Thursday, 31 October 2013

In honour of plumbers

In the days of Ottmar Issing and Juergen Stark, high-powered economists ruled the ECB but times have changed and the current environment requires a new breed of central banker. I'll call them plumbers, but that is not intended in any way to belittle them. They are, led by Mario Draghi, more practical and more adept at coping with a deply flawed monetary system that has been put under stress. Indeed, perhaps the best comparison is between architects, necessary to design a building, set policy targets and understand the way the world works and plumbers, who don't look for perfection but simply try and keep the building from falling apart, finding a way to get the hot water from the boiler to the radiators and the dirty water out into the drains rather than all over the living room.

In term of architecture and economics what does the Euro Zone need? A fiscal union with a common taxation and spending policy; a single risk-free interest rate and instrument; a genuine monetary union that can police the financial system, raise levies to provide the funds for future bailouts and provide guarantees for retail depositors. All of this is as likely as pigs flying over the Eurotower on their way to a rave in Wilhelm-Epsein Stra├če. 

By the same token, what 'should' Europe's central bank do faced with rising uemployment, a rapidly growing current account surplus, shrinking banks' balance sheets, a huge output gap and an inflation rate falling towards zero? They should have, some time ago, worked with government to create a European TARP, to re-capitalise banks and create a 'bad bank' for impaired assets. They should now be injecting money intravenously into the system through large-scale bond purchases, and there would be nothing wrong with an Abenomics-like policy of talking down the currency, front-loading fiscal easing and structural reform of the labour market and pension system.

Some people will disagree with some or all of these policies. But what they have in common is that they, too, won't happen. 'Proper' QE is against self-imposed European rules. Talking down the currency is not in the ECB's mandate. Another set of rules demand austerity with slippage rather than either outright austerity or Keynesian expansion. And as for all getting together to re-capitalise banks, it needed to happen 5 years ago.

So what is left? When Mario Draghi arrived at the ECB he was a breath of fresh air, slicing the growth forecast, announcing the LTRO, getting money moving around the system. Then a series of vague promises and incompletely-defined promises to buy government debt and bank debt if needed were introduced. Purists look at all these policies and question whether there is any substance behind them but the yields on spanish and Italian debt just goes on falling. Others are alarmed by the way the ECB is lending money to banks to buy their own government's sovereign debt. And we all worry about the fact that with little or nominal GDP growth, debt levels are doomed to rise steadily until they are unsustainable (if they aren't already). But the Euro Area house still stands and a bloke with a wrench and some tape is making sure the money flows around the system. That's what the plumber-in-chief has achieved while he waits for his political masters to build a better structure. Hey, it's a lot better than the alternative....

Saturday, 26 October 2013

Storm coming


There's a storm coming, apparently, to rival October 1987's. I was in London when that storm hit, and didn't notice anything had happened until I got to work.  But down here in Higher Coombe, we did lose a lot of trees, including much of a beech row. Since I am down in Devon now, I wandered out with a camera because there isn't anything I can do to prevent a storm blowing trees down, but I'm fond of them. The top picture shows a beautiful beech row that is almost intact on our neighbour's deer farm.  I took the picture as much for the colours as the trees.


The second picture is of the Mardle, my favourite stream, after which I named this blog.



And the third picture is of a couple of the beech trees in a row by the house, that survived 1987.  I hope the latest storm, if it comes, leaves the beech trees alone.


The World's Strongest Property Market

In 2010, I managed to get stuck in Dubai thanks to the intrusion of an Icelandic volcano.
I went soon after Dubai world had re-structured its debt after property prices fell. The grandiosity of some of the developments in Dubai (the Palm, the idea of a ski slope with artificial snow and lifts in a desert shopping mall, to name but two) made for plenty of humorous headlines but in fact, Dubai had been pushed off the front pages of the papers by the Greek debt crisis, which erupted just days after Dubai's woes started to scare investors in November 2009. Between then and June 2010, the Euro's value fell from $1.50 to $1.20.

This week, I returned to the region. Dubai is booming. GDP growth close to 5%, property prices rising faster than anywhere else in the world. Much excitement has been triggered by a report by Jones Lang Lasalle which has snappy headlines telling us rices are rising at an unsustainable rate, though it also says that measures taken double land registration taxes will help cool the market. Goldman Sachs say it's alright, so we shouldn't worry. It’s not a bubble, it’s just a boom, see.

At first glance, my assumption was that this was Ben Bernanke’s mad monetary policy at work again. Dubai has a fixed exchange rate with the dollar, which means they import US interest rates. If your economy is growing at nearly 5% and money is cheap, you'll get asset booms (or bubbles). In the Middle East, that means insatiable demand for premiership football teams, and rising property prices. So here we go again, I thought.

There is however, an additional driver of demand that didn’t exist in the mad credit frenzy of 2003-2008 - the influx of money and people that has come as a result of the Arab Spring. The rich are either sending their money to the Gulf, or sending themselves there too. It isn’t easy to quantify but the planes are full, the hotels are booming and the anecdotal evidence is plain to see. Reuters estimated earlier this year that DH30bn flowed into the region last year and this year, Cyprus (this year's weakest residential property market), Syria and Egypt will all have added to the flow of money.

I don't know how this will play out in Dubai and the UAE. But global excess money is chasing real assets because the returns on financial ones are derisory and the inflow. And the longer QE and ZIRP continue in the US, the worse it will get. Money is mis-priced and the Gulf boom is being pumped up by money fleeing the crisis in the Middle East and North Africa. Eventually, rates will go up in the US, putting pressure on some borrowers and on any lenders who have too much regional or sectoral concentration. Which is quite a few of the banks in the Gulf.

Meanwhile, at least Dubai was able to re-structure its debt, get help from the rest of the UAE, and let property and asset prices adjust quickly. Spare a thought for Greece, which went into the crisis at the same time but is left with an overvalued currency, struggled to re-structure its debt and even if GDP won't fall for ever, isn't enjoying a bounce and won't any time soon.

Wednesday, 9 October 2013

Short post on social media...

On Monday I sent a morning note out, observing that everyone will have had their fill of the observation 'we don't expect a US default' but that as the October 17th deadline to resolve the issue of the US debt ceiling draws closer we need to ponder  how hard that deadline is and meanwhile, asset prices may remain under pressure.

I was glad, therefore, that the following chart was posted on a market blog by well-known blogger/tweeter/commentator Joe Weisenthal.


The chart shows how the 'hard' line in the sand for the US running out of any wiggle room on its finances comes a bit later, either on October 31 or November 1 when big payments are due.

So I re-tweeted the picture from a restaurant as follows:

Happy Halloween. Doomsday is Nov1 RT: CHART OF THE DAY: This chart destroys the debt ceiling truthers.

Sunday, 6 October 2013

Groundhog Day for England

Is there a house price bubble? It's the topic du jour. Well, here's the simplest chart evidence for the view that whatever we want to call the current rise in house prices, it isn't 'a bubble' .

It's certainly fair to say that on official data and across the UK as a whole, the ratio of average house prices to earnings is a long way below the 2007 peak. And since mortgage rates are a lot lower than they were in previous cycles, the ratio of mortgage payments to house prices is even lower. But that tells only part of the story, certainly for London and the South East.

I borrowed three times my 25-year old economist's salary to buy my first flat in North London, in 1987. If a younger me turned up at the age of 25 today having seen economists' salaries merely keep up with national wage trends, he/she would have to borrow nearly seven times his/her salary. Not to mention the fact that the 25% deposit my father produced in his generosity would need to be nearly six times as big now. It's no wonder that while people still want to get on the housing ladder, they are doing so much later and my 24-year old self would have probably gone on flat-sharing for a few more years.

I watched the rise in house prices, then the fall, got married and got a bit older. We moved house in 1994, selling the first flat for almost exactly the same amount as I had paid for it.  But that was OK. 1993 had been a good year for 32-year old economists, so we were able to buy a house, once again with a 25% deposit, in cheaper but trendy Tuffnel Park. And it was there our children were born.

Now I can imagine another slightly younger self, following foolishly in my footsteps, who is 32 today, married and thinking about family. Average wages have nearly doubled since 1994 but unfortunately, Tuffnel Park house prices have risen twice as much again.  So he'll still need to be able to borrow 6 times his salary and find a truly mind-blowing deposit to get onto the North London house ladder. He will doubtless be staying in his flat for a bit longer, weighing up the merits of moving further out of town (but dismayed to find you have to go a long way London before prices fall enough).

My younger self would probably buy a flat later, get married later, have children later and retire older. And that is exactly what is happening. As for the generation following him I don't know what they would do, because my younger self isn't going to be enthusiastic about moving again when he sees how much stamp duty he might have to pay. He'll probably opt to stay in his first family home in London, thank his lucky stars he ever got on the housing ladder at all, and only move when he cashes in his savings and retires. In the meantime, another generation of bright young British and European economists will have moved into flats in London, met each other, fallen in love and started trawling estate agents' windows in search of a place where they can start a family. But the good people of Tuffnel Park can no longer afford to move 'up' to  Hampstead or Primrose Hill, so sellers are reluctant, turnover is low and prices as susceptible to bubble-like characteristics as it's possible to be when you're not in a bubble....

The UK economy is blessed with a rapidly growing labour force that boosts growth potential and provides far better prospects for getting the government's gargantuan debt levels under control than is the case in some other European economies. But failure to diversify the economy through regional and educational policy has left the population growth centred on London, with its antiquated  infrastructure. This economic cycle is rapidly beginning to look just like every other economic cycle of the last 30 years, led by housing and doomed to end with UK interest rates peaking above those elsewhere and the housing market going into reverse in a few years' time. I'll enjoy the positives from stronger demand growth, worry about what happens to the trade balance, hope that higher interest rates deliver a stronger currency which make holidays  and imports cheaper, but I'll bemoan the chronic lack of vision that allows a whole country to wander into its own version of Groundhog Day.