tag:blogger.com,1999:blog-37446159591680861602024-03-13T06:41:00.007-07:00Mardle CapitalMy day job involves forecasting financial markets. This blog won't do this. There are no market views, but I will write about anything else I care about as and when I have time..... Kit Juckeshttp://www.blogger.com/profile/07113766468208128928noreply@blogger.comBlogger74125tag:blogger.com,1999:blog-3744615959168086160.post-24655272975590623802024-01-28T02:32:00.000-08:002024-01-28T02:32:19.880-08:00The appeal - and perils - of working from home <p></p><div class="separator" style="clear: both; text-align: center;"><br /></div><p><br /></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEinosD7eS0SXUyrAw6q6XpcJGpp4zUh_3XtzrG93ItuxTpTkp1VbH_QSwraa_N69cL_fy29TLL0xgUI3Gn5Jes6ArtzIf9E73xUeerPJtKxxPD9dWH-HCV6eyzXPCZHS4r1HeXWrD_leXGJ8CkRKEd-CScz0KoYP8bLTwkFVQXD5X7ZH7eIJvq8wXJTlT8/s3701/DSC00424.jpeg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="2472" data-original-width="3701" height="268" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEinosD7eS0SXUyrAw6q6XpcJGpp4zUh_3XtzrG93ItuxTpTkp1VbH_QSwraa_N69cL_fy29TLL0xgUI3Gn5Jes6ArtzIf9E73xUeerPJtKxxPD9dWH-HCV6eyzXPCZHS4r1HeXWrD_leXGJ8CkRKEd-CScz0KoYP8bLTwkFVQXD5X7ZH7eIJvq8wXJTlT8/w448-h268/DSC00424.jpeg" width="448" /></a></div><div class="separator" style="clear: both; text-align: center;"><br /></div>The sad tale of Brittany Pietsch, who filmed herself being fired from her role as an account executive for a US tech company, should be a warning about the need for better management, training and performance assessment of junior staff. Maybe it's also a warning about the perils of trying to lead, manage and train in a world where face-to-face contact is diminished. My daughter told me about the viral TikTok video that resulted, and while I talked about the importance of being fair, clear and honest when taking away someone's livelihood, she suggested that some managers simply don't like telling their staff that performance isn't good enough and so don't help them improve. So someone at the start of their working career can be left with no clue how to do their job better. It's even harder for managers to mentor, train, help or evaluate junior staff in a hybrid working environment. If, as as is often the case, the managers have home offices (and would like to come into the office one or two days a week at most) while juniors are in flat-shares which encourage going in, say, three or four days a week, the chances of managers being effective are further reduced. <p></p><p>Some time before Covid, someone asked me how long I was planning to go on working and I replied, glibly, that I had no intention of stopping but I didn't know how long I wanted to go in for the 7 am morning meeting. My employer's relocation from the City to Canary Wharf and the explosion of low traffic neighbourhoods means that what used to be a 20-minute commute, is now an hour by public transport, 45 minutes by bike (downhill) or 45 minutes by car (on a Sunday morning or before 6:30 am in midweek). The result is that it is now over a year since I last went in for the morning meeting. I go in later instead. </p><p>The shift away from standalone Reuters, Telerate, Quotron or Bloomberg terminals (which were all tiny by comparison to anything you see on a trading desk today) and their replacement with huge banks of screens giving access to multiple applications, reduced human contact on trading floors years ago. The shift away from voice trading and the growth of email and chat, along with regulatory limits to who should have access to what information, has significantly changed the purpose of the cavernous trading floors of the 1980s and 1990s. There's still a strong case for a lot of trading/sales staff to be present on the floor, in order to reduce the risk of (expensive) mistakes, but those old clips of Masters of the Universe lording it over the floor and screaming abuse at everyone, have nothing to do with a modern trading business. </p><p>There is then, little point in my going into work first thing in the morning, and little benefit to being in the office to listen and watch the markets. It has become clear that the only reason to go in at all, is to talk, eat and occasionally drink with other people. Juniors need mentoring and managing, colleagues need to shoot the breeze, bosses need to be helped to say what they really think without hiding behind a Teams connection and clients need ideas. All of these can be done over breakfast, coffee, lunch, tea, drinks or dinner. And the nice thing is that while I like the view of the Wharf from home in the morning, the view from the Wharf is wonderful in the evening... </p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh31LIKpCm1nl2ZGKuBDKD7ILyKLnzRVwVK4iehsqcI_lPlHUrP8IXmEBtBPv6pvDBfg0mrsdQLPxr7uRYvB8a-MpskrPydGPA8IbIb971KM5MhqWg6ovSe-wMptPFQubhU31YiTKVRXRPSU80VNczfVBXdP0Rs3IL6JqBTMgP0jQnWJNJYsMQZ7ilZf18/s4032/IMG_1936.jpeg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="3024" data-original-width="4032" height="265" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh31LIKpCm1nl2ZGKuBDKD7ILyKLnzRVwVK4iehsqcI_lPlHUrP8IXmEBtBPv6pvDBfg0mrsdQLPxr7uRYvB8a-MpskrPydGPA8IbIb971KM5MhqWg6ovSe-wMptPFQubhU31YiTKVRXRPSU80VNczfVBXdP0Rs3IL6JqBTMgP0jQnWJNJYsMQZ7ilZf18/w432-h265/IMG_1936.jpeg" width="432" /></a></div><br /><div class="separator" style="clear: both; text-align: center;"><br /></div><br /><div class="separator" style="clear: both; text-align: center;"><br /></div><div class="separator" style="clear: both; text-align: center;"><br /></div><br /><p><br /></p><p><br /></p><p><br /></p><p><br /></p>Kit Juckeshttp://www.blogger.com/profile/07113766468208128928noreply@blogger.com0tag:blogger.com,1999:blog-3744615959168086160.post-18338494813735008242022-06-07T10:23:00.000-07:002022-06-07T10:23:16.293-07:00I sat there and I listened.....but I heard nothing<p>The debate about the merits of working from an office, or from home, will rage for years rather than months. Younger workers who live in shared accommodation, and need to be seen at work to speed promotion, have obvious incentives to go back. Factory floor workers, people who operate in tight-knit teams, or in people-facing roles, don’t have a choice. For older workers it’s more complicated but for many, the workplace is part of their social life. Middle-class, middle aged men meanwhile, may enjoy splitting work between the office, the home office and Dordogne office. </p><p>All of this begs a question at the outset - what is ‘the office’ for, in the age of the computer? I’ve spent the last 38 years working in financial markets, most of them as some kind of economist (the actual title on my business cards reflecting an attempt to boost my pay), usually on trading floors. </p><p>Trading floors have changed, however. <a href="https://youtu.be/8e1g-0n8iGo">This Youtube clip</a> shows Citi's FX trading floor in 1980, and captures the environment when I started, except that in London, there was more banter and more swearing. 'I sit here and I listen' says the head trader, who uses the information flowing all around him to make money. The edge that traders on large trading floors, seeing big flows, had over smaller firms and their clients, was very clear. I loved watching the flow of information and money, and I loved the environment. But that's not what a modern trading floor looks like! </p><p>This on the <a href="https://youtu.be/tszhLML2POc">Credit Agricole trading floor</a> is more corprorate, and more recent. When the presenter says that a few years ago he couldn’t have stood in the middle of the floor and been filmed like this, because of the noise, that struck a chord. If I sit in a modern trading floor and listen, I will hear and learn very little. </p><p>A third clip, from a few years back, shows a trader at <a href="https://youtu.be/xuCCeLlodkk">BNP Paribas in London</a>. He sits in front of a large bank of screens and uses technology to provide financial solutions for for his clients. There's a lot of Bloomberg in the picture and a lot of numbers. There's no banter and no information flowing around the room. </p><p>The trading floor is no longer the nerve-centre of a bank. It's a room full of (hopefully) smart people using technology and information to provide both simple and complex solutions to clients. There is still physical interaction going on; Huddles of people try to solve something; someone asks a colleague to watch phones (and screens) while he/she grabs a coffee, and so on. But the morning meeting isn’t a physical gathering before the market opens, because the market’s always open. Instead, it's a conference call. It's often easier to call someone 20 feet away than leave your desk to find them, standing up and shouting is frowned upon and anyway, it’s much harder with banks of screens. And that Credit Agricole trading floor is for traders, sales people and structurers. Not a suitable place for me to hang out, then! </p><p>A modern trading floor provides maximum information and analytical power to a workstation, filling as much screen space as can fit in front of one person, so that they can do their job to the best of their abilities. Doing that job involves computer-based analysis, electronic trading, electronic communication, and a smidgeon of actual old-fashioned face to face talking. If there’s information that can legally be gleaned from the flows through the system, an algorithm will do that and deliver it to the trader. </p><p>What I need to be in work to do, is those conversations that help build teams, improve the flow of information and encourage us to question what we think and really understand what’s happening in markets. On a different post years ago, I wrote about the importance of creating a ‘virtual pub’ to encourage people to challenge views. Now I realise, there’s little point in the pub being virtual!</p><p>After lockdown ended I used, at first, to go into work in time for the 7am morning meeting, and sit in a near-empty office. After a while, I decided it was more productive to do the meeting from home, and head in around 10am. Now I wonder whether I shouldn’t vary between getting in for lunch with colleagues or arrive later, simply to chat to a few of them and then go to the pub. Because discussing marketing or publication plans is best done at lunch and debating markets is always best done in a pub. </p><p>I can’t speak for other industries’ workplaces, but trading floors have changed dramatically in the last 30 years. So has the computing power available to me, both at home and at work, and the means of communication. We’ve come a long way since the days of carrier-pigeons bringing news from Waterloo.I think the decision about where and how to work can only be answered by understanding how the workplace has changed. A trading floor, and any other place of work, still serves a purpose; it’s just a different purpose from the one it used to serve. The pub, which started life as a Covent Garden coffee house, still serves the same purpose as it did in the City a hundred years ago. </p><p><br /></p>Kit Juckeshttp://www.blogger.com/profile/07113766468208128928noreply@blogger.com0tag:blogger.com,1999:blog-3744615959168086160.post-42983563027996569492021-08-02T01:33:00.000-07:002021-08-02T01:33:24.710-07:00A half-century of Dartmoor<p></p><div class="separator" style="clear: both; text-align: center;"><div class="separator" style="clear: both; text-align: center;"><a href="https://lh3.googleusercontent.com/-Q-Wwx1KlaKA/YQepLfhmHJI/AAAAAAAACRs/jWMlDEsF0cEOV2s9eHdAxUDM8Rew7rgvACLcBGAsYHQ/0533A4B5-843C-4983-8FA3-5B77148DCD77_1_105_c.jpeg" style="margin-left: 1em; margin-right: 1em;"><img alt="" data-original-height="724" data-original-width="1086" height="245" src="https://lh3.googleusercontent.com/-Q-Wwx1KlaKA/YQepLfhmHJI/AAAAAAAACRs/jWMlDEsF0cEOV2s9eHdAxUDM8Rew7rgvACLcBGAsYHQ/w415-h245/0533A4B5-843C-4983-8FA3-5B77148DCD77_1_105_c.jpeg" width="415" /></a></div><br /></div>A piece in the FT about 'The summer that changed my life' reminded me that it's 50 years since my parents bought a three-bedroomed house with neither mains electricity or water, at the end of a half-mile long track, on the edge of Dartmoor. My Dad had taken my brother and I, along with his parents, to stay for a few days at the Forest Inn at Hexworthy in the Spring of 1971. I remember walking onto the weird landscape of the moor, and wandering down to the river Dart where I watched wagtails and chaffinches flit between granite rocks while brown trout swam in the peaty water. I never wondered why we were there, but a few months later, we took the overnight ferry from Le Havre to Southampton and from there, we headed West along the A30, up and down, round bend after bend until we reached Devon. <p></p><p>My strongest memory of that first holiday is that I arrived with bronchitis, which turned into pneumonia after I ignored instructions to stay in bed and swam in the stream in my pyjamas. One of my father's brothers had brought his family down so there were eleven of us, camping in and around the house. Including four boys aged 9 and 10. My grandparents came to stay in a nearby hotel and given I was banned from outdoor frolicking, my grandfather taught the four boys how to play whist, then bridge, perhaps to reduce the amount of fighting that Monopoly seemed to cause. I coughed up a lot of green slime but developed a lifelong love for cards. As I recovered, I went for walks by the stream with my gran, and we found otters, buzzards, and a kestrel nest. The four boys made bows out of ash and arrows out of hazel. I lost a lot of arrows and killed nothing with a bow, then or since! We had sword fights with each other and with bracken, and we were learnt how to fly-fish. </p><p>Over the next decade, we came back again and again. My father took us on long walks across the moor and I morphed from skinny 9-year old to fat 11-year-old, resentful of the way Dad waited for me as I struggled up the hill, sitting on a rock until I caught up and heading off before I could catch my breath. Then I grew taller and ran on ahead. I played chess with my grandfather and racing demon with my gran, cast flies into the Dart and never minded not catching much. We went to Torquay to fish for mackerel, and occasionally to Start Point to swim in the sea, though my father never saw the point of leaving the moor. </p><p>I cycled here after I finished my A-levels, and came down with friends from University, either on the train or by car if anyone had one. When I brought my future wife down, we were dropped at the end of the lane in the pouring rain and I think she feared she was going to be murdered. Here we are again, but 15 years ago we bought a small cottage at the end of the lane, with electricity and wifi, so that I can come here without being divorced. My grandparents and parents have gone and the homes they lived in have been sold, leaving this as the one constant thread from my childhood. </p><p>Born in Kenya, brought up in France, I live in London but my roots are here. And one legacy of the pandemic is that I spend more time here, working with the sound of the stream in the background. Clients can tell where I am from the daily video I post but otherwise, the most practical difference between Canary Wharf, Highgate and Dartmoor is that the smallest building has the shortest distance between bed, kettle, and computer. Being dragged out of bed at the crack of dawn to 'help' milk the cows convinced me I didn't want to be a farmer, but if being up early is now the norm, at least I don't have to leave the house to get to the morning meeting. </p><p></p><div class="separator" style="clear: both; text-align: center;"><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://lh3.googleusercontent.com/-w9etzaaAzXo/YQep2HBuzlI/AAAAAAAACR8/ukUQF-Dw_80fcjYtCXC-0D4YKrcRleO7wCLcBGAsYHQ/5F255DBB-44C4-4E5C-BC76-4FDC5FD382CB_1_105_c.jpeg" style="margin-left: 1em; margin-right: 1em;"><img alt="" data-original-height="1024" data-original-width="768" height="313" src="https://lh3.googleusercontent.com/-w9etzaaAzXo/YQep2HBuzlI/AAAAAAAACR8/ukUQF-Dw_80fcjYtCXC-0D4YKrcRleO7wCLcBGAsYHQ/w287-h313/5F255DBB-44C4-4E5C-BC76-4FDC5FD382CB_1_105_c.jpeg" width="287" /></a></div><br /><br /><br /><p></p><p><br /></p>Kit Juckeshttp://www.blogger.com/profile/07113766468208128928noreply@blogger.com0tag:blogger.com,1999:blog-3744615959168086160.post-60395433638944537462019-09-22T07:52:00.000-07:002019-09-22T07:52:09.852-07:00What makes a currency powerful? The BIS <a href="https://www.bis.org/statistics/rpfx19_fx.pdf">Triennial Central Bank Survey</a> of foreign exchange turnover was released last week. There were, perhaps, two main headline for the press to report. Firstly, the Age of the Dollar persists, and secondly, London still dominates. <br />
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The dollar is one of the two currencies traded in 88.3% of transactions, far ahead of the second-placed currency, the euro (which is one-half of 32.3%). The top four currencies are the same as they were in the 2004 survey (the Swiss franc has been replaced in the top five by the Australian dollar) and the dollar's share has marginally increased in that period (from 88.0%). The UK's share of the OTC foreign exchange market has risen from 32% in 2004 to 43.1% now, while the US' share has fallen from 19.1% to 16.5%.<br />
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The fact that the FX market is still, as Brexit approaches, centered on London may at least mean that I don't have to move country again quite yet. There's a lot that should be written about changing nature of the industry and the challenges it - and the City - faces, but that's not today's story, which has two parts. Firstly, that the dollar's dominance is intact and what that means, and secondly that which currencies are used to transact foreign exchange doesn't really correlate very closely with which economies dominate global trade now. In both cases, China looms large.<br />
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On the surface, China is a 'loser' in this survey, at least to the extent that ambitions of challenging the dollar (in any make, shape or form) as the dominant global currency, are not being realised very fast. 0.1% of global FX trading took place in China in the last survey, much the same as was the case in 2004. The yuan meanwhile was involved in 0.1% of FX trades in 2004, and has risen to 4.3% now, taking it from 29th to 8th place in the overall rankings. That's progress, but it's still not to a dominant place.<br />
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There's no doubt that controlling the world's reserve currency has benefits for the US. For example, long-term capital flows into the US regularly lag the size of the current account deficit, because there are plenty of central bank flows to make up the difference was others try to prevent their currency from appreciating. Of course, the downside to that is evident now, as the dollar is overvalued when the President, at least, wishes it wasn't. More strategically important, is the ability of the US to leverage the dollar's status, for example by imposing fines on any firm which flouts US sanctions and allows dollars to flow in and out of prescribed countries. That allows the US to impose its geopolitical policy on there to a degree that isn't necessarily repaired the other way round. In turn, it irks any in Europe and Asia. Having more clout in Asia in particular, was one reason for the Chinese authorities to promote the use of the yuan in the first place.<br />
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What has happened with the euro however, demonstrates clearly how difficult it is to challenge the dollar's status. Back in 1992, the dollar was one-half of 82% of all transaction, while the second-placed Deutsche mark was involved in 39.6%. So the mark, back in 1992, had a bigger share than the euro does now - in second place with 32.3%. Is being in second place, meanwhile, much use? It's hard to see how it really helps the ECB or the Eurozone in general. On that basis, any ambitions that China might have to establish the yuan as a really big part of the FX market, regionally or globally, is a tall order - and might not really be worth the effort.<br />
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<b>But the size of the FX market, where, in what instruments and which currencies it takes, isn't the only measure of size that matters. </b><br />
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In another part of the BIS website, you can also find the calculations for real and nominal efective exchange rates, and <a href="https://www.bis.org/statistics/eer.htm">the trade weights the BIS uses to calculate them.</a> Back in 2004, China's share of global trade was a little below Japan's, and a little above the UK's. The US and the Eurozone were miles ahead of everyone else. Now, China is between the eurozone and the US, in second place in a market dominated by three really big players and a lot of smaller followers-on.<br />
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This means that China now has a big weighting in other countries' real effective exchange rates. And so, what happens to the Chinese yuan matters a lot. The table below shows how much of a weight each of the top 5 global currencies has in the effective exchange rates of the others. So, to take a politically-charged example, the pound is an important currency in Europe, with a weighting of 10.5% in the euro's trade-weighted value, but that's nowhere near the importance of the euro to the UK, with its 45% weighting. A major disruption to UK-Eurozone trade can hurt Europe, but would hurt the UK more. <br />
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If I just add up how much these 5 currencies matter for each other in total, I find that the euro is ore important than the others in driving effective exchange rates, but the yuan is more important than the dollar.<br />
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<b>Why does this matter? </b>Because China's currency policy may be becoming less passive (or more passive-aggressive). Between 2004 and 2016 the Chinese allowed the currency to appreciate in real terms by 60%, importing disinflation and exporting inflation to the rest of us. Re-orienting the economy away from exports and towards domestic source software growth played a part. Since mid-2016 however, the yuan has lost about 10% of its real value. That doesn't mean that the value of the currencyhas been manipulated, just that as the economy has slowed and the dollar has appreciated, the Chinese haven't always seen fit to intervene to keep the yuan strong to the same extent as they used to intervene to slow the pace of its appreciation.<br />
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The result has been that the other major currencies have all done better, in real effective terms, than a glance at bilateral exchange rates might suggest. The euro isn't as weak as a look at EUR/USD suggests, for example. But for the Chinese authorities, what this brings is clout. What the yuan's value does matters much more at a global level now, than it did before. Which begs another question - which would you rather focus on, the seemingly unattainable goal of grabbing some of the dollar's exorbitant privilege, or how to run your own currency policy to better effect, now that it affects even the biggest economies in the world?<br />
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<br />Kit Juckeshttp://www.blogger.com/profile/07113766468208128928noreply@blogger.com0tag:blogger.com,1999:blog-3744615959168086160.post-74975728764520588612019-08-11T09:03:00.001-07:002019-08-11T09:03:29.192-07:00“The dollar tends to fluctuate between been too high and being about right, but it has never been too low” Joe Gagnon <div class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0cm 0cm 0.0001pt;">
“Forget Tariffs. Here’s a better way to close the trade gap.” That’s the title of an article in <a href="https://www.barrons.com/articles/forget-tariffs-heres-a-better-way-to-close-the-trade-gap-51565348401?mod=hp_DAY_5">Barron’s</a> by Matthew Klein in which he argues in favour of a proposal by Senators Tammy Baldwin and Josh Hawley to require the Federal Reserve to keep the current account balanced around zero over 5-year periods. For the record, the US current account has been in deficit on average, by just over 2% GDP since the end the Bretton Woods era. <o:p></o:p></div>
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The view behind the Baldwin-Hawley Bill is that the US current account deficit is a product of Americans consistently spending more than they earn, not because of profligacy on their part but because of foreigners consuming less than they produce (and saving as a result), dumping the excess into the US market and displacing US output (and jobs, and income). These over-saving foreigners enthusiastically reinvest the money they earn back into the US and the upshot is that the dollar has been consistently overvalued. Mr Klein cites Joe Gagnon, a former Fed economist who now works for the Peterson Institute, observing that “The dollar tends to fluctuate between being too high and being about right, but it has never been too low”. <o:p></o:p></div>
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That’s an interesting statement, though it requires a caveat because what a currency being ‘too high’ means is up for interpretation. Broadly, there are two ways of looking at it, which come to different conclusions. The first is ‘PPP’-style valuation, which measures relative prices. That’s the valuation which matters if you’re tapping away on a keyboard by a swimming pool in a foreign country before heading out to dinner. The second is to look at where exchange rates are relative to a fundamental equilibrium that would be consistent with the current account being in balance (along with the rest of the economy) over the medium term. <o:p></o:p></div>
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On a PPP basis, the dollar has been a bit more than 10% overvalued on average over the last 20 years against the currencies of its top five trading counterparts. Perhaps unsurprisingly, the currency which has been, on average, most undervalued on a PPP basis against the dollar is the Chinese yuan. Today, the dollar is not only overvalued against all that group (yen euro, yuan, Mexican peso and Canadian dollar), but the only major currencies which are overvalued relative to the dollar are the Swiss franc and Norwegian krone, which are pretty much always overvalued on PPP. <o:p></o:p></div>
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Fair enough: on the basis of PPP, the dollar is unambiguously overvalued today. It’s a very expensive foreign holiday destination, especially if you’re British! On the other hand, back on 2011, when the Brazilian Finance Minister was complaining about currency wars and the dollar was anchored by QE, the dollar was undervalued against all the major currencies except for the Turkish Lira, Korean won and Mexican peso.<o:p></o:p></div>
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The most-accepted alternative measure of valuation is FEER, which looks at how much a country’s real effective exchange rate needs to adjust to be consistent with medium-term balance. In June the IMF conducted its <a href="https://www.imf.org/en/Publications/SPROLLs/External-Sector-Reports#sort=%40imfdate%20descending">2018 External Balance Assessment</a> and concluded that the dollar was 8% overvalued at the end of last year. It’s worth noting that the euro is also overvalued on this measure, by 6% (because the current account surplus is entirely due to the weakness of the economy, rather than the valuation of the currency). The most undervalued currencies, according to the IMF, were the Japanese yen, Malaysian ringgit, Turkish lira and Mexican peso. The Chinese yuan is about right and among the G10 currencies, Sterling and Swedish krona stand out as being undervalued. <o:p></o:p></div>
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The IMF hadn’t stated doing its external balance assessment back in 2011, when the dollar reached its post 2000 low. However, the Peterson Institute, where Mr Gagnon works, didn’t just make one assessment that year, it made two - in April and November (the dollar’s low was in July). And indeed, <a href="https://www.piie.com/publications/pb/pb11-18.pdf">they concluded</a> that the dollar was overvalued by 8 ½% in April, and 9.3% in REER terms in November. On which basis, it was still nearly 8% overvalued at its low point. The PIIE position therefore, might reasonable reflect Mr Gagnon’s that the dollar is sometimes overvalued, sometimes fairly valued but never undervalued – at least on a FEER basis. The yuan was 16% undervalued in 2011 meanwhile, and al the Asian ‘Tiger’ economies had very undervalued currencies. The euro was fairly valued (when EUR/USD was around 1.40). <o:p></o:p></div>
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The easy conclusion is that however we look at it, the dollar is overvalued now. And that is the view of the US administration, alongside anyone who thinks the US current account deficit is a product of foreigners ‘dumping’ their exports in the US at the expense of American workers.<o:p></o:p></div>
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I’m instinctively wary of that argument. Apart from anything, any argument that says the Swiss franc is undervalued fails to pass the common-sense test. In particular though, pinning all the blame for the US current account deficit on foreign rather than US behaviour, seems nearly as unfair as blaming everyone else for the UK’s (even larger) current account deficit. The US’ position in the global financial system means that, to varying degrees, we all import US monetary policy and that suits the US just fine when the dollar is cheaper (or less overvalued, if you will) but after the rest of the world was bludgeoned into boosting demand as the US ran very accommodative fiscal policy under President Reagan, and even when the dollar lost half its value between the 1985 peak and the end of the decade, the US still barley got the current account back into balance. The patsies then were the Japanese who embarked on policies to boost domestic demand that ended up with housing and equity bubbles, the hangover from which we call ‘Japanification’. Maybe it was all worth it to ‘win’ the Cold War, but the strong dollar of the mid 1980s was a product of US fiscal and monetary policy far, far more than it was the result of anything that anyone else was doing. <o:p></o:p></div>
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From a policy perspective, the US solution to its problem is the same as the one facing others when they find their exchange rates in the wrong place because of US policy. Global interest rates and bond yields are correlated and the US, because it has enjoyed stronger growth than other major economies, has higher rates and higher yields than others too. And so it has a strong currency. This is exacerbated by easy fiscal policy. If the US wants a weaker dollar (and a smaller current account deficits, for that matter) it needs tighter fiscal policy and easier Fed policy, dragging US yields down to everyone else’s levels. If it wants to run domestic policies with no regard for anyone else, as it has always done, it may find out that like everyone else, it can’t go on doing that for ever. And if we find out that the US economic out-performance is unsustainable in a joined-up global economy (one that is suffering from a trade downturn as well as self-inflicted harm in the UK and the Eurozone) then we may indeed find that the next trough in US rates and yields is lower than the last one and not that dissimilar to what other major economies are already seeing. <o:p></o:p></div>
Kit Juckeshttp://www.blogger.com/profile/07113766468208128928noreply@blogger.com0tag:blogger.com,1999:blog-3744615959168086160.post-58603758229060969632018-11-11T03:43:00.000-08:002018-11-11T03:43:01.013-08:0011-11-11 2018. George, Thomas and Roland.....My paternal grandfather was the youngest of six children born to Ambrose and Henrietta Juckes. Ambrose was the son of a Shropshire farmer, who became a doctor and spent much of his working life in Horsham, in Sussex.<br />
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Ambrose and Henrietta's four sons were dispatched to King's Canterbury. The eldest, Ralph, went on to Cambridge and then signed up for the Royal Engineers. The second, George, went to St Bart's to study medicine and on to Cambridge before signing up with the Rifle Brigade. The third son, Thomas, finished school in the summer of 1914 and signed up for the Sussex Regiment. The fourth, Richard, was 16 years old when the war ended. He survived the war along with his two sisters and Ralph, who was awarded the Military Cross in 1916, by which time both his brothers had been killed in 1915 Richard was my grandfather and told me stories of long summers in the 1920s when he rode horses, played cricket and tennis. It seemed idyllic when described that way, but perhaps not so much for the broken-hearted mother of two dead sons.<br />
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Ralph and Richard both become schoolmasters and after the second world war, farmers in Gloucestershire. Ralph's eldest son, Roland, joined the Royal Engineers like his father, and was also awarded the Military Cross, in 1944, but died soon after the commendation was made. My father, eldest son of the youngest of the Dr Ambrose Juckes' sons, was too young to fight in that war, and so her survived and so here I am. A beneficiary of the good fortune to have a grandfather too young for the first war and a father too young for the second. My mother's father signed up for the first war by lying about his age and survived but that's a story for another day. My father had four brothers and between them, they had seven sons and eight daughters, none of whom have had to fight in any wars at all. Not that there haven't been wars and sacrifices since 1945 - but by their scale they haven't caused the same devastation to a generation of young British men as the two big wars did.<br />
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Nor has anything we have done since wreaked the kind of economic devastation that the two wars did. I enjoyed David Smith's column in the Sunday Times this morning. If you don't like the paywall here's <a href="http://www.economicsuk.com/blog/">the link</a> to his webpage. Citing Nick Crafts of Warwick University, he writes...<span style="caret-color: rgb(102, 102, 102); color: #666666; font-family: "Trebuchet MS", Geneva, sans-serif; font-size: 16px;"> </span><br />
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<span style="caret-color: rgb(102, 102, 102); color: #666666; font-size: 16px; font-weight: normal;"><span style="font-family: inherit;">“Britain incurred 715,000 military deaths (with more than twice that number wounded) and the destruction of 3.6% of its human capital, 10% of its domestic and 24% of its overseas assets, and spent well over 25% of its GDP on the war effort between 1915 and 1918.” </span></span><br />
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But, as he points out, this was only part of the effect, as “economic damage continued to accrue throughout the 1920s and beyond”. The Great War ushered in a period of high unemployment and high government debt, with the last of the latter not paid off until three years ago under George Osborne’s chancellorship. Government debt rose above 100% of GDP in 1916 and did not come back down below that level (having hit 259% of GDP in the immediate aftermath of WW2) until 1963.<br />
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100 years after the Armistice, 10 years after the start of the global financial crisis, and 4 1/2 months away from our self-imposed exit from the European Union, I can't hep thinking that the lesson for policy-makers is walls that it's better not to absolutely mess things up, than to search for some impossible utopia. <br />
<br />These three share my name and my heritage and made sacrifices on my behalf long before I was born. So I won't forget them.<br />
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<a href="http://1.bp.blogspot.com/-xslvIX0Bem8/W-gAC9EnbMI/AAAAAAAACAs/QaExinVV_d4_8yP9lfFaR_UN2RrdEmWVwCK4BGAYYCw/s1600/Screen%2BShot%2B2018-11-11%2Bat%2B10.08.31.png" imageanchor="1"><img border="0" height="204" src="https://1.bp.blogspot.com/-xslvIX0Bem8/W-gAC9EnbMI/AAAAAAAACAs/QaExinVV_d4_8yP9lfFaR_UN2RrdEmWVwCK4BGAYYCw/s640/Screen%2BShot%2B2018-11-11%2Bat%2B10.08.31.png" width="640" /></a><br />
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<a href="http://1.bp.blogspot.com/-Yp6hjWU4WYs/W-gAaSUNvOI/AAAAAAAACA4/z9QI8-U2RFodETNV5PRvOx07GTBCMq6uwCK4BGAYYCw/s1600/Screen%2BShot%2B2018-11-11%2Bat%2B10.11.15.png" imageanchor="1"><img border="0" height="206" src="https://1.bp.blogspot.com/-Yp6hjWU4WYs/W-gAaSUNvOI/AAAAAAAACA4/z9QI8-U2RFodETNV5PRvOx07GTBCMq6uwCK4BGAYYCw/s640/Screen%2BShot%2B2018-11-11%2Bat%2B10.11.15.png" width="640" /></a><br />
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The memorial to Thomas Roland Juckes, next to Le Pont du Capitaine Juckes, in Bures sur Dives.<br />
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<a href="http://1.bp.blogspot.com/-5FPlYdzP_Dk/W-gErXXZuQI/AAAAAAAACBE/6qWWe1uko68jsg2CNB3v3x25Ck1vHBNSQCK4BGAYYCw/s1600/Screen%2BShot%2B2018-11-11%2Bat%2B10.29.08.png" imageanchor="1"><img border="0" height="301" src="https://1.bp.blogspot.com/-5FPlYdzP_Dk/W-gErXXZuQI/AAAAAAAACBE/6qWWe1uko68jsg2CNB3v3x25Ck1vHBNSQCK4BGAYYCw/s400/Screen%2BShot%2B2018-11-11%2Bat%2B10.29.08.png" width="400" /></a><br />
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<br />Kit Juckeshttp://www.blogger.com/profile/07113766468208128928noreply@blogger.com0tag:blogger.com,1999:blog-3744615959168086160.post-46868121320294192732018-09-16T04:38:00.001-07:002018-09-16T04:38:56.988-07:00Testing podcastsI thought I'd try podcasting. Feel free to ignore me......<a href="https://soundcloud.com/user-985843654/final-test/s-8quMr">10 years on</a>Kit Juckeshttp://www.blogger.com/profile/07113766468208128928noreply@blogger.com0tag:blogger.com,1999:blog-3744615959168086160.post-33140447522207276112017-06-25T02:06:00.000-07:002017-06-25T02:06:40.654-07:00A change of plan? Random thoughts prompted by Tony Yates. <a href="https://twitter.com/t0nyyates/status/878280506172944384">Tony Yates </a>wrote a post on his blog on Friday- <a href="https://longandvariable.wordpress.com/2017/06/23/balance-sheet-shrinkage-so-soon/">Balance sheet shrinkage: so soon?</a> - asking why the Fed is considering reducing the size of its balance sheet, while interest rates are still very low. People who spend their days staring at screens and messing around in financial market impact tend to think more about what policy-makers will do and what it will mean for markets, than about why they are doing something. Maybe shrinking the balance sheet is the lesser of two evils (the other being to go on increasing interest rates at the current pace in the face of low inflation. Or perhaps they just think the markets are in a good state to cope with them acting now, and it's just a pragmatic decision. But it does suggest that the Fed, at least, is still uncertain about the long-term implications of carrying a lot of assets on its balance sheet.<br />
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In the beginning, central banks' first steps into the murky waters of 'QE' were tentative. They clearly wanted to buy as much as necessary but as little as possible, frightened of long-term side-effects that they couldn't yet contemplate. The same was true of negative interest rates. But as time has gone on, we and they (the Fed et al) have started feel that we understand the impact of central bank intervention in bond markets little more. And yes, a little knowledge really can be very dangerous!<br />
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When the Fed first bought bonds, there was a flurry of research papers trying to gauge how big the impact would be on bond yields, particularly he yield on longer-dated Treasuries. Disentangling the relative importance of the bond-buying from the accompanying (super-low) interest rates, along with the longer-term economic consequences of the financial crisis (modest growth in GDP, low wage growth and below-target inflation inter alia) was never going to be straight-forward. But it's been easier for the sell-side research community to get its head around what bond-buying meant for the yield spread between government debt and the other bonds that investors were being crowded into. These three charts, posted on twitter over the last few weeks from research reports written by BofA Merrill Lynch and Citi's Matt King, sum up the state of thinking.<br />
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<a href="https://1.bp.blogspot.com/-Y28_svg7-JY/WU9mm53Cb9I/AAAAAAAAB8U/F8JqW3T-2JguZVcL5_f_PkViCpzBrY6qACLcBGAs/s1600/Screen%2BShot%2B2017-06-25%2Bat%2B07.51.24.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="360" data-original-width="605" height="235" src="https://1.bp.blogspot.com/-Y28_svg7-JY/WU9mm53Cb9I/AAAAAAAAB8U/F8JqW3T-2JguZVcL5_f_PkViCpzBrY6qACLcBGAs/s400/Screen%2BShot%2B2017-06-25%2Bat%2B07.51.24.png" width="400" /></a></div>
1) The net supply of bonds to the private sector investor universe has dwindled to almost nothing, if central bank buying is subtracted. A disaster if you are trying to get some decent yield into your pension portfolio, a recipe for investors to go hunting in ever more exotic places in their search for yield. Hundred-year Argentina bonds anyone?<br />
<a href="https://4.bp.blogspot.com/-t9tvnkA1Ho4/WU9m3x2vC4I/AAAAAAAAB8g/MRlQT69jW-4YanOeMEI84WFoyy9izAqZQCLcBGAs/s1600/Screen%2BShot%2B2017-06-21%2Bat%2B15.59.53.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="564" data-original-width="612" height="367" src="https://4.bp.blogspot.com/-t9tvnkA1Ho4/WU9m3x2vC4I/AAAAAAAAB8g/MRlQT69jW-4YanOeMEI84WFoyy9izAqZQCLcBGAs/s400/Screen%2BShot%2B2017-06-21%2Bat%2B15.59.53.png" width="400" /></a><br />
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2) A similar story from Matt King - if the Fed stats selling, global bond issuance goes from just below zero in 2016, and a few hundred billion dollars in 2017, to $1.5trn in 2018. And in the third picture, which is a blow-up of the top-right chart in the second, you can see the conclusion he reaches: less buying of bonds by the Fed et al is bad for corporate bonds and implies wider spreads.<br />
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Note that these aren't just charts of Fed bond-buying. They show global asset purchases, and maybe that too plays a part in Fed thinking: If what markets are sensitive to is the collective actions of central banks, maybe it's better to be first to shed excess assets, rather than waiting for the ECB, BOJ and Bank of England to join in, by which time any impact on credit spreads (and on absolute yields) will already be being felt and Fed action would exacerbate it.<br />
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I also think it's interesting to consider that the actions of the Fed affect markets differently than the action of other central banks. The next chart highlights the challenge facing the ECB and comes from their latest <a href="https://www.ecb.europa.eu/pub/economic-bulletin/html/eb201704.en.html">Economic Bulletin</a> showing the impact of ECB bond-buying on various investor communities.<br />
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<a href="https://2.bp.blogspot.com/-AJ8y6iN6Mb0/WU9mm9O1OFI/AAAAAAAAB8k/sat6knkMiNkFcrmGKGmv3rk3YnfzRCWhwCEwYBhgL/s1600/Screen%2BShot%2B2017-06-25%2Bat%2B07.55.57.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="457" data-original-width="662" height="440" src="https://2.bp.blogspot.com/-AJ8y6iN6Mb0/WU9mm9O1OFI/AAAAAAAAB8k/sat6knkMiNkFcrmGKGmv3rk3YnfzRCWhwCEwYBhgL/s640/Screen%2BShot%2B2017-06-25%2Bat%2B07.55.57.png" width="640" /></a></div>
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The ECB estimates that the Eurosystem owns EUR 1.1trn more government bonds than they would have otherwise, as a result of activities between March 2015 and march 2017. A little more than half of that has come as a result of crowding out European banks and investors, and a little under half has come as a result of crowding out foreign investors. It doesn't take a huge leap of faith to conclude that where the main impact of goal bond-buying globally (and Fed buying in particular) has been on credit spreads, the impact of the ECB being has also been felt in the currency market, as foreign investors were squeezed out of euro-denominated assets (and Europeans were squeezed out of euros, for that matter).<br />
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Where does that leave me, as I ponder Tony's question - has the Fed changed its plan and if so, why? Tony's implicit conclusion is that the Fed has changed its plan and he suggests hostility from politicians as a possible reason. Two more spring to mind if I think the Fed is, in part, simply being pragmatic.<br />
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Firstly, they might have changed course because the possible effects of running down the balance sheet - somewhat higher longer-dated yields, wider credit spreads, and maybe a knock-on to equity markets - would suit them. In a world where they face criticism for raising rates at the same time as they make little or no progress towards hitting their inflation target, maybe it's easier to shift attention slightly to the balance sheet. They always wanted to normalise it, and there's reasonable evidence that buying bonds has distorted asset markets. So why not do so that at a time when credit spreads are tight, global bond market are buoyant and the equity market is making new highs? Secondly, they'd much rather be the first major central bank to run down its holdings, than the last. Better not to sell into a crowded market.<br />
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The ECB faces a different problem. Concerns about the euro rising as they back scale bank bond-buying, just as it fell when they instigated the programme, seem hard to get around unless they just opt not to taper, and not to even think about thinking about raising rates.<br />
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<br />Kit Juckeshttp://www.blogger.com/profile/07113766468208128928noreply@blogger.com0tag:blogger.com,1999:blog-3744615959168086160.post-39822608485841842852017-04-17T03:53:00.000-07:002017-04-17T03:53:37.335-07:00Ben Bernanke and the case for lower for even longer <span style="font-family: Arial, Helvetica, sans-serif;">Michael Kiley and John Roberts, two Federal reserve economists, have produced a beautiful paper on <a href="https://www.brookings.edu/wp-content/uploads/2017/03/5_kileyroberts.pdf">Monetary policy in a low-interest rate world</a> which in turn prompted ex Fed Chairman (and easy policy champion par excellence) Ben Bernanke to write not one but two articles in Brookings last week: <a href="https://www.brookings.edu/blog/ben-bernanke/2017/04/12/how-big-a-problem-is-the-zero-lower-bound-on-interest-rates/">How big a problem is the zero lower bound on interest rates?</a> and <a href="https://www.brookings.edu/blog/ben-bernanke/2017/04/13/the-zero-lower-bound-on-interest-rates-how-should-the-fed-respond/">The zero lower bound on interest rates: How should the Fed respond? </a></span><br />
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<span style="font-family: Arial, Helvetica, sans-serif;">Mr Bernanke's man points can be summed up with a few quotes:</span><br />
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<span style="background-color: #fafafa; color: #101010; font-family: Arial, Helvetica, sans-serif;"><i>Using econometric models to simulate the performance of the U.S. economy, Kiley and Roberts (KR) find that, under certain assumptions, in the future short-term interest rates could be at zero as much as 30 to 40 percent of the time, hobbling the ability of the Fed to ease monetary policy when needed. As a result, their simulations predict that future economic performance will be poor on average, with inflation well below the Fed’s 2 percent target and output below its potential.</i></span><br />
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<span style="font-family: Arial, Helvetica, sans-serif;"><span style="background-color: #fafafa; color: #101010; font-style: italic;">One potential solution to this problem,</span><a class="js-external-link" href="https://www.imf.org/external/pubs/ft/spn/2010/spn1003.pdf" style="border-bottom-color: rgb(220, 42, 42); border-bottom-style: dotted; border-width: 0px 0px 1px; box-sizing: inherit; color: #dc2a2a; font-style: italic; line-height: inherit; margin: 0px; padding: 0px; text-decoration: none; vertical-align: baseline;" target="_blank"> suggested by leading economists like Olivier Blanchard</a><span style="background-color: #fafafa; color: #101010;"><i>, is for the Fed to raise its inflation target.....</i></span><span style="background-color: #fafafa; color: #101010;"><i>There are, however, some reasons that raising the Fed’s inflation target might not be such a good idea....</i></span><i><span style="background-color: #fafafa; color: #101010;">Another alternative would be to try to implement the optimal “make-up” strategy, in which the Fed commits to compensating for the effects of the ZLB by holding rates low for a time after the ZLB no longer binds, with the length of the make-up period explicitly depending on the severity of the ZLB episode. KR consider several policies of this type and show in their simulations that such policies reduce the frequency of ZLB episodes and largely eliminate their costs, while keeping average inflation close to 2 percent.</span><span style="background-color: #fafafa; color: #101010;"> </span></i></span><br />
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<span style="font-family: Arial, Helvetica, sans-serif;"><span style="background-color: #fafafa;"><span style="color: #101010;">The basic premise of the Kiley/Roberts paper is that if the 'neutral' real interest rate is as low as 1% (which is broadly what most analyses conclude), then the neutral nominal rate with a 2% inflation target is 3%. And if neutral rates in minimal terms are at 3%, rather than, say 6%, then the chances that rates ought to be below zero at some pint in the economic cycle are high. which, in turn, causes a huge problem if the </span></span></span><span style="color: #101010; font-family: Arial, Helvetica, sans-serif;">zero lower bound makes getting inflation back up to target in economic downturn harder. And that means that there's a bias, with a risk that inflation will be below target more frequently and output below potential more frequently, risking a vicious spiral as the central bank fails to get output back on trend. Hence the Bernanke solution - a deliberate policy of keeping policy to easy into an economic upswing, temporarily ignoring upside inflationary risks. </span><br />
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<span style="color: #101010; font-family: Arial, Helvetica, sans-serif;">This is interesting because it seems (to me, anyway) that this is exactly what current fed policy looks like. Old-fashioned measures of a potential output suggest that with the economy at or close to full employment (the weakness of wage growth notwithstanding), there isn't much slack left. So rates 'ought' to be headed to neutral (3% in nominal terms) pretty briskly. And yet, while the FOMC 'dot-plot' does get to 3% 'in the longer run', insouciance at the market pricing which undershoots the dots, and the tone of Fed commentary, both suggest that there is a deliberate bias not to rush. <table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://4.bp.blogspot.com/-dD04MxycfGc/WPSapzZQlgI/AAAAAAAAB7w/X-v_m0KaTUoj8mF0rK3xRZCXHctiJSrEQCLcB/s1600/Screen%2BShot%2B2017-04-17%2Bat%2B08.37.01.png" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="417" src="https://4.bp.blogspot.com/-dD04MxycfGc/WPSapzZQlgI/AAAAAAAAB7w/X-v_m0KaTUoj8mF0rK3xRZCXHctiJSrEQCLcB/s640/Screen%2BShot%2B2017-04-17%2Bat%2B08.37.01.png" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Measures of neutral real rates (mind you, however we look at them we're a long way below neutral). </td></tr>
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<span style="color: #101010; font-family: Arial, Helvetica, sans-serif;">I have one fundamental issue with the whole argument however, and that's the idea that potential output is in some way related to inflation in the shortish-term. Downward-pressure on inflation from globalisation and more recently from technology, means that 'potential output' needs to be thought of in terms that go beyond 'non-inflationary output'. </span><br />
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<span style="color: #101010; font-family: Arial, Helvetica, sans-serif;">This means that if measures of 'neutral' rates are trying to be consistent with steady low inflation, they will be inconsistent with wider stability, in asset prices, in the balance of payments and in debt levels in particular. Of course, that brings me back to <a href="https://www.bis.org/speeches/sp160914.pdf">Claudio Borio</a> and the importance of a financial stability-oriented monetary policy framework. </span><br />
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<span style="color: #101010; font-family: Arial, Helvetica, sans-serif;">Two slightly more market-related conclusions are firstly that despite the BIS' work, and in contrast to other central banks, the Fed still has a bias deep within its core, to favour 'lower for longer' policies, and secondly that the dollar's previous major bull markets have come when real rates in the US have been well-known above all measures of r*. To say that's not the case at the moment would be a huge under-statement. </span><br />
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<span style="color: #101010; font-family: Arial, Helvetica, sans-serif;"><br /></span>Kit Juckeshttp://www.blogger.com/profile/07113766468208128928noreply@blogger.com0tag:blogger.com,1999:blog-3744615959168086160.post-49909229414463299212017-04-01T01:32:00.000-07:002017-04-01T01:32:00.507-07:00The rise and rise of debt, correlation and commotion The rise and rise of debt, correlation and commotion<br />
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<a href="https://www.economist.com/news/economics-brief/21705672-fixed-exchange-rate-monetary-autonomy-and-free-flow-capital-are-incompatible">Trilemma/dilemma</a> + <a href="https://www.amazon.co.uk/Second-Machine-Age-Prosperity-Technologies/dp/0393239357">The Second Machine Age </a> + <a href="https://www.bis.org/speeches/sp170307.pdf">Financial Sector Drag vs Secular Stagnation </a> =<br />
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If economics is perceived as a dismal science then the onus on economists is to make it less so.<br />
If I could only persuade my teenage children to read one book, one magazine article and one slide-show of a speech in order to pique their interest in the subject, I'd have them read the Economist on Helen Rey's Trilemma, look through the slides of Claudio Borio's speech to the NABE a few weeks ago, and then settle down to read Brynjolfsson and Mcafee's "The Second machine Age" over the Easter holidays. <br />
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The chart captures the whole of my career, which started after I left university in 1984. Lower and lower real interest rates, higher and higher debt levels.<br />
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Professor Rey argues, convincingly, that in today's connected global economy, if you have relatively free capital flows you can't have monetary independence whether you let you exchange rate float freely or not. She observes, in the process, that asset price movements are correlate and are to a significant degree a function of the policies of the US Federal Reserve. Put it another way - Fed policy drives all markets, and increases asset correlation as well as leading us to a world where risk is either 'on' or 'off'.<br />
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Claudio Borio makes the simple observation that monetary policy which is consistent with equilibrium in the real economy but not in the financial sector, isn't an equilibrium interest rate at all. This is so obviously true it took a genius to point it out. If interest rate-setting central banks are only judged by a mandate of an inflation target and an economy at full employment, they may have a tendency to set rates at levels which allow the kind of ever-upward march in debt levels seen in the chart. If they took the idea of financial stability seriously, they would set policy differently, but it's not directly part of their mandate and as we can all see at the moment, fear of too-low consumer price inflation is still delivering interest rats that risk increasing global debt.<br />
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The Second Machine Age is just a great book in its own right. But it does help explain why low unemployment might not be associated with wage-induced inflation and indeed why inflation might stay low regardless of where interest rates are set by the Fed, the ECB and any other central bank.<br />
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If technology is the main driver of subdued wage growth and inflation; if US interest rates are set at levels to keep inflation down when it's down anyway; and if the rest of us import Fed policy through the global finance system, then we can just get used to asset price volatility being depressed, asset prices being hyper-correlated, debt levels going up and the profit share of GDP in most countries. marching slowly higher. All with sporadic episodes when markets that can't adequately price risk are exposed to sudden re-pricing on (often politically-inspired) surprises.<br />
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<br />Kit Juckeshttp://www.blogger.com/profile/07113766468208128928noreply@blogger.com0tag:blogger.com,1999:blog-3744615959168086160.post-21732043227249034272017-03-19T02:32:00.002-07:002017-03-19T02:32:38.556-07:00Meetings - why do we have to have the stupid things given that they are almost universally perceived as one of the banes of working life? The best article I've read about meetings was by written by Antony Jay for the Harvard Business Review in 1976 <a href="https://hbr.org/1976/03/how-to-run-a-meeting">https://hbr.org/1976/03/how-to-run-a-meeting</a> and he kicks off with the comment that <i>"<span style="background-color: white; color: #222222; font-family: Guardian;">A </span><span style="background-color: white; color: #222222; font-family: Guardian;">great many meetings waste a great deal of everyone’s time....long-established committees are little more than memorials to dead problems". </span></i><br />
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<span style="background-color: white;"><span style="color: #222222; font-family: Guardian;">Meetings can be divided into three broad types. 'Town Hall' meetings, 'Cabinet' meetings and 'Pub' meetings. The Town Mall meeting is a gathering for leaders/bosses or others to impart information and can be as big as you like. Cabinet meetings are part theatre as little is denied but they are there to reinforce the importance of the members of the cabinet and to ensure that everyone its been by each other to sign off on an agreed plan. And a Pub meeting is a place for creative debate that rarely takes place in a pub at all. </span></span><br />
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<span style="color: #222222; font-family: Guardian;">The Town Hall </span><br />
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<span style="background-color: white;"><span style="color: #222222; font-family: Guardian;">The </span></span><span style="color: #222222; font-family: Guardian;">boss wants to give the troops an update on the firm's performance over the last year, outline the key takeaways from the senior management team's offsite in Monaco, and send some motivational messages to help encourage everyone to work even harder in the months ahead. He or she instructs someone to prepare a powerpoint presentation with the financial results on it, the key goals, some metrics on profitability, on the trend in the workforce, perhaps on the trend in compensation. The boss then stands at the front of the room, goes through the slides, and opens the floor to questions at which point a few brave souls ask a few bland questions, depending on part on how many people there are listening. </span><br />
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<span style="color: #222222; font-family: Guardian;">It's possible to do these well, but it's more common to do them very badly. In the best case, the speaker is a motivational, charismatic leader who doesn't need a powerpoint to help sell a vision of the future. If there are slides they are for reference on technical issues. The listener leaves impressed by the vision and by the passion of the visionary. </span><br />
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<span style="color: #222222; font-family: Guardian;">In the worst case, the speaker hasn't really read through the slides properly in advance and so is left mumbling his or her way through them, reading off the screen. Perhaps the VC equipment wasn't tested much in advance and a technician needs to be summoned early in the presentation. There is little ad-libbing and so even less passion or motivation. There may be questions but the overall sense as the listeners leave, is of deflation. A ritual has been accomplished, because it is a ritual obligation of management to talk to the common workers occasionally, but little has been achieved and an opportunity has been missed. </span><br />
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The cabinet meeting<br />
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<span style="background-color: white;"><span style="color: #222222; font-family: Guardian;">A cabinet or committee meeting is a social structure, where a group gets together to formally reach agreement, and where the members can be seen to be reaching agreement. The group shares information which others may not have, reasserting its own exclusivity. It may have the meeting at a time and in a place where other lesser mortals know it's happening, which boosts prestige. It offers a chance for the members to reinforce their status relative to each other. But the key to these meetings is that they can only reach significant agreement if there has been sufficient preparation. Issues have been debated in smaller groups over a period of time and the purpose of the final gathering is to iron out the last wrinkles, put the finishing touches on the plan and to be seen to be in collective agreement so that there is collective </span></span><span style="color: #222222; font-family: Guardian;">accountability. N</span>o-one can easily say they were never part of the agreement.<br />
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So it's a meeting to agree something that's already been agreed. I'm sure there are some things that are agreed at a cabinet meeting but the preparation work has been done in advance. A proposal was made, the meeting participants were canvased, their views heard. The t's are crossed and the i's are dotted at the meeting itself but the purpose is for everyone to see the body-language, and then there's photo-opportunity, or a signing ceremony or some sort of mutual affirmation. <br />
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The failure of a vast number of meetings in real life, is that they should be this kind, where the groundwork has been done long in advance, but instead there is some absurd hope that a group of 20-odd people can get together, discuss, debate and agree something from a standing start in an hour-long meeting. It's impossible for a host of reasons but the most important is that there's so much ritual involved in this kind of meeting. Who sits where, who speaks when, who is trying to impress the boss, who is competing with whom to be a bigger cheese week than they were last, and so on. If you chair meetings of 6 to 20 people in a work environment and want to understand a bit of the underlying psychology, try asking the members whether they mind the meeting being filmed for training purposes and stick a few discrete cameras in the corners of the room. There will be people trying to get a word in edgeways who are ignored. There will be people whose sole purpose is to disagree with their competitors. There will be body-language galore as our inner ape goes into overdrive.<br />
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I've sat through some good meetings on business planning, some meetings where the homework that had been done in advance really paid off and strategic plans were proposed, debated from the perspective off everyone having already done a lot of thinking abut them, and agreement reached. I've sat in more and ones were someone was mad enough to think that 20 people could brainstorm a subject and come up with an interesting plan in an hour. Some of the most awful of these meetings, where presenters drone on, anyone who asks a question is scowled at because that makes the meeting drag on for even longer and where the only thing that is certain is that the group will not take genuine collective ownership of the conclusions, can be found in investment forecasting and strategy. A better recipe for half-hearted groupthink is hard to imagine. </div>
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Which is why I prefer the 'Pub' meeting, <span style="color: #222222; font-family: Guardian;">where issues really are debated and a relatively blank canvas is covered with ideas and eventually a plan. </span><span style="color: #222222; font-family: Guardian;">The image in my mind of a pub argument is of people jabbing fingers in each others faces, sometimes disagreeing loudly, sometimes agreeing joyously, always walking out arm in arm. </span></div>
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<span style="color: #222222; font-family: Guardian;">In practice, these meetings can only happen in pubs if all the members of the group are</span><span style="color: #222222; font-family: Guardian;"> the kind of people comfortable in a pub. And I'm not sure that you can have even as many as ten people participating. But wherever the meeting happens the rules of engagement are the same - everyone is entitled to </span><span style="color: #222222; font-family: Guardian;">their opinion and is encouraged to have a say, regardless of status, age, experience, sex, ethnic background or which rugby team they support. Disagreement is encouraged. But finally, it is absolutely mandatory that everyone leave the pub able to put aside the differences of opinion and be civil to each other. </span><br />
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<span style="color: #222222; font-family: Guardian;">In an office environment, the best way to run these meetings is to make the older/more senior/more vocal members of the team wait a while before entering the argument. Younger or more junior people will be nervous of disagreeing later, so need encouraging to express views. And need to know in advance their opinions are going to be sought. Those people who in a film of a meeting are quietly trying to get a word in, need to be picked out early too. It's also important to get to the most important issue for discussion early, before the group starts to flag. </span><br />
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<span style="color: #222222; font-family: Guardian;">Some people will never be able to change their opinions even in an environment that encourage them to question them. That's fine, so long as they can debate without being (too) boring and aren't allowed to dominate proceedings. The debate is there to dig into the pros and cons of different opinions and also, to tease out relevant pearls of wisdom from unusual sources. The geeky end of the asset-backed research group had all the clues to impending disaster in 2007 but few firms were listening. The premise of Moneyball is the statisticians had more answers to baseball performance than experienced scouts. A good meeting creates a safe space where the views of these people can get a hearing. </span><br />
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Kit Juckeshttp://www.blogger.com/profile/07113766468208128928noreply@blogger.com0tag:blogger.com,1999:blog-3744615959168086160.post-80918838263434556572017-03-11T06:53:00.000-08:002017-03-11T06:53:46.094-08:00Debt will be the death of us As investment bank research teams ponder how much to charge for their insights, they could do worse than check out what is available for free, particularly from the growing band of central bank blogs of which the BIS' is still probably the best. <a href="http://www.bis.org/speeches/sp170307.pdf">Claudio Borio's speech </a>to the NABE conference in Washington DC last week is fascinating (and free, of course).<br />
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The speech looks at the role of financial sector drag as a reason for the sluggishness of the economic recovery in many developed economies after the 2008 financial crisis. The BIS view of the world could be summed up as being that equilibrium or natural real interest rates are higher than many policy-makes believe, and this has resulted in an inability to restrain financial booms which cause a misallocation of resources that in turn, leads to painfully slow productivity gains in the subsequent economic recovery.<br />
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This is so intuitively true that it needs to be taken seriously. I've reproduced a couple of slides from this presentation and one from an earlier presentation covering the same theme. The first one shows global debt levels rising as a share of GDP, at the same time as real interest rates fall.<br />
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If I made the really simple assumption that across the economy as a whole, borrowers pay something like 3% more than the average of the real yields in long-dated government bonds and the central bank policy rate, and that inflation was around 3% in 1986 and 2% in 2015, this chart would suggest that in 1986, overall debt service costs were something like 19% GDP. And in 2015, after almost 30 years of rising debt and falling rates, they were something like 16% GDP. So, no problem then?<br />
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You could argue that it makes sense in this world, for policy-makers to accept the downward trend in interest rates. Companies and households alike would and indeed should have more debt because debt-service costs are low. Which is what's happened. Mortgages are bigger as a multiple of income than they used to be (fine if house prices rise for ever, right?) and a glance at the universe of borrowers in the corporate bond market will quickly confirm the gradual downward drift in average credit ratings. A triple-A company with little debt is not maximising the return to shareholders. Better to issue bonds and buy shares back, immediately.<br />
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The flaw, is that creditworthiness is a function not solely (or even mainly) of the ability to pay back the interest on a loan. It's about the ability to pay back interest AND principal. In other words, the size of the loan matters. Furthermore, it matters at least as much for the financial sector as for the non-financial sector. If I borrow money from the bank, the bank itself borrows that money too. And if we've learnt nothing else in the last decade, it's that that size of a bank's balance sheet matters. A bank that cares only about keeping income (from interest earned) growing faster than costs (from interest paid) will grow and grow it's balance sheet much as some did in the early 2000s. A focus on return on equity may be Ok for some companies, but not for a bank which needs to care about the return on the capital it uses to earn that money, and needs to set capital aside for the possibility that some of the money it lends never comes back.<br />
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Just accepting that premise implies that the 'equilibrium' which sees more debt and lower rates, is an unstable one. A real equilibrium is one which applies to both the financial cycle and the real economy cycle. As in the second chart I've nicked.....<br />
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This chart shows that real policy rates fell sharply and stayed low in 2001-2204. This is after the Dot.com bubble burst and after the 9/11 attacks on the US. Fed Chairman Alan Greenspan worried about disinflation even as the global economy started to recover in earnest and so the Us kept rates down (and the rest of us followed). In part because inflation was was falling more than people expected, estimates of the natural rate of interest were coming down, albeit not nearly enough to justify the Greenspan-led monetary madness unleashed on us all. But adjust them for the financial cycle and the natural rate was already rising in 2002-2003.<br />
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The crisis followed. Too much money was lent at these low rates. Too many resources were mis-allocated in a world where money was mis-priced. Here's what the BIS' experiment in setting policy to smooth the financial cycle throws out. A cycle, just not nearly such a pronounced one.<br />
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After the financial crisis and recession, the misallocation of resources that the financial boom caused/exacerbated, has led to a productivity-free economic recovery, at least in the economies most directly affected. So, estimates of natural rates have come down further. And since there's slack in the global economy, especially if we measure it on the basis of inflation undershooting expectations, policy rates fall even further. The possibility that the inflation cycle is a function of technology and the growth of global markets in goods and labour, is at most only considered in passing.<br />
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The depressing thing about this argument, is that the obvious conclusion would be that after a while we're just going to get washed way by another financial boom/bust cycle. Maybe not one whose epicentre is in the US and the UK to quite the same extent as the last one was, but that would be small comfort. It would be better to set global monetary policy with debt levels in mind, before the overall global debt/GDP level gets too much higher.<br />
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<br />Kit Juckeshttp://www.blogger.com/profile/07113766468208128928noreply@blogger.com0tag:blogger.com,1999:blog-3744615959168086160.post-26269388509457955172016-04-24T02:07:00.000-07:002016-04-24T02:07:11.018-07:00Immigration, inequality and conceptual artThe Tate has a new exhibition called 'Conceptual Art in Britain 1964-1979' <a href="http://www.tate.org.uk/whats-on/tate-britain/exhibition/conceptual-art-britain-1964-1979">http://www.tate.org.uk/whats-on/tate-britain/exhibition/conceptual-art-britain-1964-1979</a> if you're interested. A BBC Radio 4 reviewer explained carefully that conceptual art is all about the concept! One of the exhibits is of a glass of water that the artist explains has been changed into an <a href="http://An Oak Tree consists of an ordinary glass of water placed on a small glass shelf of the type normally found in a bathroom, which is attached to the wall above head height. Craig-Martin composed a series of questions and answers to accompany the objects. In these, the artist claims that the glass of water has been transformed into an oak tree.">Oak Tree</a>.<br />
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Economics is about concepts - notions, ideas, some of them rather abstract - and the economics of inequality is one of the most important ones. Thomas Piketty's "Capital in the 21st Century" captured the mood and helped spur a huge debate about its causes and the remedies that policy-makers should or shouldn't adopt. But at 700 pages long, it wasn't an easy read. Branko Milanovic's new book "Global Inequality, A New Approach for the Age of Globalization" comes in at 299 pages and the last 34 of those are the references and the index. It's also a book with great charts, so that the first time I opened it, I just skimmed through the picture with a cup of coffee. For those two reasons alone, anyone interested in the economics of inequality should buy it (and read it).<br />
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There is a third, rather more serious reason,to be interested in the book. Thomas Piketty's focus was on how wealth inequality in particular grew in developed economies over time, and what policy-makers should do about it. The market, in his opinion, has and will feed widening inequality. Mr Milanovic's focus is on income not wealth and on global not national trends and is far more relevant to the world we find ourselves in. Martin Wolf reviewed the book more seriously <a href="http://www.ft.com/cms/s/0/13603aa2-0185-11e6-ac98-3c15a1aa2e62.html">here</a> and talked about in a speech he gave for the Toynbee Foundation a couple of weeks ago.<br />
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The chart that Mr Milanovic is most famous for makes an appearance on the second page of the first chapter. It shows changes in income over 20 years plotted against income levels and can be loosely divided into four segments. On the left, the very poor are mostly in Africa (though you can reasonably throw Yemen, Afghanistan, even Pakistan and by now, Syria into this pot as well). The middle of the chart shows income growth for average/below-average income groups many of whom are in newly-developed economies, notably in Asia. The group in the the 70-90th percentiles of global income levels are the poor/median income groups in developed western economies (they're being left behind) and the far right grouping is the top 5%, or the 1%.<br />
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The second chart shows the distribution of incomes in 1998 and 2011. Average incomes have gone up, but are still low by the standards of developed western economies. And the lack of growth in incomes in the 20-40,000 (2005) dollars per annum range is very apparent.<br />
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Apart from suggesting this is a book worth reading, I'll make a couple of observations. The first is that the reduction in global inequality levels isn't evenly-distributed; a lot of people, a lot of whom live on the other side of the Mediterranean, have been left behind. And secondly, the political debate in developed economies is going to be shaped by how the lack of growth in median/below-median incomes is tackled.<br />
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My generation has grown up with the effects of booming trade - imported goods are cheaper and industries which can't compete in the global market-place have withered. The Philips Curve has creaked and groaned in the face of a global labour market and the profit share of GDP has boomed on the back of lower labour costs. As the UK debates how (or even, whether) to keep the last bits of its steel industry alive, the issue hasn't gone away but now the main talking point is immigration, almost everywhere. It's the single biggest political issue in both Europe and the US. It fuels the 'Brexit' voters' ranks, it holds up support for Nigel Farage, Marine Le Pen and of course, Donald Trump. Meanwhile, those 1988-2008 charts don't even try to capture earnings gap that years of QE have opened up.<br />
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The failure of developed economies to tackle the humanitarian crisis in Syria (or Libya) before mass migration took over is miserably depressing. The response to the tide of refugees arriving on our shores over the last year, equally so. But even beyond the conflict zone, migration is globalisation's response to global economic inequality. The poor and oppressed of the world are going to go on moving and between them, the advance of technology and the aftermath of the global commodity boom, they'll go on fuelling inequality within developed economies and all the political baggage that comes with that. Maybe that won't result in Trump becoming President, or the UK voting to leave the EU, or Marine Le Pen making a serious push for power. But without structural reform aimed at boosting the earning power of median income earners in developed economies, major victory for an anti-immigration, anti-free trade, anti-liberal party in a developed economy near you and me, is inevitable within the next 5 years or so.<br />
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Branko Milanovic doesn't make friends with all his opinions. But then, nor does Thomas Piketty and that hasn't stopped him from becoming an economics superstar. Income inequality is more important than wealth inequality and global inequality is more interesting in a global economy than only looking at national trends. Meanwhile, as for forecasts of median wage growth in high-income economies, well that's going to be a function of political choices, rather than Phillips Curves, isn't it! </div>
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Kit Juckeshttp://www.blogger.com/profile/07113766468208128928noreply@blogger.com0tag:blogger.com,1999:blog-3744615959168086160.post-53589452155062696522016-04-03T01:47:00.000-07:002016-04-07T05:21:22.473-07:0025 multinationals and a big fat deficit <div>
Awful balance of payments data fuel all sorts of responses - the UK doesn't make or export enough, or consumes too much. Is reliant on the kindness of strangers to finance the deficit, (Mark Carney) and is need of foreign direct investment that in turn probably depends on staying in the EU (David Smith). All fine arguments. But the surge in the deficit in recent years is largely a result of the falling foreign income of a handful of huge multinational companies, whose incomes have fallen step by step with falling commodity prices. They finance themselves in international markets and are owned by international shareholders: Does that make a difference? <br />
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<b>Heading for £100 per annum.... an awfully big hole </b></div>
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The UK’s current account deficit reached £32.7bn in Q4 2015, which equates to 7% GDP and is the biggest deficit since records began. It takes the annual deficit to £96.2bn, 5.2% GDP. The £12.6bn deterioration from Q3 to Q4 was due to a £3.3bn increase in the deficit in goods and services to £12.2bn, a £2bn increase in the deficit in secondary income to £5.4bn and a £7.3bn increase in the deficit on primary income, to £13.1bn. It’s worth noting in passing that the UK’s net investment position now is in liability to the tune of £65,9bn, In other words, foreigners own £65.9bn-worth of UK assets more than UK investors own of foreign assets. All other things being equal over time, the bigger the net liability, the bigger the net investment income deficit will be.</div>
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The ONS’ chart of the overall make-up of the current account balance is below.<br />
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The trade account includes goods (a deficit) and services (a surplus). It's been pretty steady in recent years, though still significantly in deficit. The secondary income balance includes transfers provided with no expectation of payment, so things like bilateral aid and of course, payments to or from the EU. This series is volatile on a quarterly basis but not so much over a longer period. The primary income balance includes compensation of staff, rents, taxes and most of all, investment income. Here’s a chart of that, and its constituent parts:<br />
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The primary income balance was in surplus as recently as mid-2013 and just glancing at the chart you can see that its deterioration coincides with a dramatic shift in the balance of direct investment income. The ONS took the trouble to publish an article to explain what’s going on and the link is here: <a href="https://www.ons.gov.uk/economy/nationalaccounts/balanceofpayments/articles/ananalysisofthedriversbehindthefallindirectinvestmentearningsandtheirimpactontheukscurrentaccountdeficit/2016-03-31">https://www.ons.gov.uk/economy/nationalaccounts/balanceofpayments/articles/ananalysisofthedriversbehindthefallindirectinvestmentearningsandtheirimpactontheukscurrentaccountdeficit/2016-03-31</a><br />
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If reading it all is too much bother on a sunny Sunday morning, the main points are as follows:<br />
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More than 80% of the deterioration in the current account since 2011is attributable to falls in net foreign direct investment (FDI) earnings.<br />
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Falling FDI credits over this period explain just under 80% of the decline in net FDI earnings, and the majority of that is attributable to the largest 25 multinational companies. This partly reflects the fact that UK FDI assets are exposed to movements in global commodity prices – most notably crude oil.<br />
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In my day job, I mostly ignore these niceties. The current account deficit is huge and leaves the UK dependent on foreign investors’ confidence in and appetite for UK assets. In the middle of a toxic debate about whether or not to remain in the EU, that’s bad for confidence and particularly bad for the pound. I’ve written extensively on that and the pound has indeed, fallen sharply in recent months and since the latest data were released.<br />
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<b>Questions</b><br />
But two questions are posed by the data. The first is whether we will see the current account deficit recover as an when oil and other commodity prices stabilize (or bounce)? The second is whether what 25 big multinationals do matters at a national level? <br />
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The UK still had a current account deficit, albeit a smaller one, when the commodity boom was in full flight. So in 2011 when the deficit was 1.7% GDP and commodity prices were at their peak, the headline figure masked the poor underlying situation. Q4’s 7% deficit may overstate how bad things are, but I could average between the 1.7% of 2011 and the 5.2% of 2015 and conclude that 3 ½% GDP is a truer reflection of the underlying position. And that’s only small comfort. It’s still, in today’s money, an annualized international borrowing need of GBP 65bn.<br />
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I might be tempted to say that the UK’s £65bn underlying deficit is just the other side of the coin with regard to the Eurozone's near-£200bn current account surplus.<br />
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I might also conclude that the commodity cycle is far more volatile than FX trends, and so the idea that a weaker pound will magically solve the UK’s balance of payments problems is absurd. It would improve them a bit, but the parts that have caused the deterioration are not terrible senstivie to sterling exchange rates.<br />
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<b>But are big global companies different? </b><br />
The second question is more difficult. Imagine a large UK-domiciled multi-national that used to earn huge amounts on its foreigh investments, but is now no longer doing so as a result of falling oil prices. So, instead of repatriating income and paying a dividend to its (global) shareholders, it will borrow money or run down cash reserves until prices recover. ,It may well also save money by reducing employment overseas, which helps improve the situation on the balance of payments without having much impact on the UK economy. If it borrows by issuing debt, does that really have much impact on the UK? Once upon a time a large UK multinational issuing sterling bonds might have been considered to squeeze out other buyers of gilts, say, but I’m not even sure that’s a relevant factor anymore.<br />
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I’m not going to argue this doesn’t affect the national accounts – it does. A multinational that earns money abroad is bringing pounds back home and one that issues debt is adding to the demand the rest of the UK makes on the global investor community. But to what degree does a multinational borrowing money really squeeze out the UK Government? To what extent does paying dividends to global shareholders boost the UK? And while huge changes in commodity prices have clearly been a driver of the direct investment income balance, it’s also true that whether a company reinvests in its foreign businesses, or brings cash home, is a decision determined by all sorts of factors, with international tax regulations often at the top of the pile.<br />
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All this is framed as a question and that’s why this is a blog rather than an investment bank's sell-side research note. I’m not sure I’m aloud to write ‘I don’t know’ this often in the day job! The UK’s 7% GDP current account deficit is frankly, embarrassingly huge. There are no positives in the data but if someone asks just how hard it will be to find foreign financing for the defiit, and whether it will go on growing in the years ahead, all I can really say is that I don’t know, because that depends on the decisions of the management of a couple of dozen huge global companies who may think that this is a good time to be borrowing at super low rates, even if that does drive the UK’s current account deficit up. <br />
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Kit Juckeshttp://www.blogger.com/profile/07113766468208128928noreply@blogger.com0tag:blogger.com,1999:blog-3744615959168086160.post-19871175595466429162015-07-11T01:12:00.001-07:002015-07-12T01:00:23.804-07:00The Age of Migration - debt, migration and flawed architecture With Eurozone Finance Ministers discussing suggestions ranging from a temporary Greek exit from the Euro, to a request for the Greeks to come up with 'more' (more austerity, more evidence that proposed measures actually will be carried out?), there's a long day of negotiations ahead in Brussels. But that Greek debt crisis has now opened up a debate on the notion of debt restructuring within the single currency area.<br />
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There is growing pressure for Greece's creditors to allow more formal restructuring of Greek debt, which would inevitably lead to acceptance that debt restructuring, re-profiling or relief may need to be seen across the Euro Area at times. Many people who have been looking at the mountains of debt accumulated by Eurozone governments in recent years have long believed repayment of that debt is unlikely, so what's the big deal? Even a casual glance at the history of sovereign debt shows that defaults happen more often than many people realise, often occur in clusters, and the risk of them is underpriced. Furthermore, default is, by and large, forgiven faster for sovereigns than for others, understandably. A defaulting individual or company can be cast away, never to be seen again. Literally, in the case of debtors the English sent to the other side of the world in the 19th century. But a country won't go away. Russia defaulted and then sat there on the same bit of land as before until we all decided to do business with it again.<br />
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History, furthermore, tells us that punishing a country's people too harshly and demanding they repay the debts accumulated by their parents, leaders or even themselves, is counter-productive. At worst, it builds enmity. At best, it means an economically weakened trading partner.<br />
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So if we accept that default is occasionally necessary, why be bothered about doing it in Europe? The answer, I think, is that the idea that sovereign default is impossible in the Euro Area is a big part of the architecture of the system, put there to cope with one of its very biggest structural flaws - the fact that while national central banks do not have the ability to run independent monetary policies, national governments have a lot of autonomy over fiscal policy. This is a huge flaw, 'managed' with the rules on deficits and debt. Weaken those and the flaw is exposed, and will either bring the system crashing down or be resolved itself through adoption of a new fiscal structure.<br />
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Here's a description of the conditions for a strong monetary union, which I took from the late Victor Argy: <span style="font-family: Times, Times New Roman, serif;"><span style="background-color: white; color: #222222; line-height: 18px;">"A strong monetary union is assumed to have a common currency and a common central bank. Capital markets are unified and independent monetary policy becomes impossible. Some independent fiscal policy continues to be feasible. And he goes on to list the conditions which make the costs of joining a union smaller, or the benefits larger. They are 1) that differences in growth rates and labour productivity are not large; 2) that intra-union trade is large; 3) that there is no long-run trade-off between inflation and unemployment; 4) the differences in propensities to inflate are relatively small; 5) differences in degree of domestic instability are relatively small; and 6) there is a significant degree of labour mobility." </span><a href="http://mardlecapital.blogspot.co.uk/2013/04/the-grapes-of-wrath.html" style="background-color: white; line-height: 18px;">Grapes of Wrath</a>. A better read on currency unions than anything I've written can be found <a href="http://www.project-syndicate.org/commentary/the-euro--monetary-unity-to-political-disunity?utm_source=MadMimi&utm_medium=email&utm_content=Joseph+Stiglitz%3A+%22Europe%27s+Attack+on+Greek+Democracy%22&utm_campaign=20150705_m126454385_Joseph+Stiglitz%3A+%22Europe%27s+Attack+on+Greek+Democracy%22&utm_term=The+Euro_3A+Monetary+Unity+To+Political+Disunity_3F">here</a>, in a discussion by Milton Friedman of the Euro in 1997. Some of the weakness he outlines have been tackled since then, but not all. </span><br />
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'Some independent fiscal policy continues to be feasible'. That is absolutely not what European fiscal policy looks like. Consider this. US State and Local debt totals 1/6th of Federal debt and less than 20% GDP. So when California over-borrows, despite being the biggest state, it still doesn't cause a huge national crisis. Imagine California having a debt level of 120% GDP, and then asking smaller states to forgive a share of that debt based on their own share of US GDP. It doesn't happen because the US allows 'some independent fiscal policy'.<br />
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This problem of local control over debt and Federal control over monetary policy is a really, really issue. When I write that sovereign debt default is relatively common, I should differentiate between default on domestic debt, and default on foreign debt. There's a brief discussion of the top in this week's Economist <a href="http://www.economist.com/news/finance-and-economics/21657414-developed-world-has-not-found-answer-its-debt-problem-debt-trap">here, Buttonwood</a>. Domestic debt default is often counter-productive because of the damage it does to the domestic banking system, so default usually happens via the means of inflation. Historically this was done through the effortless means of debasing the currency, more recently it's been done with the help of a monetary policies than boost inflate and weaken the currency. And most recently of all, global disinflationary forces have made it hard to do at all. Defaulting on foreign currency debt is more straightforward, and therefore more common. But in Europe, the domestic routes to de facto default through devaluation and inflation, simply don't exist. All debt is foreign because no single country controls the Euro printing press. And worse still, since more and more of any single country's debt is now held by that country's banks, this is now de facto foreign debt but defaulting will still cause havoc in the domestic banking system.<br />
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I still don't know how this weekend will play out, let alone how long the Greek debt can can be kicked down the road before we're back talking about debt. But I do know that Greece isn't the only European country whose debt won't ever actually be repaid in full and I know that changing the rules to accept that reality will either bring about the collapse of the Euro system or lead to a change in the way that European fiscal policy is operated.<br />
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Finally, a quick word about Puerto Rico. A very different debt crisis but one which really is a sign of the times. Puerto Rico's $72bn of debt is close to 3/4 of GDP and either huge compared to any US State (which Puerto Rico isn't) or manageable if it were an independent country with (which it isn't either).<br />
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What really makes Puerto Rico's debt unsustainable, and is both a cause and result of GDP shrinking in 7 of the last 8 years, is the fact that its population is falling. Faced with a weak economy and poor prospects, people, especially young workers, are leaving the country. Check out this <a href="http://www.pewhispanic.org/2014/08/11/puerto-rican-population-declines-on-island-grows-on-u-s-mainland/">link </a> from the Pew research centre if you want some scary charts of where this is heading. When I first wrote about the Grapes of Wrath, I thought that labour mobility in the US in the 1930s (which resulted in huge numbers of displaced Oklahoma farmers heading down Route 66 in search of jobs in California) was both a sign of a monetary union working properly and yet, evidence that even in the US there was huge social strife caused by migration. I wasn't really wondering what would have happened to Oklahoma's ability to repay debts if it had been an independent country. Nor was I thinking forwards to a world where would have the degree of mobility in people, job and technology that we have now. In a technologically joined-up world, skills will spread globally and people will move to where those jobs are, as well as moving away from places with political or economic problems. This may 'the Age of Migration'. The politics of migration/immigration are increasingly important and for the countries they leave, while the economics of debt with shrinking populations will be equally important.<br />
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<br />Kit Juckeshttp://www.blogger.com/profile/07113766468208128928noreply@blogger.com0tag:blogger.com,1999:blog-3744615959168086160.post-38321279054225718112015-06-14T03:24:00.001-07:002015-06-14T03:24:45.444-07:00Over 50s, the new thirty-year olds<div>
I've been reading about the "older" (over-50) worker - something I've been for a few years now. </div>
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A recent paper by the <a href="https://www.i-l-m.com/About-ILM/Research-programme/Research-reports/untapped-talent">Institute of Leadership and Management </a> which got a fair amount of coverage in the press week starts with the encouraging observation<span style="color: #555555; font-family: arial; font-size: medium;"><span style="background-color: white; line-height: 25px;"> </span></span>that "Baby Boomers (aged 51–70) are seen as loyal, skilled
and knowledgeable members of the workforce – but they aren’t viewed by their
colleagues and managers as the ‘organisational stars’ of the future and they
are perceived as having little potential for further progression or development
in their organisations"<span style="font-size: 16pt;">. </span>Well, isn't that nice!<br />
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I recognise some of the things written in the paper although in the world of finance, I'm not sure it's all about oldish workers being seen as lacking in leadership potential. In the latest flurry of redundancies at a variety of firms, I know a number of over-50s who have lost their jobs. Nothing too shocking in that perhaps - I know more over-50s than under-30s so the sample of my acquaintances is biased - but I do remember being surprised when I was told me over 15 years ago that there only three over 50s left on the Bishopsgate trading floor of NatWest Markets.<br />
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What happened 15 yrs ago still happens now - when numbers need cutting, the older worker is a prime candidate. The justification is usually that organisations get too top-heavy: the number of people with business cards that say 'Managing Director' is high relative to those who cards read 'Associate'. The management pyramid is inverted and better to lose someone who is not seen as 'an organisational star of the future' than some bright young thing. And why not? This is the City, where dog eats dog and so on. Mind you, if more and more people are living longer, having families later and working into well their 50s or 60s, I can't help feeling that a decade-long flow of workers from sell-side investment banks to buy-side fund managers means there's a role for the fifty-something sales-person who has known these clients for half a lifetime.<br />
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Separately, I was signed up a fortnight ago by a colleague to participate in a '100-day journey' measuring how much exercise people take. It's a team event, run by some people called <a href="https://www.gettheworldmoving.com/home">GCC</a> and my employer has decided that this would be good for the staff, or fun, or something. I was handed a step counter and sent on my way. I dutifully fill in the number of steps every day, with the intention of making sure that I take more exercise than the average. No problem there, the global GCC average is a little over 12000 steps a day. My (erratic) round of golf yesterday morning ran my total up to 16000 before lunch. Looking at average steps for various cohorts on the website I find that men step more than women and that 50-54 year-old men step more than the average man.<br />
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This isn't a complete surprise. By and large, my generation of late baby-boomer over-50s is pretty motivated to stay in decent-ish shape. We got the message about smoking ages ago and even if the one about alcohol has been largely ignored, we have gym memberships and we force our 'dad bods' into luminescent lycra cycling clothes with far too much enthusiasm. We're (mostly) no longer taking children to the Pirate's Playhouse or the zoo on Saturday mornings - or even to football/skating/ballet. Instead, we have time to get some exercise in before we take the children to the Oval to watch T20 (where £8 for Pimms makes the prices for ice cream at the zoo seem almost reasonable).<br />
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Another thing I recognise in my age group is that they turn up for the morning meeting.<br />
The average age of people in a dealing room is in the 30s, but at 6:45 a.m, it's a good bit older. The young worker finds getting out of bars and clubs in time to get enough sleep and make it to the morning meeting hard. The young parent is sleep-deprived. A decade ago, when asked how long I would go on working I said I couldn't imagine stopping, but I could easily imagine giving up morning meetings. Yet I find it easier to wake up now than I used to and travelling round London after 7 a.m is almost too hideous to contemplate. Nowadays, the choice is between being at my desk early, or connecting to it from a computer far away from London.<br />
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Of course, the fact that I'm a fan of the over-50s work ethic and would happily employ them if I were an organisational star (future or present) won't change employers' attitudes towards them. But what will go on changing is the number of older people who are still working. It's going to go on growing. I may not take the children to Alexandra Palace ice rink on Sunday mornings any more, but they're not likely to be financially independent any time soon. My generation can't afford to stop working even if it wants to. But if "having little potential for further progression" means we aren't competing for the top jobs, "loyal, skilled and knowledgeable" has its merits. The over-50s I know who've lost their jobs mostly seem to find new ones pretty quickly, even if they have to take a cut in pay. In the process, they act as an anchor on wage growth across the pay scale (except for CEOs, but that's another story).<br />
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The changes in the workforce aren't limited to the over-50s male of course, it's just that this is the group I know best. If I were a woman, I might be inclined to think about the number of women who either have, or want to return to the workforce and have a deep pool of skill as well as a huge amount of motivation after taking some time away. If I were bit older, I'd point to the desire to shift the work-life balance around, without actually stopping work. Thoughts on the world from members of these groups can be found <a href="http://ladyfohf.tumblr.com/">here</a> (from @LadyFOHF on twitter) or <a href="http://www.georgemagnus.com/">here</a> from (@georgemagnus1).<br />
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Mostly, I think too many employers are woefully out of touch with the way the labour force is changing and are still wedded to an antiquated understanding of what 'work-life balance' means. They regard surfing the internet in your office as 'work' and reading <a href="https://www.worldbank.org/content/dam/Worldbank/GEP/GEP2015b/Global-Economic-Prospects-June-2015-Global-economy-in-transition.pdf">The Global Economy in transition</a> at home as 'life'. And if they think older workers are loyal, skilled and knowledgeable but have little potential, they'll end up finding out how much they have in common with dinosaurs.<br />
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<!--StartFragment--><!--EndFragment-->Kit Juckeshttp://www.blogger.com/profile/07113766468208128928noreply@blogger.com0tag:blogger.com,1999:blog-3744615959168086160.post-48190330875957816952014-12-06T04:07:00.001-08:002014-12-06T04:07:32.373-08:00Does 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... <a href="http://www.ft.com/cms/s/0/d41dff28-7c83-11e4-aa9c-00144feabdc0.html?siteedition=uk#axzz3L7DaFIDK">(US Heads for best jobs growth since 1999)</a>. 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.<br />
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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.<br />
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<a href="http://3.bp.blogspot.com/-bkXPJUzZ_vQ/VILp4HLT0kI/AAAAAAAABO4/Xz3NYci0u2g/s1600/USNovJobs.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="http://3.bp.blogspot.com/-bkXPJUzZ_vQ/VILp4HLT0kI/AAAAAAAABO4/Xz3NYci0u2g/s1600/USNovJobs.png" height="240" width="400" /></a></div>
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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.<br />
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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.<br />
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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.<br />
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<br />Kit Juckeshttp://www.blogger.com/profile/07113766468208128928noreply@blogger.com0tag:blogger.com,1999:blog-3744615959168086160.post-82886679439179642212014-11-23T03:49:00.000-08:002014-11-23T03:49:13.368-08:00Basic 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 <a href="http://www.rdhawan.com/Robinson/Conf_Nov14/Beyond-QE-Economic-Outlook.pdf">(Link)</a>.<br />
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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. <br />
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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.<br />
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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. <br />
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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.<br />
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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....<br />
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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...Kit Juckeshttp://www.blogger.com/profile/07113766468208128928noreply@blogger.com0tag:blogger.com,1999:blog-3744615959168086160.post-8345135193944866582014-10-11T05:33:00.002-07:002014-10-11T05:33:22.517-07:00Hopelessly 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.<br />
<span style="font-family: Times, 'Times New Roman', serif; font-size: 25px; line-height: 1.3em;">T</span><span style="font-family: Times, 'Times New Roman', serif; line-height: 1.3em;">he 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%.</span><br />
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<a href="http://2.bp.blogspot.com/-QbxLOqSn6ng/VDkPUHkaD3I/AAAAAAAABN8/KDgqgVMdLH8/s1600/Oct143.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="http://2.bp.blogspot.com/-QbxLOqSn6ng/VDkPUHkaD3I/AAAAAAAABN8/KDgqgVMdLH8/s1600/Oct143.png" height="240" width="400" /></a></div>
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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.....<br />
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<span style="font-size: x-small;">"<span style="color: #282828; font-family: arial, helvetica, sans-serif;"><span style="line-height: 33.1520004272461px;"><i>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 team....i</i></span></span><i style="color: #282828; font-family: arial, helvetica, sans-serif; line-height: 33.1520004272461px;">t 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"</i><i style="background-color: white; color: #282828; font-family: arial, helvetica, sans-serif; line-height: 1.48em;">.</i></span><i style="background-color: white; color: #282828; font-family: arial, helvetica, sans-serif; font-size: small; line-height: 1.48em;"> </i><br />
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<span style="background-color: white;"><span style="color: #282828; font-family: arial, helvetica, sans-serif; font-size: x-small;"><span style="line-height: 1.48em;">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 </span><span style="line-height: 19.2399997711182px;">smaller</span><span style="line-height: 1.48em;"> than Islington with the help of 5 playrs from a club lying 8th in the Premiership is a bit too much, even for me... </span></span></span><br />
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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.<br />
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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.<br />
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<a href="http://4.bp.blogspot.com/-fwfGLywa3e8/VDkPclPzboI/AAAAAAAABOM/Hzq9nG48nPQ/s1600/Picture2.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="http://4.bp.blogspot.com/-fwfGLywa3e8/VDkPclPzboI/AAAAAAAABOM/Hzq9nG48nPQ/s1600/Picture2.png" height="240" width="400" /></a></div>
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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. </div>
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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 <a href="http://www.bls.gov/opub/mlr/2013/article/labor-force-projections-to-2022-the-labor-force-participation-rate-continues-to-fall.htm">this piece</a> whose opening summary reads... </div>
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<span style="background-color: white; font-family: Times, 'Times New Roman', serif; line-height: 1.3em;">"Labor force projections to 2022: the labor force participation rate continues to fall: </span><em style="font-family: Times, 'Times New Roman', serif; font-size: 14.5px; line-height: 1.22em; margin: 0px; padding: 0px;">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."</em></div>
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<span style="font-family: Times, Times New Roman, serif;"><span style="font-size: 15px; line-height: 17.6900005340576px;">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. </span></span></div>
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<br />Kit Juckeshttp://www.blogger.com/profile/07113766468208128928noreply@blogger.com0tag:blogger.com,1999:blog-3744615959168086160.post-30263634839152688552014-06-29T05:39:00.000-07:002014-06-29T05:39:24.143-07:00Brexit - 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.<br />
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<a href="http://www.ft.com/cms/s/0/8070d718-efe5-11e3-9b4c-00144feabdc0.html?siteedition=uk#axzz35vcmTwV7">This, by Michael Ignatief in the FT</a> 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.<br />
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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.<br />
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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.<br />
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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.<br />
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<br />Kit Juckeshttp://www.blogger.com/profile/07113766468208128928noreply@blogger.com0tag:blogger.com,1999:blog-3744615959168086160.post-6055497385136020082014-06-22T10:34:00.001-07:002014-06-22T10:34:58.421-07:00If a coffee shop can charge honest exchange rates, why can't everyone? <div class="separator" style="clear: both; text-align: center;">
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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.<br />
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Anyway, so much for trees! </div>
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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. </div>
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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. </div>
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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. </div>
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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. </div>
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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. </div>
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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. </div>
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Kit Juckeshttp://www.blogger.com/profile/07113766468208128928noreply@blogger.com0tag:blogger.com,1999:blog-3744615959168086160.post-78663415317917853012014-05-17T07:53:00.000-07:002014-05-17T07:53:01.350-07:00Stumbling 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. <br />
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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.<br />
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<a href="https://4.bp.blogspot.com/-xNfn79leAUA/U3dH-KNAw3I/AAAAAAAABLc/2VpVVqTl4wM/s1600/FTSE.png" imageanchor="1" style="clear: left; display: inline !important; margin-bottom: 1em; margin-right: 1em; text-align: center;"><img border="0" src="http://4.bp.blogspot.com/-xNfn79leAUA/U3dH-KNAw3I/AAAAAAAABLc/2VpVVqTl4wM/s1600/FTSE.png" height="240" width="400" /></a><br />
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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.<br />
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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. <br />
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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%.<br />
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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.<br />
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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.<br />
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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.<br />
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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.<br />
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<a href="http://4.bp.blogspot.com/-xNfn79leAUA/U3dH-KNAw3I/AAAAAAAABLc/2VpVVqTl4wM/s1600/FTSE.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"></a><a href="http://1.bp.blogspot.com/-0T8pJFYm5Kc/U3dH-AK3o4I/AAAAAAAABLg/r6Iz9aPjb2M/s1600/ftse2+-+Copy.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="http://1.bp.blogspot.com/-0T8pJFYm5Kc/U3dH-AK3o4I/AAAAAAAABLg/r6Iz9aPjb2M/s1600/ftse2+-+Copy.png" height="250" width="400" /></a></div>
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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.<br />
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<a href="http://2.bp.blogspot.com/-aFzPucpBrUQ/U3dPJU2uAjI/AAAAAAAABL4/Nn1aWMQU_ko/s1600/ftse3.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="http://2.bp.blogspot.com/-aFzPucpBrUQ/U3dPJU2uAjI/AAAAAAAABL4/Nn1aWMQU_ko/s1600/ftse3.png" height="252" width="400" /></a></div>
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Enjoy it while it lasts... <br />
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<!-- Blogger automated replacement: "https://images-blogger-opensocial.googleusercontent.com/gadgets/proxy?url=http%3A%2F%2F4.bp.blogspot.com%2F-xNfn79leAUA%2FU3dH-KNAw3I%2FAAAAAAAABLc%2F2VpVVqTl4wM%2Fs1600%2FFTSE.png&container=blogger&gadget=a&rewriteMime=image%2F*" with "https://4.bp.blogspot.com/-xNfn79leAUA/U3dH-KNAw3I/AAAAAAAABLc/2VpVVqTl4wM/s1600/FTSE.png" -->Kit Juckeshttp://www.blogger.com/profile/07113766468208128928noreply@blogger.com0tag:blogger.com,1999:blog-3744615959168086160.post-17284286988168371902014-04-29T06:10:00.000-07:002014-04-29T06:10:08.512-07:00The Economics of InequalityThe 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. <br />
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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.<br />
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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.<br />
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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.<br />
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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.<br />
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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!<br />
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<br />Kit Juckeshttp://www.blogger.com/profile/07113766468208128928noreply@blogger.com0tag:blogger.com,1999:blog-3744615959168086160.post-27916430819210772422014-04-06T12:50:00.001-07:002014-04-06T12:50:25.905-07:00Short update post US jobs <div class="separator" style="clear: both; text-align: center;">
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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!<br />
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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?<br />
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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!<br />
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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.<br />
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<br />Kit Juckeshttp://www.blogger.com/profile/07113766468208128928noreply@blogger.com0tag:blogger.com,1999:blog-3744615959168086160.post-88057751434917213672014-03-23T05:12:00.000-07:002014-03-23T05:12:04.711-07:00Janet's JackhammerIt'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.<br />
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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.<br />
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Anyway, what we learnt about the world last week:<br />
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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.<br />
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I am SO glad that's cleared up any uncertainty.<br />
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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.<br />
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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.<br />
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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.<br />
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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….<br />
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<br />Kit Juckeshttp://www.blogger.com/profile/07113766468208128928noreply@blogger.com0