Chart of the Year – China’s shadow banking collapse means deflation may be round the corner

Last year it was Bitcoin, in 2016 it was the near-doubling in US 10-year interest rates, and in 2015 was the oil price fall.  This year, once again, there is really only one candidate for ‘Chart of the Year’ – it has to be the collapse of China’s shadow banking bubble:

  • It averaged around $20bn/month in 2008, a minor addition to official lending
  • But then it took off as China’s leaders panicked after the 2008 Crisis
  • By 2010, it had shot up to average $80bn/month, and nearly doubled to $140bn in 2013
  • President Xi then took office and the bubble stopped expanding
  • But with Premier Li still running a Populist economic policy, it was at $80bn again in 2017

At that point, Xi took charge of economic policy, and slammed on the brakes. November’s data shows it averaging just $20bn again.

The impact on the global economy has already been immense, and will likely be even greater in 2019 due to cumulative effects.  As we noted in this month’s pH Report:

“Xi no longer wants China to be the manufacturing Capital of the world. Instead his China Dream is based on the country becoming a more service-led economy based on the mobile internet.  He clearly has his sights on the longer-term and therefore needs to take the pain of restructuring today.

“Financial deleveraging has been a key policy, with shadow bank lending seeing a $609bn reduction YTD November, and Total Social Financing down by $257bn. The size of these reductions has reverberated around Emerging Markets and more recently the West:

  • The housing sector has nose-dived, with China Daily reporting that more than 60% of transactions in Tier 1 and 2 cities saw price drops in the normally peak buying month of October, with Beijing prices for existing homes down 20% in 2018
  • It also reported last week under the heading ’Property firms face funding crunch’ that “housing developers are under great capital pressure at the moment”
  • China’s auto sales, the key to global market growth since 2009, fell 14% in November and are on course for their first annual fall since 1990
  •  The deleveraging not only reduced import demand for commodities, but also Chinese citizens’ ability to move money offshore into previous property hotspots
  • Real estate agents in prime London, New York and other areas have seen a collapse in offshore buying from Hong Kong and China, with one telling the South China Morning Post that “basically all Chinese investors have disappeared “

GLOBAL STOCK MARKETS ARE NOW FEELING THE PAIN

As I warned here in June (Financial markets party as global trade wars begin), the global stock market bubble is also now deflating – as the chart shows of the US S&P 500.  It has been powered by central bank’s stimulus policies, as they came to believe their role was no longer just to manage inflation.

Instead, they have followed the path set out by then Federal Reserve Chairman, Ben Bernanke, in November 2010, believing that:

“Higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.”

Now, however, we are coming close to the to the point when it becomes obvious that the Fed cannot possibly control the economic fortunes of 325m Americans. Common sense tells us that demographics, not monetary policy, drive demand. Unfortunately, vast amounts of time and money have been wasted by central banks in this  failed experiment.

The path back to fiscal sanity will be very hard, due to the debt that has been built up by the stimulus policies.  The impartial Congressional Budget Office expects US government debt to rise to $1tn.

Japan – the world’s 3rd largest economy – is the Case Study for the problems likely ahead:

  • Consumer spending is 55% of Japan’s GDP.  It falls by around a third at age 70+ versus peak spend at 55, as older people already own most of what they need, and are living on a pension
  • Its gross government debt is now 2.5x the size of its economy, and with its ageing population (median age will be 48 in 2020), there is no possibility that this debt can ever be repaid
  • As the Nikkei Asian Review reported in July, the Bank of Japan’s stimulus programme means it is now a Top 10 shareholder in 40% of Nikkei companies: it is currently spending ¥4.2tn/year ($37bn) buying more shares
  • Warning signs are already appearing, with the Nikkei 225 down 12% since its October peak. If global stock markets do now head into a bear market, the Bank’s losses will mount very quickly

CHINA MOVE INTO DEFLATION WILL MAKE DEBT IMPOSSIBLE TO REPAY

Since publishing ‘Boom, Gloom and the New Normal: how the Ageing Boomers are Changing Demand Patterns, Again“, in 2011 with John Richardson, I have argued that the stimulus policies cannot work, as they are effectively trying to print babies.  2019 seems likely to put this view to the test:

  • China’s removal of stimulus is being matched by other central banks, who have finally reached the limits of what is possible
  • As the chart shows, the end of stimulus has caused China’s Producer Price Inflation to collapse from 7.8% in February 2017
  • Analysts Haitong Securities forecast that it will “drop to zero in December and fall further into negative territory in 2019

China’s stimulus programme was the key driver for the global economy after 2008.  Its decision to withdraw stimulus – confirmed by the collapse now underway in housing and auto sales – is already putting pressure on global asset and financial markets:

  • China’s lending bubble helped destroy market’s role of price discovery based on supply/demand
  • Now the bubble has ended, price discovery – and hence deflation – may now be about to return
  • Yet combating deflation was supposed to be the prime purpose of Western central bank stimulus

This is why the collapse in China’s shadow lending is my Chart of the Year.

Financial markets party as global trade wars begin

More people left poverty in the past 70 years than in the whole of history, thanks to the BabyBoomer-led economic SuperCycle.  World Bank and OECD data show that less than 10% of the world’s population now live below the extreme poverty line of $1.90/day, compared to 55% in 1950.

Globalisation has been a key element in enabling this progress, as countries and regions began to trade with each other.  But now global trade is starting to decline, as the chart from the authoritative Dutch World Trade Monitor shows:

  • After a good start to 2018, February saw trade fall 0.7% in February and 1.2% in March
  • The major slowdown was in Asia, particularly China, as its lending began to slow

And then on Friday, President Trump confirmed the opening of his long-planned trade wars:

  • He imposed 25% import tariffs on steel and 10% on aluminium from Canada, Mexico and the European Union
  • Similar tariffs were already in place on imports from China, Russia and other countries
  • America’s longest standing allies have since imposed their own sanctions in retaliation
  • The stage is now set for a developing global trade war as more countries join in

PRESIDENT TRUMP IS IMPLEMENTING THE POLICIES ON WHICH HE WAS ELECTED
None of this should have been a surprise, as it simply follows the agenda that President Trump set out in his Gettysburg speech just before the election.  His policy proposals then, which I featured here in depth in January 2017, were crystal clear about his objectives, as the slide shows:

  • Those policies marked in red are now being introduced
  • Only 2 of them – around China being a currency manipulator, and infrastructure – are still to be delivered
  • Yet companies, commentators and analysts have preferred to ignore the obvious

It was clear then, and is even clearer today, that Trump intends to abandon the policies followed by all post-War Republican and Democratic presidents including Eisenhower, Reagan and Clinton, and summarised in President Kennedy’s 1961 Inauguration Speech:

“To those old allies whose cultural and spiritual origins we share, we pledge the loyalty of faithful friends. United there is little we cannot do in a host of cooperative ventures. Divided there is little we can do–for we dare not meet a powerful challenge at odds and split asunder.”

As I noted after Trump’s own Inauguration Speech in January last year, he broke very explicitly with these policies:

“We assembled here today are issuing a new decree to be heard in every city in every foreign capital and in every hall of power. From this day forward, a new vision will govern our land. From this day forward, it’s going to be only America first, America first. Every decision on trade, on taxes, on immigration, on foreign affairs will be made to benefit American workers and American families.”

BAD NEWS HAS ALWAYS LED TO MORE STIMULUS IN THE PAST

Unsurprisingly, financial markets have chosen to ignore this rise in protectionism.  For them, bad news is always good news, as they expect the central banks to provide more stimulus via their money-printing policies.  As the left-hand chart shows of Prof Robert Shiller’s CAPE Index (Cyclically Adjusted Price/Earnings ratio) since 1881:

  • When Trump took office, the ratio was already at 28.5 – above the 1901 and 1966 peaks
  • Since then it has peaked at 33.3, above the 1929 peak
  • Only 2000 was higher at 44, when the end of the SuperCycle coincided with the Fed’s first liquidity programme to prevent any problems with the Y2K issue

The right-hand chart confirms the bubble nature of the rally:

  • It compares S&P 500 developments with the level of margin debt in the New York Stock Exchange
  • Until 1985, the Fed operated on the principle of “taking away the punchbowl as the party gets going
  • Since then, it has increasingly believed, as then Fed Chairman Ben Bernanke said in November 2010

“Higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.

As a result, the S&P 500 has risen along with margin debt, which peaked at $659bn in January ($2018).

FINANCIAL MARKETS HAVE AN UNPLEASANT “SURPRISE” AHEAD AS CHINA SLOWS
It is therefore no great surprise that financial markets have continued to ignore developments in the real world.

Yet a decline in world trade, and the rise in protectionism, will inevitably produce Winners and Losers.  This will be quite different from the SuperCycle, when the rise of globalisation created “win-win opportunities” for countries and regions:

  • Essentially the deal was that consumers in richer countries got cheaper, well-made, products
  • People in poorer countries gained paid employment for the first time in history by making these products

History also suggests President Trump will be proved wrong with his March suggestion that:  “Trade wars are good and easy to win”.  Like all wars, they are easy to start and increasingly difficult to end.

So far, financial markets have ignored these uncomfortable facts.  They still believe that any bad news will lead to even more central bank stimulus, and a further rise in margin debt.

But as I noted last week, China – not the Fed – was in fact the major source of stimulus lending.  Now its lending bubble is history, the party in financial markets is inevitably entering its end-game.

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Chart of the Year: Bitcoin, the logical end for stimulus policies

Last year it was the near-doubling in US 10-year interest rates.  In 2015, it was the oil price fall.  This year, there is really only one candidate for ‘Chart of the Year’ – it has to be Bitcoin:

  • It was trading at around $1000 at the start of 2017 and had reached $5000 by August
  • Then, after a brief correction, it stormed ever-higher, reaching $7000 last month
  • On Friday it was trading around $19000 – fortunes are being made and lost all the time

The beauty of the concept is that nobody really has a clue about what it is all about.  You can read the Wikipedia entry as many times as you like, and still not gain a clear picture of what Bitcoin is, and what it does.  But why would you want to know such boring details?

All anyone has to know is that its price is going higher and higher.  Plus, of course, there is the opportunity to laugh at stories of people who bought Bitcoins, but then lost the code – for an excellent example by a former editor of WIRED (with a happy ending), click here.

But there is another side to the story, as the second chart suggests.  “Mining” Bitcoins now uses more electricity than a number of real countries, like Ireland, for example:

  • On Friday, Bitcoin’s current annual consumption reached 33.73TWh – equivalent to Belarus’ 9 million people
  • Each transaction produces 117.5kg of CO2, as the network is powered by cheap coal-fired power plants in China
  • It also uses thousands of times more energy than a credit card swipe 

And, of course, interest is growing all the time as people rush to get rich.  Today sees the start of Bitcoin futures trading on the CME, a week after they began on the CBOE and CME.  Bloomberg suggests Exchange Traded Funds based on Bitcoin will be next.  In turn, these developments create more and more demand, and push prices ever-higher.

Comparisons have been made with the Dutch tulip mania in 1836-7, when prices peaked at 5200 guilders.  At that time, Rembrandt’s famous Night Watch painting was being sold for 1600 guilders, and at its peak a tulip bulb would have bought 156000lbs of bread.  Bitcoin probably won’t equal this ratio until next year, if its current price climb continues.

Of course, one key difference between tulips and Bitcoin is supposedly that there were always more tulips to buy – whilst there are just 21 million Bitcoins available to be mined.  And apparently, around 80% of these have been mined. Bitcoin enthusiasts therefore suggest Bitcoins will have increasing scarcity value.  But, of course, anyone can create a crypto-currency and many people have – such as Bitcoin Cash and Bitcoin Gold, and the Ethereum family.

Yet already, Bitcoin’s market capitalisation* is getting close to that of the “tech stocks” such as Apple, Alphabet (formerly Google), Microsoft, Amazon and Facebook as the chart from Pension Partners shows:

  • On 7 December, less than 2 weeks ago, its market cap was already higher than major US stocks such as Home Depot and Pfizer
  • On Friday, it hit $323bn, above Wal-Mart and P&G and close to ExxonMobil
  • This also made it worth more than the IMF’s Special Drawing Rights
  • And the total market cap of the 10 largest crypto-currencies has now reached $500bn, equal to Facebook

This is an amazing amount of money to be tied up in an asset which has no intrinsic value.  After all, what is Bitcoin?  It certainly isn’t real, although the media like to picture it as a gold coin:

  • Although it is called a crypto-currency, its volatility makes it unattractive as a currency – major changes in a currency’s value can easily cause businesses (and countries) to go bust, and Bitcoin’s value has moved by 1900% just this year
  • Nor is it a method of settling transactions, as its value is increasing all the time – obviously a good deal for the person who receives the Bitcoin when its price is rising, but why would any sensible person pay with a Bitcoin?
  • So essentially, therefore, Bitcoin is simply a speculative asset, where its value is based on the “greater fool theory”, which says “I know its not really worth anything, but I am clever enough to sell out before it hits the top”

The “story” behind its boom is also powerful because it is linked to the great investment theme of our time, the internet.  We have all seen the fortunes that can be made by investing in companies such as Apple.  Now, Bitcoin supposedly offers us the chance to invest in the Next Big Thing – a new currency, entirely based on the internet.

BITCOIN HAS MANY PARALLELS WITH OTHER MANIAS IN HISTORY, SUCH AS THE SOUTH SEA BUBBLE 
The Bitcoin mania has many parallels, such as with the South Sea Bubble from 1719 – 1720.  Its power was also based on “the greater fool theory”, and its linkage to the great investment theme of its time – the opening up of foreign trade.  As the chart from Marc Faber shows, one of its early investors was Sir Isaac Newton – one of the most intelligent people ever to live on the planet, who discovered Newton’s laws of motion and invented calculus.  Newton doubled his money very quickly when he first invested, but then re-invested at a higher price – and lost the lot.

Of course, all the dreams associated with Bitcoin and the other crypto-currencies may come true. That is part of their attraction.  Another part of their attraction is for criminals, who can launder money without being traced.  So most likely, prices will continue rising for some time as more and more people around the world see a chance of getting rich very quickly.  We have never seen a global mania before, so nobody can tell how long it will last.

The question for governments, however, is what would happen to the economy if the mania collapsed?  Only China has so far banned Bitcoin trading, as Pan Gongsheng, a deputy governor of the People’s Bank of China, explained:

“If we had not shut down bitcoin exchanges and cracked down on ICOs several months ago, if China still accounted for more than 80% of the world’s bitcoin trading and ICO fundraising, everyone, what would happen today? Thinking of this question makes me scared.”

Having let the mania develop this far, other governments  are in a difficult position – millions of people would complain if they closed down these currencies today.  And most governments are reluctant to intervene as, in reality, crypto-currencies are essentially the creation of central bank stimulus policies, as explained by US Federal Reserve chairman, Ben Bernanke, in November 2010:

“Higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.” 

But by letting the mania continue, the potential impact from its collapse will increase.  Added together, crypto-currencies already have the same market cap as Facebook – and could soon overtake Apple to become the most valuable “stock” in the world.  Yet unlike Apple, they have no sales, no income and no assets.

Bernanke and the major central banks wanted to stimulate investors’ “animal spirits”, so that they would take on more and more risk.  Crypto-currencies are therefore the logical end result of their post-crisis strategy. The end of the Bitcoin mania, whenever it occurs, will therefore also mark the end of stimulus policies.

 

*Bitcoin’s market capitalisation is its equity valuation – the current dollar price multiplied by the number of Bitcoins in existence

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Central banks’ reliance on defunct economic theory makes people worry their children will be worse off than themselves

“Average UK wages in 2022 could still be lower than in 2008” 
UK Office for Budget Responsibility

While Western stock markets boom under the influence of central bank money-printing, wages for ordinary people are not doing so well.  So it is no wonder that Populism is rising, as voters worry their children will be worse off than themselves at a similar age.

The chart above is the key to the story.  It shows births in the G7 countries (Canada, France, Germany, Italy, Japan, UK, USA) since 1921.  They are important as until recently, they represented around 50% of the global economy.  Equally important is the fact that consumer spending represents 60% – 70% of total GDP in each country.

As the chart shows, the absolute number of consumers saw a massive boost during what became known as the BabyBoom after the end of World War 2:

  • The US Boom lasted from 1946 – 1964, and saw a 52% increase in births versus the previous 18 years
  • The Boom lasted longer in the other G7 countries, from 1946 – 1970, but was less intense
  • In total, there were 33 million more G7 births in 1946 – 1970 versus the previous 25 years
  • This was the equivalent of adding a new G7 country the size of Canada to the global economy

Today’s dominant economic theories were also developed during the BabyBoom period, as academics tried to understand the major changes that were taking place in the economy:

  • Milton Friedman’s classic ‘A Monetary History of the United States’ was published in 1963, and led him to argue that “inflation is always and everywhere a monetary phenomenon”  
  • Franco Modigliani’s ‘The Life Cycle Hypothesis of Saving‘ was published in 1966, and argued that consumers deliberately balanced out their spending through their lives

Today’s problem is that although both theories appeared to fit the facts when written, they were wrong. 

We cannot blame them, as nobody during the 1960s realised the extraordinary nature of the BabyBoom.  The word “BabyBoom” was only invented after it had finished, in 1970, according to the Oxford English Dictionary.

Friedman had no way of knowing that the number of US babies had risen by such an extraordinary amount.  As these babies grew up, they created major inflation as demand massively outgrew supply.  But once they entered the Wealth Creator 25 – 54 age cohort in large numbers and began working, supply began to catch up – and inflation to fall.

Similarly, Modigliani had no way of knowing that people’s spending began to decline dramatically after the age 55, as average US life expectancy during the BabyBoom was only around 68 years.

But today, average US life expectancy is over 10 years higher.  And as the second chart shows, the number of households in the 55+ age group is rocketing, up by 55% since 2000.  At 56m, it is fast approaching the 66m households in the critical 25 – 54 Wealth Creator cohort, who dominate consumer spending:

  • Each Wealth Creator household spent an average of $64k in 2017, versus just $51k for those aged 55+
  • Even this $51k figure is flattered by the large number of Boomers moving out of the Wealth Creator cohort
  • Someone aged 56 spends almost the same as when they were 55.  But at 75+, they are spending 47% less
  • Older people already own most of what they need, and their incomes decline as they approach retirement

Unfortunately, today’s central bankers still base policy on these theories, just as Keynes’ warned:

“Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back”.

The result is seen in the third chart from the Brookings Institute.  It highlights how labour’s share of income has collapsed from 64% in 2000 to 57% today.  The date is particularly significant, given that the oldest Boomers (born in 1946), reached 55 in 2001 and the average US Boomer became 55 in 2010.

  • Fed Chairman Alan Greenspan tried to compensate for this paradigm shift from 2003 by boosting house prices – but this only led to the 2008 subprime crisis which nearly collapsed the global economy
  • Since then, Fed Chairs Ben Bernanke and Janet Yellen have focused on boosting the stock market, as Bernanke noted in November 2010:

“Higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.

But fewer Americans own stocks than houses – only 54% versus 64% for homes.  So “printing babies” cannot work.

The real issue is that the dramatic increase in life expectancy has created a paradigm change in our life cycle:

  • It is no longer based on our being born, educated, working, retiring and then dying
  • Instead, we have a new stage, where we are born, educated, work, and then retrain in our 50s/60s, before working again until we retire and then die

This transition would have been a difficult challenge to manage at the best of times. And having now gone in the wrong direction for the past 15 years,  we are, as I warned last year, much closer to the point when it becomes:

“Obvious that the Fed could not possibly control the economic fortunes of 321m Americans. Common sense tells us that demographics, not monetary policy, drive demand. Unfortunately, vast amounts of time and money have been wasted as a result. The path back to fiscal sanity will be very hard indeed.”

 

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Debt, demographics set to destroy Trump’s GDP growth dream

US debt Apr17Unsurprisingly, Friday’s US GDP report showed Q1 growth was just 0.7%, as the New York Times reported:

“The U.S. economy turned in the weakest performance in three years in the January-March quarter as consumers sharply slowed their spending. The result fell far short of President Donald Trump’s ambitious growth targets and underscores the challenges of accelerating economic expansion.”

And as the Wall Street Journal (WSJ) added:

The worrisome thing about the GDP report is where the weakness was. Consumer spending grew at just a 0.3% annual rate—its slowest showing since the fourth quarter of 2009… As confirmed by soft monthly retail sales and the drop off in car sales, the first-quarter spending slowdown was real“.

The problem is simple.  Economic policy since 2000 under both Democrat and Republican Presidents has been dominated by wishful thinking, as I discussed in my Financial Times letter last week.

The good news is that there are now signs this wishful thinking is finally starting to be questioned.  As the WSJ reported Friday, BlackRock CEO Larry Fink, who runs the world’s largest asset manager, told investors:

“Part of the challenge the U.S. faces, Mr. Fink said, is demographics. Baby boomers, the largest living generation in the country are aging, reaching retirement age.  “With our demographics it seems pretty improbable to see sustainable 3% growth.””

And earlier this year, the chief economist at the Bank of England, Andy Haldane, suggested that the importance of:

“Demographics in mainstream economics has been under-emphasized for too long.”

Policymakers should have focused on demographics after 2001, as the oldest Boomers (born in 1946) began to join the low-spending, low-earning New Old 55+ generation.  The budget surplus created during the SuperCycle should have been saved to fund future needs such as Social Security costs.

But instead, President George W Bush and the Federal Reserve wasted the surplus on futile stimulus policies based on tax cuts and low interest rates.  And when this wishful thinking led to the 2008 financial crisis, President Obama and the Fed doubled down with even lower interest rates and $4tn of money-printing via quantitative easing.

This wishful thinking has therefore created a debt burden on top of the demographic deficit, as the chart confirms:

  Between 1966 – 1979, each $1 increase in US public debt created $4.49 of GDP growth, as supply and infrastructure investment grew to meet the needs of the Boomer generation
  Debt still added to GDP in 1980 – 1999 during the SuperCycle: each $1 of debt created $1.15 of GDP growth
  But since 2000, debt has risen by $13.9tn, whilst GDP has risen by just $4.6tn

Each $1 of new debt has therefore only created $0.33c of GDP growth – value destruction on a massive scale

It is therefore vital that President Trump learns from the mistakes of Presidents Bush and Obama.  Further stimulus policies such as tax cuts will only make today’s position worse in terms of debt and growth.  Instead, he needs to develop new policies that focus on the challenges created by today’s ageing population. as I suggested last August:

“3 key issues will therefore confront the next President. He or she:

□  Will have to design measures to support older Boomers to stay in the workforce
□  Must reverse the decline that has taken place in corporate funding for pensions
□  Must also tackle looming deficits in Social Security and Medicare, as benefits will otherwise be cut by 29% in 2030

It has always been obvious that the Fed could not possibly control the economic fortunes of 321m Americans. Common sense tells us that demographics, not monetary policy, drive demand. Unfortunately, vast amounts of time and money have been wasted as a result. The path back to fiscal sanity will be very hard indeed.”

Markets doubt Carney’s claim to have saved 500k UK jobs

Brexit Oct16

Last week as the BBC reported, Bank of England Governor, Mark Carney, explained to an audience in Birmingham that the Bank had saved the UK economy after the Brexit vote in June:

Between 400,000 and 500,000 jobs could have been at risk if the Bank had not taken action after the referendum, he said.  ”We are willing to tolerate a bit of an overshoot [on inflation] to avoid unnecessary unemployment. We moved interest rates down to support the economy.”

Imagine that!  How wonderful, that one man and his Monetary Policy Committee could save “between 400,000 and 500,000 jobs“, just with a speech, an interest rate cut, and more money-printing.

There was only one problem, as the chart above shows.  Markets didn’t applaud by buying more UK government bonds and so reducing interest rates.  They sold off again (red line)*, panicked by the idea that debt was rising whilst growth was slowing and the currency falling (blue line):

  Interest rates had fallen after the June 23 vote, as traders bet that Carney would add more stimulus
  They fell to 1.09% on June 24, and then to 0.65% after his August confirmation that this was underway
  But then, in a departure from the Bank’s script, they bottomed at 0.53% a week later, and began to rise
  Premier Theresa May caused further alarm at the Conservative Conference, suggesting Brexit might be for real
  They closed on Friday after Carney’s speech at 1.1% – nearly twice the August level, and above the June 24 close

Over the weekend, traders were then able to read the previously unpublished comments of Foreign Secretary, Boris Johnson, on the implications of a Brexit vote:

There are some big questions that the “out” side need to answer. Almost everyone expects there to be some sort of economic shock as a result of a Brexit. How big would it be? I am sure that the doomsters are exaggerating the fallout — but are they completely wrong? And how can we know?

“And then there is the worry about Scotland, and the possibility that an English-only “leave” vote could lead to the break-up of the union. There is the Putin factor: we don’t want to do anything to encourage more shirtless swaggering from the Russian leader, not in the Middle East, not anywhere.

“And then there is the whole geostrategic anxiety. Britain is a great nation, a global force for good. It is surely a boon for the world and for Europe that she should be intimately engaged in the EU. This is a market on our doorstep, ready for further exploitation by British firms: the membership fee seems rather small for all that access.

“Why are we so determined to turn our back on it?”

Its just a pity that it was left until now for Johnson’s “alternative view” on Brexit to emerge.  It confirms my fear immediately after the Brexit vote, that Brexit will prove to be:

The canary in the coalmine.  It is the equivalent of the “Bear Stearns collapse” in March 2008, ahead of the financial crisis.    And as I have argued for some time, the global economy is in far worse shape today than in 2008, due to the debt created by the world’s major central banks.

The sad conclusion is that the world is now likely to suffer some very difficult years.  Markets will have to relearn their true role of price discovery, based on supply and demand fundamentals, rather than central bank money-printing.  On Wednesday, I will look at some of the wider implications for global interest rates.

* Bond prices move inversely to interest rates, so a higher rate means a lower price

WEEKLY MARKET ROUND-UP
My weekly round-up of Benchmark prices since the Great Unwinding began is below, with ICIS pricing comments:
Brent crude oil, down 50%
Naphtha Europe, down 48%.“Petrochemical demand high despite margin drop”
Benzene Europe, down 53%. “Prices have ebbed and flowed with the crude oil/energy market as well as market developments in the US”
PTA China, down 40%. “Bottle chip producers in China have been staying away from purchasing import cargoes, with traders describing demand for PET producers as ‘soft”
HDPE US export, down 31%. “The depreciation of Chinese Yuan dampened buying interest for import cargoes”
S&P 500 stock market index, up 9%