increased its interest rates to about 2%. Too low. Collectively, markets had a rethink and by September that 1-year interest rate starting in 5 years was priced at 4.2%. So the new best guess was that the Fed would raise rates over 5 years to around 4%.

That was a better guess. Right or wrong, time will tell. But from the central bank's perspective this was healthy. Everyone had woken up to the fact that we wouldn't really have such low rates for ever. Markets cooled and in some cases fell. But recently, egged-on by low inflation and a lack of wage growth, central bankers have been downplaying the risk of interest rates going up soon, or far. And so, here we are, pricing in 1 year rates in 5 years' time at 3.4%. So we thought rates would be 2% in 5 years's time, re-thought and decided the answer was 4% and now we think it's a touch above 3%.  Investors, borrowers and lenders are stumbling around in the dark because they don't understand how central bankers decide the level of interest rates any more.

Markets need guidance. I thought the Federal Reserve did a good job last summer. I think they're in danger of undoing their good work. We were in the dark and we thought the Fed was showing leadership. But now, we're stumbling again.

As we stumble, two things happen. The first is that investors drive the price of houses, shares and all sorts of assets up. To levels which will be unsustainable when interest rates finally go up. And the second is that we treat all assets as being the same, so that I can dram pretty pictures of all sorts of asset prices, and they look eerily similar.

So, here we are with a  14-year high in the FTSE. We've also got a the recovery of the Brazilian real, also at it strongest levels since last summer just in time for the World Cup. That picture's below. If you do get the chance to go to Brazil you can experience at first hand what such a strong currency does to the cost of coffee, or beer, or any of the other things football-watchers need to buy.


And it's not just the Brazilian real. The Indian rupee picture looks similar.  Completely different underlying economic story.  And political uncertainty removed. But the way the real and rupee are tracking each other speaks of a world where investors are once again simply looking for yield, rather than differentiating between these different economic stories. And that's a very unhealthy consequence of central banks which don't just leave markets wandering around in the dark, but give the impression that's what they're doing, too.















Enjoy it while it lasts...







Tuesday, 29 April 2014

The Economics of Inequality

The Economics of Inequality is a book written by A B Atkinson and published in 1983. There's a copy on a bookshelf somewhere round here - bought when it was new and I was supposed to be studying economics (because it's easier to buy books than read them properly). I can't seem to lay my hands on it at the moment - the books I can find are a (perhaps sad) reflection on the bits of economics I spend more time with. From where I'm sitting I can see Glyn Davies' History of Money, Nicholas Mayhew's Sterling, Victor Argy's The Postwar International Money Crisis, Kindleberger's Exorbitant Privilege,  Keynes' General Theory and even This Time is Different. But almost all I can remember of Mr Atkinson's seminal work is that it is utterly unlike Thomas Piketty's Capital in the 21st Century - and not just because 'Capital' is on my iPad,  rather than in paper form.

This isn't a review of Capital  - there are plenty, written by far smarter people than me. The Economist's website has a series of analyses. Michael Bird at City A.M has collated a host of reviews. But what interests me is the way in which Mr Piketty has captured the Zeitgeist and tapped into the biggest topic in economics today. When I 'studied' economics in the early 1980s Milton Friedman was the rock star economist of the day. The weekly release of US money supply data on Thursday afternoons was a major market event. And there was an accompanying backlash against the policies of the Thatcher era (we held hands for jobs across the country, or in my case, Highbury Fields). Winding the clock forwards, the rock stars three years ago were Carmen Reinhart and Ken Rogoff, who were, too looking at huge macroeconomic issues in the wake of the great financial crisis. In short, it was all very macro.

Inequality is the biggest economic legacy of the Great Recession and the policies that western governments and central banks have chosen to escape it. Fiscal austerity and low interest rates accompanied by central bank asset purchases have been the chosen policies of the UK, US, Europe and Japan, albeit to varying degrees. The biggest winners have been those who own assets whose prices have risen as a result (directly or indirectly) of central bankers' actions. The biggest losers are those who are asset poor, and reliant on the state. The outcome is greater economic inequality and you'd have to be blind not to see it.

It's against this backdrop that Mr Piketty has published this work. To be clear, this is not a new theme for Mr Piketty - Wealth redistribution was the topic of his Phd thesis, 20 years ago (Ph.d at 22!!) and since Capital looks at 300-years worth of data to conclude that as long as the rate of return  on capital is higher than the growth rate of the economy, wealth will flow to the owners of capital unchecked, it's partly co-incidence that he's published his latest book now. But, the reaction to it is very much a reflection of the fact that this is a theory whose time has come. Money is cheap but severely rationed (Apple is likely to issue billions of dollars in debt to help move a vast cash pile around the world). So rich companies, countries and individuals can borrow very cheaply to invest, while the rest can't borrow at all. Young Londoners can only dream of owning homes, while the 'buy-to-let' market earns better returns than leaving money idling in a bank.

What is disturbing about Mr Piketty's analysis is not his proposed cures (taxation of capital and assets, which even he accepts won't happen in the way he would like), as much as the idea that inequality is built into our economic system. I read a piece by Simon Kuper about apartheid over the weekend, and it struck a small chord with the debate about inequality. His observation of South African apartheid is that it meant that an individual's life path was largely determined before birth, and he describes inequality as the new apartheid. Inequality of economic outcomes would be less disturbing if they were the result of choice (did you go to school or play hooky, did you save or waste your money?), innate talent or even chance. But  in Mr Piketty's world, the rich get richer until the masses rise up and revolt or until the state reacts. Even for people with liberal economic views in which the market is considered a 'good thing', the idea of an economic system where the odds are that heavily stacked against those who don't start out with a trust fund, is pretty unattractive.

If you have time to read the book, do so. If you don't, be prepared for the debate about inequality to rage on. And if you don't understand why this kind of inequality is a bad thing - they're coming to get you!






Sunday, 6 April 2014

Short update post US jobs

A short Sunday update after a week in the US.The US jobs report deserves two charts, but not more. The top one shows real GDP growth, and employment growth from the non-farm payroll data. Year over year employment growth on this measure picked up a bit to 1.66% in March. It's over three years since annual employment growth was outside a 1.5-1.9% range. The first Friday of the month isn't as thrilling as it used to be!

Since 1990 (the period covered by this chart), employment growth has averaged 1%, and real GDP growth 2.5%. The period of tediously boring employment data since Q4 2011, has seen employment growth average 1.7%, and real GDP average 2.3%, so more jobs are created than has been the norm since 1990 but productivity has lagged pretty badly. Why? the wrong kind of jobs (too many self-employed, or part-time jobs), perhaps?
The second chart shows the annual growth of average hourly wages for non-supervisory workers, and the unemployment rate (inverted). The slowdown in wage growth (on this measure, from 2.4% per annum to 2.2%), was the most significant piece of information in the jobs report because without a pick-up in wage growth there is virtually no chance that the Federal Reserve will deviate from its dovish policy stance. And indeed, very few investors, traders or financial market participants in general will be worried about inflationary pressures unless or until wage growth picks up a god bit further. Mind you, the current modest acceleration in wage growth is enough for the traditional correlation between lower unemployment and f aster wage growth to be re-asserting itself. So we may not worry now but as the unemployment rate falls, it seems wage growth is indeed responding. Now, I live in a country where wage growth is still well below inflation and I see this re-coupling in the US as good news for Americans, and a reason to be just a teeny-weeny bit jealous!
So there you have it  - an OK pace of jobs creation, a pause in the acceleration in wage growth, and nothing much for financial markets to get het up about. There's still lots and lots and lots of cash looking for a place to be invested.


Sunday, 23 March 2014

Janet's Jackhammer

It's Sunday in Abu Dhabi and there's lots of noise coming from the construction site outside my hotel window (as there was for much of the night). I'm inclined to blame this on the Federal Reserve. This may same harsh but the UAE has pegged its exchange rate to the dollar (hence my tall latte this morning cost a mere £2.32, a mere 3% more than I paid last week in London). The other side of the competitive exchange rate however, is that monetary policy is too easy, asset prices rising and the Middle Eastern property boom is back  - hence the over-enthusiastic workers outside. Still, there's more chance that the hotel will change my room for one the other side of the building, than there is of the Fed tightening policy this year.

This tendency to see everything as being a result of Fed policy does have a serious side. In a world where the world's biggest economy has set the cost of money at a level that is utterly inconsistent with her own growth rate, let alone anyone else's (except perhaps the Eurozone's), asset prices rise to daft levels, irrespective of the 'fundamentals' of individual companies, or countries. Market analysis (particularly sell-side investment bank research) is reduced to guessing whether a particular share price is a 'dangerous bubble' or a 'justifiable boom', over-intrepreting every single utterance we get from the FOMC, and watching for random market-affecting events anywhere else in the world. Of course the 'exogenous shocks' from global political events then require London or New-York based analysts to sound like 'experts' in everything from Russian regional politics to Chinese currency policy.

Anyway, what we learnt about the world last week:

1) The Fed is not discouraged by winter weather-distorted data and will continue to pump money into the bond market at a slower and slower rate. Then, something like six months after they have finished buying bonds (which is an illustrative, not a literal six months) the Fed will start to raise rates, and the best guess of the committee is that they could be at about 1% rates by the end of 2015, maybe up close to 2 1/2% by the end of 2016, and perhaps just a little under 4% at some point in the dim and distant future, subject as usual to their changing their minds between now and then.

I am SO glad that's cleared up any uncertainty.

2) The Crimea became part of Russia, a bunch of names were put on a list, some more sanctions may or may not be imposed and in a wider sense, financial markets have not reacted very much. Europe is hurrying to wean itself off Russian gas according to the press, the leaders of several countries that used to be part of the USSR are very worried about what Mr Putin might do next, and, well, that's about it.

3) The Chinese renminbi has continued to weaken at a snail's pace and the subject is gradually attracting fewer headlines, though the publication later today of the first of the Chinese 'flash' PMIs will doubtless bring the issue top again. A tall latte in Beijing, I remind you, costs £2.63 and yet the consensus view amongst eco-people is that the currency will continue to appreciate in nominal as well as real terms from here. hey ho.

4) The UK had a 'Budget' and having spent years removing tax incentives to save for a private pension, the government has decided that in the future, pensioners won't have to buy annuities whose prices have been as distorted by Bank of England and Fed policy as any other asset. This has helped narrow the gap between Conservative and Labour parties in the polls, though it hasn't stopped the gap between 'yes' and  'no' closing in Scotland too.

We can now all move to on to analyse expertly the French local elections, before we get into the monthly PMI-fest tomorrow. Along with any random events about which people will have to become immediate experts. For myself I am gong to go on relying on Twitter to seek out and find me experts to explain the (very long) list of subjects about which I know almost nothing, while I try and work out whether the Fed's painfully slow pace of policy normalisation will strike fear into the hearts of the world's investors (somehow, I doubt it, but we'll see….). In the mean-time, I just need to get away from the noise of this Yellen-propelled jackhammer….


Sunday, 16 March 2014

Wandering around Asia - it's all about Chinese currency policy

I have spent a week in Asia, 40 hours flying to four countries in five days and have returned to find out that someone turned Winter off and Spring on instead. B&Q are likely to see barbecue sales go through the roof….

Singapore's economy is in full boom. As usual. There aren't enough workers in the country to fill the jobs available in bars, coffee shops or driving taxis. Reclaiming land from the sea just continues. The last time I was there, the Marina Bay Sands hotel ($3.5bn with a gigantic surf board on the top, a vast pool and a casino) was surrounded by building work. Now, it's surrounded by the Marina Bay Shoppes (sic). And a light show in the evening. A thriving economy has diversified into tourism and casinos, at pretty much exactly the same time as a newly-affluent Asian middle class took to the airways and started going on holiday. The post-2008 collapse in trade was followed a bounce pretty quickly,  Singapore's banks escaped relatively unscathed from the crisis and now it's all go.

The investor community in Singapore listen politely to views about Europe, the US and financial markets in general, but the conversation pretty quickly turned to the Renminbi.  Singapore is the private banking hub for Southern Asia, and benefiting from the combination of an ever-appreciating RMB and higher yields than are on offer in either US or Singapore dollars, is one the most popular investment strategies for their high net worth clients. The general view or hope of these investors is that the current PBoC-induced volatility in the USD/CNY rate is just a blip, which will not stand in the way of their investment strategy.

From Singapore to Seoul, a 5 1/2 hour overnight flight followed by a day of meetings. Really, I remember less of them than I should - I just wanted to sleep! I found a spa in the airport to shower, shave and try to calm my cold down in a sauna, then took the train into the city rather than a cab because it is so much cheaper. I've been visiting Seoul for over 20 years and it has transformed from 'developing' to 'developed' more impressively perhaps than any other city I visit. In the early 1990s it was full of identical black saloon cars and utilitarian-looking buildings. Not any more.  

Beijing, by contrast, has become a hard place to visit. I was lucky to have a day of clear skies and breathable air but the traffic is awful, cars nose to tail where not that many years ago bicycles outnumbered cars. Here, the conversations were about investment in Europe, with a fascination for Australia and Canada too, but when the talk turned to the domestic currency, I sensed nervousness and uncertainty. That is unusual in Beijing, a place where there is usually certainty about the authorities' goals and little doubt that they will be successfully achieved.

Hong Kong is an astonishing city. The drive in from the airport is a reminder that this is a major trade hub, as you pass container ship after container ship. More the  one person though, tells me that the luxury shopping brands and stores are doing less well now. The Chinese slowdown is being felt here. As for the clients, we were back to talking about China. I was asked how far I think the USD/CNY rate may rise and retorted that if the idea was to reduce the appeal of the 'carry trade', then what I learnt in Singapore is that those buying the Renminbi are not feeling dissuaded yet. The glib remark that from the current 6.15, we are more likely to see the rate at 7 than 5 in the coming years caused real concern until I qualified it by saying that neither of these levels is likely. What did I learn is that a 2 1/2% depreciation is causing more anguish than a fall that magnitude should. And by association that there is more leverage in the trade than I had realised. That increase in leverage makes me concerned, particularly in the wake of the announcement this weekend that the daily trading band for USD/CNY is being widened.

A note at the end. I've ben jotting down the price of a tall latte at Starbucks stores around the world for many years. This week, I paid SGD 5.60 (£ 2.66) , KRW 4400 (£2.47) , CNY 27(£ 2.64) and HKD 31 (£2.40), all of them more expensive that the £2.25  I get charged in london, the steady widening of the price differential between Beijing and Hong Kong perhaps the most striking feature.