In the days of Ottmar Issing and Juergen Stark, high-powered economists ruled the ECB but times have changed and the current environment requires a new breed of central banker. I'll call them plumbers, but that is not intended in any way to belittle them. They are, led by Mario Draghi, more practical and more adept at coping with a deply flawed monetary system that has been put under stress. Indeed, perhaps the best comparison is between architects, necessary to design a building, set policy targets and understand the way the world works and plumbers, who don't look for perfection but simply try and keep the building from falling apart, finding a way to get the hot water from the boiler to the radiators and the dirty water out into the drains rather than all over the living room.
In term of architecture and economics what does the Euro Zone need? A fiscal union with a common taxation and spending policy; a single risk-free interest rate and instrument; a genuine monetary union that can police the financial system, raise levies to provide the funds for future bailouts and provide guarantees for retail depositors. All of this is as likely as pigs flying over the Eurotower on their way to a rave in Wilhelm-Epsein Straße.
By the same token, what 'should' Europe's central bank do faced with rising uemployment, a rapidly growing current account surplus, shrinking banks' balance sheets, a huge output gap and an inflation rate falling towards zero? They should have, some time ago, worked with government to create a European TARP, to re-capitalise banks and create a 'bad bank' for impaired assets. They should now be injecting money intravenously into the system through large-scale bond purchases, and there would be nothing wrong with an Abenomics-like policy of talking down the currency, front-loading fiscal easing and structural reform of the labour market and pension system.
Some people will disagree with some or all of these policies. But what they have in common is that they, too, won't happen. 'Proper' QE is against self-imposed European rules. Talking down the currency is not in the ECB's mandate. Another set of rules demand austerity with slippage rather than either outright austerity or Keynesian expansion. And as for all getting together to re-capitalise banks, it needed to happen 5 years ago.
So what is left? When Mario Draghi arrived at the ECB he was a breath of fresh air, slicing the growth forecast, announcing the LTRO, getting money moving around the system. Then a series of vague promises and incompletely-defined promises to buy government debt and bank debt if needed were introduced. Purists look at all these policies and question whether there is any substance behind them but the yields on spanish and Italian debt just goes on falling. Others are alarmed by the way the ECB is lending money to banks to buy their own government's sovereign debt. And we all worry about the fact that with little or nominal GDP growth, debt levels are doomed to rise steadily until they are unsustainable (if they aren't already). But the Euro Area house still stands and a bloke with a wrench and some tape is making sure the money flows around the system. That's what the plumber-in-chief has achieved while he waits for his political masters to build a better structure. Hey, it's a lot better than the alternative....
Thursday, 31 October 2013
Saturday, 26 October 2013
Storm coming
There's a storm coming, apparently, to rival October 1987's. I was in London when that storm hit, and didn't notice anything had happened until I got to work. But down here in Higher Coombe, we did lose a lot of trees, including much of a beech row. Since I am down in Devon now, I wandered out with a camera because there isn't anything I can do to prevent a storm blowing trees down, but I'm fond of them. The top picture shows a beautiful beech row that is almost intact on our neighbour's deer farm. I took the picture as much for the colours as the trees.
The second picture is of the Mardle, my favourite stream, after which I named this blog.
And the third picture is of a couple of the beech trees in a row by the house, that survived 1987. I hope the latest storm, if it comes, leaves the beech trees alone.
The World's Strongest Property Market
In 2010, I managed to get stuck in Dubai thanks to the intrusion of an Icelandic volcano.
I went soon after Dubai world had re-structured its debt after property prices fell. The grandiosity of some of the developments in Dubai (the Palm, the idea of a ski slope with artificial snow and lifts in a desert shopping mall, to name but two) made for plenty of humorous headlines but in fact, Dubai had been pushed off the front pages of the papers by the Greek debt crisis, which erupted just days after Dubai's woes started to scare investors in November 2009. Between then and June 2010, the Euro's value fell from $1.50 to $1.20.
This week, I returned to the region. Dubai is booming. GDP growth close to 5%, property prices rising faster than anywhere else in the world. Much excitement has been triggered by a report by Jones Lang Lasalle which has snappy headlines telling us rices are rising at an unsustainable rate, though it also says that measures taken double land registration taxes will help cool the market. Goldman Sachs say it's alright, so we shouldn't worry. It’s not a bubble, it’s just a boom, see.
At first glance, my assumption was that this was Ben Bernanke’s mad monetary policy at work again. Dubai has a fixed exchange rate with the dollar, which means they import US interest rates. If your economy is growing at nearly 5% and money is cheap, you'll get asset booms (or bubbles). In the Middle East, that means insatiable demand for premiership football teams, and rising property prices. So here we go again, I thought.
There is however, an additional driver of demand that didn’t exist in the mad credit frenzy of 2003-2008 - the influx of money and people that has come as a result of the Arab Spring. The rich are either sending their money to the Gulf, or sending themselves there too. It isn’t easy to quantify but the planes are full, the hotels are booming and the anecdotal evidence is plain to see. Reuters estimated earlier this year that DH30bn flowed into the region last year and this year, Cyprus (this year's weakest residential property market), Syria and Egypt will all have added to the flow of money.
I don't know how this will play out in Dubai and the UAE. But global excess money is chasing real assets because the returns on financial ones are derisory and the inflow. And the longer QE and ZIRP continue in the US, the worse it will get. Money is mis-priced and the Gulf boom is being pumped up by money fleeing the crisis in the Middle East and North Africa. Eventually, rates will go up in the US, putting pressure on some borrowers and on any lenders who have too much regional or sectoral concentration. Which is quite a few of the banks in the Gulf.
Meanwhile, at least Dubai was able to re-structure its debt, get help from the rest of the UAE, and let property and asset prices adjust quickly. Spare a thought for Greece, which went into the crisis at the same time but is left with an overvalued currency, struggled to re-structure its debt and even if GDP won't fall for ever, isn't enjoying a bounce and won't any time soon.
I went soon after Dubai world had re-structured its debt after property prices fell. The grandiosity of some of the developments in Dubai (the Palm, the idea of a ski slope with artificial snow and lifts in a desert shopping mall, to name but two) made for plenty of humorous headlines but in fact, Dubai had been pushed off the front pages of the papers by the Greek debt crisis, which erupted just days after Dubai's woes started to scare investors in November 2009. Between then and June 2010, the Euro's value fell from $1.50 to $1.20.
This week, I returned to the region. Dubai is booming. GDP growth close to 5%, property prices rising faster than anywhere else in the world. Much excitement has been triggered by a report by Jones Lang Lasalle which has snappy headlines telling us rices are rising at an unsustainable rate, though it also says that measures taken double land registration taxes will help cool the market. Goldman Sachs say it's alright, so we shouldn't worry. It’s not a bubble, it’s just a boom, see.
At first glance, my assumption was that this was Ben Bernanke’s mad monetary policy at work again. Dubai has a fixed exchange rate with the dollar, which means they import US interest rates. If your economy is growing at nearly 5% and money is cheap, you'll get asset booms (or bubbles). In the Middle East, that means insatiable demand for premiership football teams, and rising property prices. So here we go again, I thought.
There is however, an additional driver of demand that didn’t exist in the mad credit frenzy of 2003-2008 - the influx of money and people that has come as a result of the Arab Spring. The rich are either sending their money to the Gulf, or sending themselves there too. It isn’t easy to quantify but the planes are full, the hotels are booming and the anecdotal evidence is plain to see. Reuters estimated earlier this year that DH30bn flowed into the region last year and this year, Cyprus (this year's weakest residential property market), Syria and Egypt will all have added to the flow of money.
I don't know how this will play out in Dubai and the UAE. But global excess money is chasing real assets because the returns on financial ones are derisory and the inflow. And the longer QE and ZIRP continue in the US, the worse it will get. Money is mis-priced and the Gulf boom is being pumped up by money fleeing the crisis in the Middle East and North Africa. Eventually, rates will go up in the US, putting pressure on some borrowers and on any lenders who have too much regional or sectoral concentration. Which is quite a few of the banks in the Gulf.
Meanwhile, at least Dubai was able to re-structure its debt, get help from the rest of the UAE, and let property and asset prices adjust quickly. Spare a thought for Greece, which went into the crisis at the same time but is left with an overvalued currency, struggled to re-structure its debt and even if GDP won't fall for ever, isn't enjoying a bounce and won't any time soon.
Wednesday, 9 October 2013
Short post on social media...
On Monday I sent a morning note out, observing that everyone will have had their fill of the observation 'we don't expect a US default' but that as the October 17th deadline to resolve the issue of the US debt ceiling draws closer we need to ponder how hard that deadline is and meanwhile, asset prices may remain under pressure.
I was glad, therefore, that the following chart was posted on a market blog by well-known blogger/tweeter/commentator Joe Weisenthal.
The chart shows how the 'hard' line in the sand for the US running out of any wiggle room on its finances comes a bit later, either on October 31 or November 1 when big payments are due.
So I re-tweeted the picture from a restaurant as follows:
I was glad, therefore, that the following chart was posted on a market blog by well-known blogger/tweeter/commentator Joe Weisenthal.
The chart shows how the 'hard' line in the sand for the US running out of any wiggle room on its finances comes a bit later, either on October 31 or November 1 when big payments are due.
So I re-tweeted the picture from a restaurant as follows:
Happy Halloween. Doomsday is Nov1 RT@TheStalwart: CHART OF THE DAY: This chart destroys the debt ceiling truthers. http://www.businessinsider.com/chart-of-the-day-this-chart-destroys-the-debt-ceiling-truthers-2013-10 …
Sunday, 6 October 2013
Groundhog Day for England
Is there a house price bubble? It's the topic du jour. Well, here's the simplest chart evidence for the view that whatever we want to call the current rise in house prices, it isn't 'a bubble' .
It's certainly fair to say that on official data and across the UK as a whole, the ratio of average house prices to earnings is a long way below the 2007 peak. And since mortgage rates are a lot lower than they were in previous cycles, the ratio of mortgage payments to house prices is even lower. But that tells only part of the story, certainly for London and the South East.
I borrowed three times my 25-year old economist's salary to buy my first flat in North London, in 1987. If a younger me turned up at the age of 25 today having seen economists' salaries merely keep up with national wage trends, he/she would have to borrow nearly seven times his/her salary. Not to mention the fact that the 25% deposit my father produced in his generosity would need to be nearly six times as big now. It's no wonder that while people still want to get on the housing ladder, they are doing so much later and my 24-year old self would have probably gone on flat-sharing for a few more years.
I watched the rise in house prices, then the fall, got married and got a bit older. We moved house in 1994, selling the first flat for almost exactly the same amount as I had paid for it. But that was OK. 1993 had been a good year for 32-year old economists, so we were able to buy a house, once again with a 25% deposit, in cheaper but trendy Tuffnel Park. And it was there our children were born.
Now I can imagine another slightly younger self, following foolishly in my footsteps, who is 32 today, married and thinking about family. Average wages have nearly doubled since 1994 but unfortunately, Tuffnel Park house prices have risen twice as much again. So he'll still need to be able to borrow 6 times his salary and find a truly mind-blowing deposit to get onto the North London house ladder. He will doubtless be staying in his flat for a bit longer, weighing up the merits of moving further out of town (but dismayed to find you have to go a long way London before prices fall enough).
My younger self would probably buy a flat later, get married later, have children later and retire older. And that is exactly what is happening. As for the generation following him I don't know what they would do, because my younger self isn't going to be enthusiastic about moving again when he sees how much stamp duty he might have to pay. He'll probably opt to stay in his first family home in London, thank his lucky stars he ever got on the housing ladder at all, and only move when he cashes in his savings and retires. In the meantime, another generation of bright young British and European economists will have moved into flats in London, met each other, fallen in love and started trawling estate agents' windows in search of a place where they can start a family. But the good people of Tuffnel Park can no longer afford to move 'up' to Hampstead or Primrose Hill, so sellers are reluctant, turnover is low and prices as susceptible to bubble-like characteristics as it's possible to be when you're not in a bubble....
The UK economy is blessed with a rapidly growing labour force that boosts growth potential and provides far better prospects for getting the government's gargantuan debt levels under control than is the case in some other European economies. But failure to diversify the economy through regional and educational policy has left the population growth centred on London, with its antiquated infrastructure. This economic cycle is rapidly beginning to look just like every other economic cycle of the last 30 years, led by housing and doomed to end with UK interest rates peaking above those elsewhere and the housing market going into reverse in a few years' time. I'll enjoy the positives from stronger demand growth, worry about what happens to the trade balance, hope that higher interest rates deliver a stronger currency which make holidays and imports cheaper, but I'll bemoan the chronic lack of vision that allows a whole country to wander into its own version of Groundhog Day.
It's certainly fair to say that on official data and across the UK as a whole, the ratio of average house prices to earnings is a long way below the 2007 peak. And since mortgage rates are a lot lower than they were in previous cycles, the ratio of mortgage payments to house prices is even lower. But that tells only part of the story, certainly for London and the South East.
I borrowed three times my 25-year old economist's salary to buy my first flat in North London, in 1987. If a younger me turned up at the age of 25 today having seen economists' salaries merely keep up with national wage trends, he/she would have to borrow nearly seven times his/her salary. Not to mention the fact that the 25% deposit my father produced in his generosity would need to be nearly six times as big now. It's no wonder that while people still want to get on the housing ladder, they are doing so much later and my 24-year old self would have probably gone on flat-sharing for a few more years.
I watched the rise in house prices, then the fall, got married and got a bit older. We moved house in 1994, selling the first flat for almost exactly the same amount as I had paid for it. But that was OK. 1993 had been a good year for 32-year old economists, so we were able to buy a house, once again with a 25% deposit, in cheaper but trendy Tuffnel Park. And it was there our children were born.
Now I can imagine another slightly younger self, following foolishly in my footsteps, who is 32 today, married and thinking about family. Average wages have nearly doubled since 1994 but unfortunately, Tuffnel Park house prices have risen twice as much again. So he'll still need to be able to borrow 6 times his salary and find a truly mind-blowing deposit to get onto the North London house ladder. He will doubtless be staying in his flat for a bit longer, weighing up the merits of moving further out of town (but dismayed to find you have to go a long way London before prices fall enough).
My younger self would probably buy a flat later, get married later, have children later and retire older. And that is exactly what is happening. As for the generation following him I don't know what they would do, because my younger self isn't going to be enthusiastic about moving again when he sees how much stamp duty he might have to pay. He'll probably opt to stay in his first family home in London, thank his lucky stars he ever got on the housing ladder at all, and only move when he cashes in his savings and retires. In the meantime, another generation of bright young British and European economists will have moved into flats in London, met each other, fallen in love and started trawling estate agents' windows in search of a place where they can start a family. But the good people of Tuffnel Park can no longer afford to move 'up' to Hampstead or Primrose Hill, so sellers are reluctant, turnover is low and prices as susceptible to bubble-like characteristics as it's possible to be when you're not in a bubble....
The UK economy is blessed with a rapidly growing labour force that boosts growth potential and provides far better prospects for getting the government's gargantuan debt levels under control than is the case in some other European economies. But failure to diversify the economy through regional and educational policy has left the population growth centred on London, with its antiquated infrastructure. This economic cycle is rapidly beginning to look just like every other economic cycle of the last 30 years, led by housing and doomed to end with UK interest rates peaking above those elsewhere and the housing market going into reverse in a few years' time. I'll enjoy the positives from stronger demand growth, worry about what happens to the trade balance, hope that higher interest rates deliver a stronger currency which make holidays and imports cheaper, but I'll bemoan the chronic lack of vision that allows a whole country to wander into its own version of Groundhog Day.
Saturday, 28 September 2013
Slowing US labour force growth, wages and Transatlantic inflation trends
Two weeks of travelling in the US and Europe and finally, a Saturday morning in Highgate. Markets have had the 'notaper' from Ben Bernanke, the 'No QE' from Mark Carney and the 'No negotiation on Obamacare' which threatens to bring the US government to a halt. Hey ho. And in the foolish world of financial markets on we go to another monthly Labor Report, next Friday.
When it was still summertime, I threw out some observations on the Phillips Curve, which seems to work well in Japan, a bit in the US and very poorly in the UK. The US labour market remains hugely important for monetary policy, even if Mr Bernanke went to some pains to make us understand there are no automatic consequences of a falling unemployment rate. Markets will still be watching the jobs data (very) closely. So, here's a quote from July's Chicago Fed letter
"For the unemployment rate to decline, the U.S. economy needs to generate above-trend
job growth. We currently estimate trend employment growth to be around 80,000 jobs
per month, and we expect it to decline over the remainder of the decade, due largely
to changing labor force demographics and slower population growth"
That's a much lower estimate of trend employment growth than I might have come up with in the pub on a Thursday night. The August payroll gain was a 'disappointing' 169k and in the last twelve months the range has been between 332k and 104k, in other words, consistently well above trend. Hence the falling unemployment rate. But, this solid employment growth hasn't prevented GDP from growing by a relatively measly 1.6% in real terms. The bottom line, if I take the fine analysis from the folks at the Chicago Fed to heart, is that even if job creation continues at what Americans consider to be a paltry rate (180k or so per month of late), the unemployment rate will go on falling steadily.
Now if you don;'t believe there is any such thing as a 'NAIRU', you won't care about that. But you should be worried if you are one of those people who do think there is an unemployment rate below which wage growth accelerates (small rant here for me to repeat that the empirical connection between unemployment and wage growth is much less awful than that between unemployment and inflation).
Which brings me to a completely different topic - the Beveridge Curve. The US Federal Reserve employs armies of really talented economists, not only at the Chicago Fed. So, here is a great paper from Rand Ghayad at the Boston Fed (many thanks to Mike Green in New York for sending it to me). The Beveridge curve shows the relationship between job vacancies and the unemployment rate, which reflects the amount of friction in the labour market. There ought to be a low unemployment rate when there are lots of spare jobs going, obviously. Mr Ghayad is one of many to observe an outward shift in the Beveridge Curve, which suggests that it take more vacancies to get the US unemployment rate down than it used to. In my simple mind, that indicates more friction in the labour market. Mr Ghayad shows that this is mostly driven by those who have been out of work for longer periods of time and proposes that much of this is due to changes in how long people can receive unemployment benefits in the US. But a shift outwards in the Beveridge Curve tends to suggest that more of the unemployed are not looking for jobs as hard as they used to, or are unsuited to them. They could be people who have been out of work for a long time who no-one will hire, or they could be unemployed CDO structurers, who are ill-suited to most other tasks. We used to call such people 'outsiders' in an insider/outsider theory of the labour market which explains why the long-term unemployed don't put downward pressure on wage growth elsewhere, and why the only people who ever get to manage premiership football teams, are people who manage top-class football teams somewhere else in Europe. Professor Dennis Snower who is now the head of the Kiel Institute, had the misfortune of having to teach me about this 30 years ago. In Phillips Curve parlance, a shift outwards in the Beveridge Curve, increases the NAIRU level and if that is what is going on in the US, there is a likelihood that we will see a pick-up in wage growth as the unemployment rate falls from here.
On weekdays, when I'm earning my living as a fixed income strategist, I may worry about faster wage growth. On Saturday mornings, I say bring it on! But it does raise questions about the relationship between inflation and wage growth and it raises the intriguing question of whether the labour share of GDP, pummelled ever lower in recent years, is finally going to turn higher, at the expense of the profit share. Nice for people, not so nice for shareholders...
UK Inflation....
US wage growth (at 2.2% per annum) isn't affecting inflation (the core PCE deflator is languishing at 1.2% per annum). That may partly be because inflation is driven more by demand than wages. So if wage growth goes up because the labour force and population are growing more slowly, that also reflects sluggish overall demand. This is a neat theory to fit the facts, but is also immediately focuses my mind back on the UK. Because here, we are seeing an acceleration in population and labour force growth, notably in the South East of the country. This helps anchor wage growth, but also helps push up inflation. It pushes up inflation in the same way as is seen more frequently in emerging market economies, where population growth is a really big driver. The sectors of the UK CPI which are growing faster than overall inflation at the moment are food, drink & tobacco, housing, utilities, health and education. Away from food and drink, the price of utilities, health, education, and other services are going up largely because a growing population requires investment to increase capacity (more trains, tubes, water pipes, power stations, nurses and bin collectors) which is passed on to consumers because a cash-strapped government won;'t make the investment for us. There is good news in the latest CPI data, insofar as the price of coffee and tea, beer, shoes and cars are all falling while photographic equipment prices are falling fastest of all, but I can't help thinking that the fact UK inflation is higher than it is in the US, or Euro Area, has more to do with structural strains on services than anything else. Meanwhile, a growing population will continue to anchor wage growth (so we can all grumble) and push up the one price that doesn't get properly reflected in the CPI data - that of flats and houses.
When it was still summertime, I threw out some observations on the Phillips Curve, which seems to work well in Japan, a bit in the US and very poorly in the UK. The US labour market remains hugely important for monetary policy, even if Mr Bernanke went to some pains to make us understand there are no automatic consequences of a falling unemployment rate. Markets will still be watching the jobs data (very) closely. So, here's a quote from July's Chicago Fed letter
"For the unemployment rate to decline, the U.S. economy needs to generate above-trend
job growth. We currently estimate trend employment growth to be around 80,000 jobs
per month, and we expect it to decline over the remainder of the decade, due largely
to changing labor force demographics and slower population growth"
That's a much lower estimate of trend employment growth than I might have come up with in the pub on a Thursday night. The August payroll gain was a 'disappointing' 169k and in the last twelve months the range has been between 332k and 104k, in other words, consistently well above trend. Hence the falling unemployment rate. But, this solid employment growth hasn't prevented GDP from growing by a relatively measly 1.6% in real terms. The bottom line, if I take the fine analysis from the folks at the Chicago Fed to heart, is that even if job creation continues at what Americans consider to be a paltry rate (180k or so per month of late), the unemployment rate will go on falling steadily.
Now if you don;'t believe there is any such thing as a 'NAIRU', you won't care about that. But you should be worried if you are one of those people who do think there is an unemployment rate below which wage growth accelerates (small rant here for me to repeat that the empirical connection between unemployment and wage growth is much less awful than that between unemployment and inflation).
Which brings me to a completely different topic - the Beveridge Curve. The US Federal Reserve employs armies of really talented economists, not only at the Chicago Fed. So, here is a great paper from Rand Ghayad at the Boston Fed (many thanks to Mike Green in New York for sending it to me). The Beveridge curve shows the relationship between job vacancies and the unemployment rate, which reflects the amount of friction in the labour market. There ought to be a low unemployment rate when there are lots of spare jobs going, obviously. Mr Ghayad is one of many to observe an outward shift in the Beveridge Curve, which suggests that it take more vacancies to get the US unemployment rate down than it used to. In my simple mind, that indicates more friction in the labour market. Mr Ghayad shows that this is mostly driven by those who have been out of work for longer periods of time and proposes that much of this is due to changes in how long people can receive unemployment benefits in the US. But a shift outwards in the Beveridge Curve tends to suggest that more of the unemployed are not looking for jobs as hard as they used to, or are unsuited to them. They could be people who have been out of work for a long time who no-one will hire, or they could be unemployed CDO structurers, who are ill-suited to most other tasks. We used to call such people 'outsiders' in an insider/outsider theory of the labour market which explains why the long-term unemployed don't put downward pressure on wage growth elsewhere, and why the only people who ever get to manage premiership football teams, are people who manage top-class football teams somewhere else in Europe. Professor Dennis Snower who is now the head of the Kiel Institute, had the misfortune of having to teach me about this 30 years ago. In Phillips Curve parlance, a shift outwards in the Beveridge Curve, increases the NAIRU level and if that is what is going on in the US, there is a likelihood that we will see a pick-up in wage growth as the unemployment rate falls from here.
On weekdays, when I'm earning my living as a fixed income strategist, I may worry about faster wage growth. On Saturday mornings, I say bring it on! But it does raise questions about the relationship between inflation and wage growth and it raises the intriguing question of whether the labour share of GDP, pummelled ever lower in recent years, is finally going to turn higher, at the expense of the profit share. Nice for people, not so nice for shareholders...
UK Inflation....
US wage growth (at 2.2% per annum) isn't affecting inflation (the core PCE deflator is languishing at 1.2% per annum). That may partly be because inflation is driven more by demand than wages. So if wage growth goes up because the labour force and population are growing more slowly, that also reflects sluggish overall demand. This is a neat theory to fit the facts, but is also immediately focuses my mind back on the UK. Because here, we are seeing an acceleration in population and labour force growth, notably in the South East of the country. This helps anchor wage growth, but also helps push up inflation. It pushes up inflation in the same way as is seen more frequently in emerging market economies, where population growth is a really big driver. The sectors of the UK CPI which are growing faster than overall inflation at the moment are food, drink & tobacco, housing, utilities, health and education. Away from food and drink, the price of utilities, health, education, and other services are going up largely because a growing population requires investment to increase capacity (more trains, tubes, water pipes, power stations, nurses and bin collectors) which is passed on to consumers because a cash-strapped government won;'t make the investment for us. There is good news in the latest CPI data, insofar as the price of coffee and tea, beer, shoes and cars are all falling while photographic equipment prices are falling fastest of all, but I can't help thinking that the fact UK inflation is higher than it is in the US, or Euro Area, has more to do with structural strains on services than anything else. Meanwhile, a growing population will continue to anchor wage growth (so we can all grumble) and push up the one price that doesn't get properly reflected in the CPI data - that of flats and houses.
Sunday, 8 September 2013
Summer's over, tapering's coming but money is still easy.
I went for a walk this morning - 2 hours before I saw anybody at all. Water levels are low but rising. Summer's over. Stay-vacation visitors to Devon enjoyed the best weather in years in August but the pub is quiet now and the moor is empty.
The chart shows the 3-month average US unemployment rate. I put a trendline through it for fun. The fall in the unemployment rate is progressing at a very steady rate and on the current trajectory, will get to 6.9% by next April, 6.4% by the end of 2014. If the Federal reserve wants to have completed its 'tapering' programme and stopped buying bonds by the time the unemployment rate gets below 7%, they're going to have get going.
A falling unemployment rate is almost always better than the alternative. But the current downward trend is not accompanied by strong GDP growth, or strong real disposable income growth, or inflation Hence the unhappiness in some circles at the idea the Federal Reserve may be thinking about easing back on the monetary throttle.
That brings me back to the trend line. Most Americans, having seen an unemployment rate of 4 1/2% without any major inflation threat in the last cycle, can't see why 7% is the magic number today. Others argue, reasonably, that the unemployment rate is distorted by part-time work, and by people leaving the labour force.
The Fed references unemployment and inflation in its forward guidance for interest rates for two reasons. Firstly, because of a long-held belief there is a relationship between falling inflation and higher consumer price inflation. The evidence is dodgy. And secondly because it believes there is a relationship between inflation and the amount of spare capacity in the economy, but that is too complicated to talk about directly, so the unemployment rate is used as a proxy for describing the output gap. I wish policy-makers would resist the temptation to treat the rest of us as idiots and just say - we will keep policy easy until we're scared growth is so strong it might push inflation up.
The framework to policy does nothing for credibility and helps fuel the debate about where policy should go. But ultimately, the message we are going to hear, over and over again, is that 'tapering is not tightening'. The steady decline in the unemployment rate is going to be one factor, along with the strength of the ISM surveys and the housing recovery, to justify slowing the pace of bond-buying slightly. This month or next month? To my mind that's a tactical decision and in a perverse way, I think the Fed may feel that buying fewer bonds after a period of upward adjustment in yields gives them a better chance that they can slow their buying without causing untoward volatility. But if they then start to really emphasise the fact that rates are on hold for a lot longer, and point repeatedly to the benign inflation backdrop - the core PCE deflator at 1.4% for starters - we will all eventually realise that monetary policy remains exceptionally accommodative.
Super-easy policy has driven and will drive asset price inflation. The adjustment that came from the shock news that super-easy policy won't really be left in place in perpetuity should begin to come to an end when tapering starts. Some people tell me equity valuations are high, others than M&A makes corporate bonds less attractive. EM outflows continue and maybe that promises more weakness. There are reasons for every single 'risk' asset to remain under the cosh even when the spike in bond yields finishes. But I'm a simple enough fool to know that something is going to have a fantastic autumnal rally on the back of near-zero rates. It would be nice if it were farmland prices, I suppose....
The chart shows the 3-month average US unemployment rate. I put a trendline through it for fun. The fall in the unemployment rate is progressing at a very steady rate and on the current trajectory, will get to 6.9% by next April, 6.4% by the end of 2014. If the Federal reserve wants to have completed its 'tapering' programme and stopped buying bonds by the time the unemployment rate gets below 7%, they're going to have get going.
A falling unemployment rate is almost always better than the alternative. But the current downward trend is not accompanied by strong GDP growth, or strong real disposable income growth, or inflation Hence the unhappiness in some circles at the idea the Federal Reserve may be thinking about easing back on the monetary throttle.
That brings me back to the trend line. Most Americans, having seen an unemployment rate of 4 1/2% without any major inflation threat in the last cycle, can't see why 7% is the magic number today. Others argue, reasonably, that the unemployment rate is distorted by part-time work, and by people leaving the labour force.
The Fed references unemployment and inflation in its forward guidance for interest rates for two reasons. Firstly, because of a long-held belief there is a relationship between falling inflation and higher consumer price inflation. The evidence is dodgy. And secondly because it believes there is a relationship between inflation and the amount of spare capacity in the economy, but that is too complicated to talk about directly, so the unemployment rate is used as a proxy for describing the output gap. I wish policy-makers would resist the temptation to treat the rest of us as idiots and just say - we will keep policy easy until we're scared growth is so strong it might push inflation up.
The framework to policy does nothing for credibility and helps fuel the debate about where policy should go. But ultimately, the message we are going to hear, over and over again, is that 'tapering is not tightening'. The steady decline in the unemployment rate is going to be one factor, along with the strength of the ISM surveys and the housing recovery, to justify slowing the pace of bond-buying slightly. This month or next month? To my mind that's a tactical decision and in a perverse way, I think the Fed may feel that buying fewer bonds after a period of upward adjustment in yields gives them a better chance that they can slow their buying without causing untoward volatility. But if they then start to really emphasise the fact that rates are on hold for a lot longer, and point repeatedly to the benign inflation backdrop - the core PCE deflator at 1.4% for starters - we will all eventually realise that monetary policy remains exceptionally accommodative.
Super-easy policy has driven and will drive asset price inflation. The adjustment that came from the shock news that super-easy policy won't really be left in place in perpetuity should begin to come to an end when tapering starts. Some people tell me equity valuations are high, others than M&A makes corporate bonds less attractive. EM outflows continue and maybe that promises more weakness. There are reasons for every single 'risk' asset to remain under the cosh even when the spike in bond yields finishes. But I'm a simple enough fool to know that something is going to have a fantastic autumnal rally on the back of near-zero rates. It would be nice if it were farmland prices, I suppose....
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