Saturday, 6 December 2014

Does the (US) Phillips Curve work in leisure & hospitality?

The US employment data released yesterday are worthy of a short post. The bare bones of the report are that a strong monthly increase in employment and a modest acceleration in wage growth (321,000 jobs, wage growth from 2% to 2.1%, unemployment rate steady at 5.8%) have prompted excited headlines like the FT's... (US Heads for best jobs growth since 1999). The growth rate of employment has picked up from an above-trend 1.95% annual rate to a whopping 1.99% rate. That doesn't really answer anyone's questions about whether falling unemployment will drive wage growth up, or whether the US is going to return to less pathetic rates of productivity growth any time soon for that matter but with some cracking (i.e., low) CPI and PCE inflation likely to turn  up shortly, real incomes are rising in time for Christmas; and a 2% growth rate in unemployment will underpin GDP growth nicely above that in the coming months.

All of this you can read all about to your heart's content elsewhere. What I've been spending more time on is the make-up of the labour market, which has continued to see the strongest employment growth in the lowest-paid sectors, and some of the weakest in the highest-paid sectors. But one thing that was striking in the November data was a further acceleration in wage growth for the lowest-paid of all the sectors - leisure and hospitality. This is a sector where wages average $14.10 per hour, compared to $24.66 for all workers and over $30 in mining, finance and information. But over the last year, wage growth has picked up to 3.75% at this end of the spectrum. I've plotted wage growth in leisure and hospitality, along with overall wage growth and (inverted) the unemployment rate, in the chart below.

The picture tells a simple enough story. The lowest-paid workers in the US saw their pay levels fall in the aftermath of the recession, suffering far worse than the average. And their wage growth (let alone their wage levels) lagged until late last year. But as the unemployment rate has gone on falling, they have started to see pay rises. The Phillips curve for the overall US economy still looks pretty useless - wage growth trending sideways, while unemployment falls - but tightness in the labour market may finally be turning into more cash at the bottom end of the scale. And since those are the people who spend the largest share of any additional income (because they need to), the impact on demand may be greater.

The main causes of weak real wage growth over the last decade (technology, globalisation) would also suggest that a sector where out-sourcing jobs and replacing them with robots are both difficult, should see wages respond to falling supply of workers. So this pattern does nothing to allay longer-term concerns that the policy response to weak demand caused by weak real wage growth, itself due to major structural forces, is ineffective: An orgy of monetary accommodation has sent up asset prices (which do very little to address falling real incomes for low-income families), helped increase the profit share of GDP at the expense of the wage share and fuelled bubble-like pricing in commodities and currencies, many of which are now deflating.

However, for all those long-term, concerns, I can't think of any reason not to cheer on a boost in wage growth for the lowest-paid sector of the (US) economy at last, even if we need to see this filter up to sectors with higher wage rates before it is reflected in faster average wage growth.

Sunday, 23 November 2014

Basic maths and a big headache

A three-hour train journey to see my daughter en route to bothering clients in Scotland tomorrow leaves me with time to write, though less access to data than I need to fully explain my point. Still,  I'm grateful to Matthew Boesler (@boes_ on twitter)  for drawing my attention to the presentation on the US economy by David Altig, the Atlanta Fed's Director of Research, which he gave at Georgia State University's Economic Forecasting Conference this week (Link).

The amount and quality of research that comes out the Fed's regional offices is incredible. The whole presentation is worth looking at but I've been playing with slide 15, which shows US employment growth since June 2009 in various sectors of the economy and compares it to the wage level. It's not a surprise that the majority of the employment growth has been in lower-paid work and this is something that is as true in the UK as it is in the US. Spend much time reading Brinjolfsson and McAfee and you'll end up convinced this is a trend which can persist.

I started playing with the data behind the chart on Friday and look forward to hours of fun doing so in the next week or two.  For a really simple exercise, I looked at wage growth across the different sectors. Overall, US hourly earnings growth in October was running at 2.0% y/y, and the average hourly wage was USD 24.57, pretty close to the $24.96 earned in manufacturing, the sector with the fastest employment growth since 2009 and 4th of the 8 sectors in the chart.

At the extremes, wage growth in 'information', the top sector on this list, is 3.3%, and the wage growth in the lowest-earning sector is 3.6%. Both higher than the average. Not every sector is seeing higher than average wage growth, but they could be. The average growth of wages in the two mentioned sectors is 3.15%, a good bit lower than in either of them, simply because of one year's change in relative employment between the two sectors.

There's one immediate conclusion: Even as the overall US economy approaches full employment, that may cause more wage growth only in the (lower-paid) sectors where the labour shortages will be felt first and even then only if the effect is not simply a return of discouraged workers to the labour force.

What I really need to time to do, is to replicate these figures in the UK. Mark Carney, Governor of the Bank of England, sounded confident about a pick-up in wage growth in the press conference after the release of the latest Inflation Report. The bank expects a pick-up to around 3%, and I can only assume that they are hearing positive noises from their Agents. But if that 3% figure reflects the belief that each sector will see a 3% increase in wages, while the make-up of the labour force changes, the actual number could still be a fair bit lower. So I'll note the optimism and reserve judgement....

The implications for fiscal policy are even more disturbing. If the shift in the make-up of employment drags average wage growth below the average of each sector, it wreaks even more havoc to income tax receipts. More people are paying less tax. And the trend is not about to change. I'll leave those with a political agenda to draw their own conclusions, while I focus on what this means for inflation, interest rates and the pound...

Saturday, 11 October 2014

Hopelessly over-optimistic....

Where do you think trend growth is for the US economy in the years ahead? Maybe that's not a question you ask yourself much but as another IMF World Economic Forecast is published and the great and good meet and greet each other in Washington, it's a question I would love to answer. After all, it's a key input into global growth, global interest rate trends and asset prices. And I fear the answer is  - slower than most economists appear to believe.
The picture below, shows how the consensus forecast for US real GDP growth collated by Bloomberg has shifted over time. The darker blue line on the left-hand side shows how the consensus forecast for 2011 growth was around 3% in early 2010, but fell sharply in mid-2011 as it become clear the eventual outcome would be somewhere between 1 1/2 and 2%. Back in early 2010, the consensus forecast for 2012 was even more optimistic, flirting with 3 1/2% but sadly, this too was gradually revised lower in 2011. And the 2013 forecast started life at just above 3% but ended below 2%. And the 2014 forecast, back in early 2012, was above 3% but we now know that too, is too optimistic. The pattern is obvious - a tale of dashed hope and disappointment. You won't be surprised to see that at this point the 2015 and 2016 forecasts are around 3%. And yes, in case you wondered, the IMF's forecast for  2015 is 3.1%.

A friend told me hat he thought this optimism was admirable and a feature of  human nature as opposed to evidence of massive failure by economic forecasters. And I caught an echo in this response to the England football teams 5-0 win over might San Marino from the Daily Telegraph.....

"For 21 second-half minutes at Wembley on Thursday night, the statisticians who follow the England team were left scrambling for the record books. The half-time introduction of Alex Oxlade-Chamberlain for Jordan Henderson had swollen the number of Arsenal players on the pitch to five and it was soon confirmed that you had to go back to the days of Herbert Chapman in the 1930s for when the club were last responsible for half of England’s outfield all follows a definite trend in the composition of the previous two World Cup-winning squads. The Spanish in 2010 had seven players from Barcelona and five from Real Madrid while Germany’s triumphant squad from Brazil comprised seven from Bayern Munich and four from Borussia Dortmund". 

Now, I'm as patriotic as the next English football-watcher, but putting such a positive spin on a win against  a team from a country smaller than Islington with the help of 5 playrs from a club lying 8th in the Premiership is a bit too much, even for me... 

Anyway, back to the US economy....The good news for next year, is that the 2015 forecast is holding up better than in previous years. By this time in 2013, the 2014 forecast was slipping as the effects of a massive jump in bond yields (far greater than we have seen this summer) took its toll on emerging markets and then US housing. And we'll never know how much of the 2014 disappointment was due to the awful weather at the start of the year.

But away from where we should pitch the 2015 forecast, what the chart really prompts me to do is to question where 'trend' GDP growth is heading in the US. This tendency to forecast growth at 3% next year, the year after and for ever represents a very rose-tinted view of the US outlook. Economists will quickly assert that after a deep recession a few years of 'above-trend' growth can reasonably be expected but as the unemployment rate falls below 6%, that story has a shortening shelf-life. And the 3%-plus forecasts all assume trend growth is somewhere above 2%. Which may be much too optimistic. The next two charts both worry me in this regard.

This first one shows my preferred way of looking at the monthly jobs report - as the annual growth rate of non-farm payrolls. Employment growth is running at 1.9% per annum and has steady for the last three years. GDP growth meanwhile has been growing at a disappointing rate - disappointing for those who keep on thinking it should be above 3%, at any rate. The green line, on the right-hand axis, shows the difference, smoothed over three years and just under 1/2%. This is an over-simplification of productivity growth but does get away from the nonsense that I am currently reducing my productivity by 'working' outside 'work hours'. Since 1960 US GDP growth has averaged 3.1% and employment growth 1.8%. So this is a very disappointing period for GDP growth relative to a rather normal period for job creation. The general view of trend GDP growth being above 2% assumes that productivity will magically revert to the long-term average. And you can see that productivity is cyclical, because employers hoard workers in recessions and then are slow to hire - usually. But in this cycle productivity is weakening years after the recession, which makes alarm bells ring. 

Trend growth, in the longer run, is a function of where we think full employment is, what we think productivity is, and how fast the labour force is growing. The final chart shows the US labour force, growing gradually more slowly of late. The second line is the 3-year average growth rate, currently just under 1/2%. That line has been trending lower since the late 1970s. The US Bureau for Labor Statistics writes a about longer-term trends and at the end of last year they produced this piece whose opening summary reads... 

"Labor force projections to 2022: the labor force participation rate continues to fall: Because of the decreasing labor force participation rate of youths and the prime age group, the overall labor force participation rate is expected to decline. The participation rates of older workers are projected to increase, but remain significantly lower than those of the prime age group. A combination of a slower growth of the civilian noninstitutional population and falling participation rates will lower labor force growth to a projected 0.5 percent annually."

So labour force growth has averaged 0.5% in the last three years and the BLS thinks it will do so the next decade, give or take. The gap between employment growth and GDP has been 1.3% since 1960 but 0.5% since 2011. There's room for GDP to 'do better' as the remaining slack in the labour market is used up. After that, trend growth is probably between 1% on a bearish view that the recent past is a sign of the 'new normal' times to come, and 1.8% on the optimistic view that we will return to the long-run average. You're welcome to you own guess, but I reckon hoping that 'trend' US GDP growth is above 2% is wishful thinking. As is believing that beating San Marino tells us anything about England's chances of winning a major football tournament in the next decade or two. 

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 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.

Sunday, 9 February 2014

The Grand Old Duke of Rio

The emerging market sell-off paused for much of last week but the debate about what it all 'means' rages on.  So to carry on from last weekend's themes here are a few points and a picture:

Firstly, a re-cap: really low rates (and QE) in the US (and Europe) caused a huge flow of money into almost any asset with any yield both in 2004-2008 and 2009-2002. Secondly, many (not all) central bankers allowed the effects of this to be felt in 2009-2012 through currency appreciation, a major difference with the 1990s. Some of them ended up with very expensive currencies. The US ended up with a very cheap one. Thirdly, many (but definitely not all) EM countries were consequently able to avoid the explosion of debt, notably foreign currency debt, that they suffered from in the 1990s. In aggregate, foreign currency debt is a smaller share of EM exports today that it was a decade ago and the interest that is paid on it totals something like 2 1/2% of export earnings. Fourthly, it isn't the US' 'fault' that the Fed sets a domestic level of interest rates that works for the US but doesn't work for the rest of the world. And finally, I think it would be very useful if we stopped talking EM and DM, and at the very least took China out of EM and started calling it the world's second biggest economy with the world's biggest domestic credit problem. It makes a mess of 'EM-wide' data if it isn't considered separately and if China's debt bubble does burst, I for one won't describe the outcome as an 'EM crisis'  

Anyway, here's a chart of real effective exchange rates, some EM and some DM, back to 2005. I drew it to keep my mind occupied for the last hour of a truly awful game of football yesterday and I'll do some 'work' on this theme in the next few days.  The data are from the BIS, and I've updated them as best as I could in the time I had. With any index-based look at FX, the starting point is arbitrary and therefore prone to skewing conclusions if you're not careful, but I chose 10 years ago because that was far enough after the 1990s EM crisis for recovery to be underway, and far enough after the Euro's launch for EUR/USD to have both collapsed and recovered. So for better or for worse, this chart shows how real exchange rates have moved since the global economy was in a relatively balanced state, in the early stages of the great financial bubble.

A few things are interesting. The first is that towards the end of 2012, the three cheapest currencies on this arbitrary list and relative to my arbitrary starting point, are the dollar, euro and pound. The second is that three currencies saw truly staggering real appreciation in 2004-2008 and then again after 2009:  The Chinese Yuan has appreciated by 40% in real terms over a decade. The Brazilian real had at one point almost doubled in value in real terms and even now is still 50% more expensive than it was in 2004. Go to the World Cup, and experience what that means for yourself. The Rouble too, is 40% more expensive in real terms than it was. If you are in Sochi, you probably realise what that means. But at the other end of the spectrum, whatever else is going wrong in South Africa, the rand has replaced the pound as the biggest FX faller in this list over the last decade, the Turkish Lira is correcting fast and the whole EMFX boom, in real terms anyway, rather passed the Mexico Peso by.

Perhaps it isn't surprising given the trend above, that the current account balance of the developed economies as a whole, should have improved by over USD 400bn per annum over this period. The developed economies now have a combined current account surplus. And by contrast, the surplus of the emerging and developing economies has, of course, shrunk. Indeed, in all probability some time this year the current account balance of 'EM' will be in deficit if we exclude China.

The shift in the balance of payments reflects in part the real appreciation of EM currencies and the real depreciation of the two most important developed economy currencies. But that still doesn't automatically mean that EM disaster in upon us. In 2007, just before everything went wrong, the EM world had a $600bn current account surplus, but an even bigger inflow of private capital, almost USD 700bn. The other side of that coin was a USD 1.2trn increase in EM central banks' currency reserves. Madness! We all thought everything would change after 2008 but in 2010-2012, the total private sector inflow into EM was $1.5trn, and FX reserves grew by another $2trn to mop as much of that up as possible.

So much investor capital has flowed into EM overall that the global financial system is inherently unstable and prone to the kind of volatility we are seeing. Really, am I supposed to be shocked by weekly flow data that show money still coming out of EM funds?

More facts: External debt of EM economies has risen from around $3trn in 2005 to about $7trn now but as  a share of exports, that total is actually down slightly from 80% to something a little above 75% today. It's above 100% GDP in Latin America and the CIS while in Central and Eastern Europe it's north of 150% of exports. It's around 50% of exports in Asia.

Finally, the big hornet's next is the growth of domestic debt, and this is a global rather than an EM problem. There is much debate about whether deflation is here, whether it's bad and whether there are good and bad kinds of deflation. The kind of deflation that will cause us all trouble will be the kind that results in nominal growth rates being too low to prevent debt/GDP ratios heading inexorably upwards. That's the biggest challenge facing Japan, Europe and as Chinese growth slows while debt grows very quickly, it will be more than a headache for the world's second biggest economy.

Saturday, 1 February 2014

Unravelling the global effects of mad money

Since some of my 'work' observations on currencies have been doing the rounds in the press over the last few days, I thought I'd lay out some broad thoughts on recent weakness in emerging market (and other) currencies. There's a danger in broad generalisation in a quick sweep through thirty years of the after-effects of very low US interest rates, but this is a blog not a research paper so here goes....

In 1993, when the Federal Reserve maintained interest rates at what was then perceived to be an astonishingly low level of 3% as the US economy recovered from the aftermath of the S&L crisis and the recession two years earlier, the seeds were sown for the 1990s Asian crisis.

When the central bank of the world's biggest economy decides that its domestic interests are best served by extraordinary monetary policy settings, policy-makers all over the world have to decide how to react. In 1993, by and large, Asian policy-makers' response was to continue to gradually liberalise the flow of money into and out of their economies, to maintain formal or informal pegs between their currencies and the US dollar and to let the good times roll. In countries like Thailand, the decision not to allow currencies to appreciate pretty much automatically resulted in US interest rates being imported into economies which were growing far too fast for 3% rates. What followed was a surge in both domestic credit growth and in foreign currency borrowing - if your central bank sets rates at 6%, the Fed is at 3% and you have a fixed exchange rate between your currency and the US dollar, why not just borrow cheap dollars?

The result through the early part of the 1990s was that a lot of Asian countries maintained competitive exchange rates and saw very rapid growth in credit. That was fine for a while but as US interest rates rose, it became problematic. It became clear to everyone that what looked like a credit 'boom' was a bubble and that too many golf courses, casinos and beach resorts had been built without regard for whether there was income enough to service the debts to pay for them - debts whose services costs were going up.

As growth slowed, bad debts ballooned and capital left their countries, Asian central banks found that they did not have enough currency reserves to stop the pressure on their (pegged) exchange rates, and were forced to choose between letting them fall (making the foreign currency debt problem worse), raising interest rates (causing an even greater economic downturn) or imposing capital controls. Different countries chose different paths but the Asian crisis followed and the next few years were spent trying to learn the lessons from the disaster.

The lessons which were learnt served Asia well in 2001-2012. As the Federal Reserve once again embarked on a policy of exceptionally easy monetary policy after 2000, Asian central banks were much more alert to the danger of poor lending practises and to the danger of foreign currency borrowing. They set about building vast war-chests of currency reserves to help defend themselves against future runs on their currencies. And they started to allow their currencies to float somewhat more freely, which mostly meant that they allowed them to appreciate against a US dollar anchored by low interest rates.

Because they avoided the worst excesses of credit growth in this period, Asian economies weathered the 2008 crisis much better than Europe and the US. But what came out of that period was even lower interest rates (3% Fed Funds in the 1990s become 1% Fed Funds in the 2000s and then zero Fed Funds in the 2010s) with the added twist of Quantitative Easing.

The challenge remained the same and was no longer in any way an 'Asian' problem or even one just for 'emerging' economies. The central bank of the world's biggest economy set interest rates at zero when the emerging market economies as a whole were enjoying real GDP growth of 7 1/2% in 2010. They faced the choice of allowing their currencies to appreciate sharply, of allowing domestic asset prices to rise and credit to grow because rates were too low, or of imposing capital controls. No wonder many complained they were in a currency war.

Different countries faced different domestic issues and reacted to the global environment in different ways. But if there is a common thread it is that most allowed their currencies, in nominal and even more in real terms, to appreciate more than they had in the early 1990s.  In 1993, a young backpacker wandering the world would generally have found that 'emerging economies' were cheap places to visit. By 2011, that was no longer the case. Again, it was not just an 'emerging market' story. In 1995, British people could go and enjoy cheap prices for winter sun in Australia, while young Australians came to London to earn better pay than they could get at home and see the world at the same time. Now, Australia's youth stays at home to serve beer to locals who enjoy watching their cricket team thrash England's.

When the notion of the Federal Reserve 'tapering' its bond purchases was first mooted last May, there was a temptation to ask whether that was important. Buying bonds more slowly is only a marginal shift and interest rates are still at zero, after all. However, a turn in the monetary policy cycle was signalled and was enough to trigger a violent response in asset markets. US bond yields rose and the currencies which had been allowed to appreciate in reponse to super-easy US monetary policy, started to fall back, chaotically in many cases.

The most positive way to look at the events of the last 9 months is that most of the central banks whose currencies are falling, probably welcome at least part of the adjustment. They didn't choose to have overvalued exchange rates, after all. What they chose was to allow the currency to take the strain of offsetting US monetary policy, which in turn allowed them to maintain some degree of control over domestic credit conditions. If I compare the modest sell-off we have seen in emerging market bonds, for example, with the larger moves we have seen in currencies, the conclusion is that the currency is doing its job of acting as a shock-absorber and this is a currency adjustment (so far) and not a crisis. In Australia, whose currency is now 20% cheaper than it was at its peak, there is no sense of crisis at all. In Argentina whose currency has fallen almost 20% in January, it's definitely a crisis.

Whether it is right to conclude that there is 'no crisis' is a matter of judgement. But I would draw three very broad conclusions:

Firstly, the willingness to allow currencies to act as a shock-absorber helps prevent the extremes of domestic credit imbalances which plagued Asia in the 1990s. That is a very good thing indeed in those countries which did allow their currencies to float more freely and did manage their domestic financial system more closely.

Secondly, given that we are still in the very early stages of the US policy nomalisation and since there are still an awful lot of countries whose currencies are far more expensive in real terms today than they were 10 years ago, it would be rash to assume that the adjustment is mostly complete.

And thirdly, since Fed policy was even more accommodative in this cycle than in the early 2000s or the 1990s, it isn't surprising that the scale of the capital flight from G3 economies into the rest of the world was much bigger this time and the accompanying asset inflation was also much greater. And so, the turmoil that can be caused by those flows being reversed, can also be greater than it was in the second half of the 1990s. Which is to say that even while I don't think this IS a crisis at this point, the risk of it becoming one is clear. Particularly in those countries where control of domestic asset inflation and credit creation was weakest.

Saturday, 11 January 2014

A short Saturday morning US jobs post

A quick run down of the US employment data and where it leaves this particular fool...

There are three charts to consider. The first shows falling unemployment rate, which is a function of the on-going decline in the labour force. That's been written about to death. At some point people will stop just leaving the labour force, but it hasn't happened yet. When they do, the pace of decline in the unemployment rate will slow, but the best estimate I have seen of the long-term trend growth rate of the US labour force is around 80,000 per month, which suggests that even yesterday's 74k increase in jobs is enough to keep the unemployment rate steady.

I've plotted it against the hourly earnings series, which has slowed to 1.8% y/y, and to 2% on a 3-month smoothed basis. Unemployment has fallen sharply but there's nothing pointing to any significant pick-up in wage growth yet. That will be yet another factor keeping consumer price inflation at bay.

The second chart shows the two measures of employment, the non-farm payroll series, plotted against the growth rate in employment from the household survey (the one that is used to measure the unemployment rate). Employment growth in the NFP series has slowed to 1.62% from 1.73%, and you'll excuse me I hope if I fail to get over-excited. The December payroll data were bad, albeit possibly excused by the weather, but the underlying trend in employment growth is close to long-term averages and still very consistent with a 'new-normal' economic recovery. Little has changed as a result of yesterday's soft headline and won't unless it is repeated for a couple more months. But the household survey shows employment growth of 0.8%, which is much worse. Even if I smooth it out, the gap is bigger than it has been since the late 1990s. Just looking at the two lines you can see that the (smaller) household survey is more volatile, but even so, the divergence is big enough that I for one will be watching it in the months ahead.

The last chart shows the NFP data, plotted against a 36-month standard deviation, i.e. a measure of the volatility of the series. Relative to recent norms, yesterday's number was a genuine outlier. If you glance across a the last period of low NFP volatility in the late 1990s, you can see that there were spikes, but they were followed by corrections. The lack of volatility in the US employment data is a source of optimism about this year's growth, because weather aside there isn't much which 'ought;' to cause a negative shock. In the 1995-1998 period, low employment volatility was accompanied by equity price gains, a strong dollar, and strengthening growth until the Fed 'blew it' by cutting rates and keeping them too low for too long after LTCM went bust -  re-fuelling the housing and dotcom booms. I take heart from both solid employment gains and the lack of volatility in the series, so a pick-up in vol would alarm me...

The jobs report poses questions about whether this was a one-month weather-induced outlier or something more meaningful. Most people will guess that it's the former, at least for a couple more months,. But the slowdown in wage growth either puts NAIRU even lower or says the wage/unemployment relationship is broken. Either way, the only inflation we should worry about is asset price inflation and the Fed seems happy to ignore that. The household survey meanwhile, needs to show employment growing faster or I'll start to really worry about that, too. And as a final aside, since no-one knows what to make of the jobs data, the big news was the fall in the US trade deficit as energy independence raises the attractive prospect of an economic recovery that is NOT accompanied by a widening deficit. In short, a recovery with much better balance between output and demand growth than we've been used to in the US. Oh, that we in the UK could dream of such balance in our recovery....

Sunday, 5 January 2014

UK and US monetary policy - designed in Monaco

The Sunday Times shadow MPC is voting for a rate hike in the UK. It won't make a blind bit of difference, what we will get instead is a bit of tinkering with the forward guidance the MPC use, to lower the rate unemployment needs to fall below before they will contemplate rate hikes.

The UK rate debate is echoed in the US, though it seems more vociferous here, and centres around the question of whether it is interest rate changes that matter, or the level of interest rates.  If you ever play with monetary policy rules, like the Taylor Rule, they will suggest appropriate rate levels, rather than moves and will definitely suggest that rates should be raised even when inflation is low. Their starting point is that there is a 'neutral interest rate' from which actual rates should differ as a function of how much slack there is in the economy and how far inflation is from target.

A standard Taylor rule estimate would put UK interest rates around 2% at the moment, on the basis of a 6 1/2% NAIRU and a 2% inflation rate target. Core CPI inflation is just below target and unemployment is not that far above target, so a real interest rate a little above zero would seem to make sense. You need to get NAIRU under 4% to justify current policy rates. That's even lower than the US (NAIRU at 4.3%) and of course far lower than the level of NAIRU which justifies current rates in Europe (around10%).

The Taylor rule isn't the holy grail of policy making, and it's certainly being ignored by central banks at the moment; but should rates to be kept at current (extraordinarily low) levels just because there is slack in the economy? On that basis, rates would be far below 'neutral' until there was no slack in the economy, or until growth was consistently above trend, and then they would have to rise very fast. It's the equivalent of keeping your foot hard down on the accelerator of a car until it's time to brake equally hard - more like how you might drive an F1 car round Monaco than a Ford Fiesta round Islington.

Setting rates too far from 'neutral', however that's measured, causes mis-allocation of capital. By keeping rates too low for too long a decade ago, the Fed provided the fertiliser that allowed the credit bubble to blossom so disastrously.  There are times when extraordinary monetary policy makes sense, but I'd like to see a return to rate levels that are higher, but still very low relative measures of 'neutral', as soon as it is safe to do so. So the question now, is whether it's 'safe' to take baby steps in the direction of nomalising policy, not whether it's time for policy to be 'tightened'?

For now,  the debate (in the UK and the US) is about whether rates should be raised or not, rather than whether they are at appropriate levels for economies with falling unemployment and above-trend growth rates. That's a  mindset which is friendly for asset prices and even if there is little risk that we see any significant upward pressure on either wage growth or inflation, it will continue to cause capital to be misallocated.