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Over the weekend, traders were then able to read the previously unpublished comments of Foreign Secretary, Boris Johnson, on the implications of a Brexit vote: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

 

Central bankers create debt, not growth, by ignoring demographic reality

Japan Sept16The world’s 4 main central bankers love being in the media spotlight.  After decades climbing the academic ladder, or earning millions with investment banks, they have the opportunity to rule the world’s economy – or so they think.

But their background is rather strange preparation to take on this role – even if it was achievable:

  Janet Yellen, Chair of the US Federal Reserve, is a former academic
  Haruhiko Kuroda, Governor of the Bank of Japan, is a career civil servant
  Mario Draghi, President of the European Central Bank; and Mark Carney, Governor of the Bank of England, are former Goldman Sachs bankers

None of these roles are noted for their contact with ordinary people.  Nor does their habit of flying First Class and staying in top-class hotels, or being chauffeur-driven to meetings, help them to engage with the real world.  Mark Carney’s travel expenses currently average £100k/year ($130k), in addition to his £250k/year housing allowance.

But the main disadvantage is simply that common sense is not a core requirement for the job.  If it was, then none of the stimulus policies enacted since 2000 – subprime, QE, Abenomics etc – would ever have been considered.

Common sense would have told them that people create demand – not economic models or financial markets.  And anyone used to working with real people would know that the key to demand is (a) the existence of a “need”, or at least a “want” and (b) the ability to afford the purchase.

Last week’s announcements by the Federal Reserve and the Bank of Japan highlight the disconnect.  Unsurprisingly, Yellen and Kuroda’s stimulus policies have completely failed to create sustained demand.  Instead, they have destroyed price discovery in financial markets and created asset bubbles instead.

The above chart highlights the irrelevance of their current policies.  As Bloomberg comment in respect of Japan:

Japan’s economy has been in trouble for decades. Massive monetary and fiscal stimulus have so far failed to spur faster growth. (Last) week, the Bank of Japan met to decide whether to apply yet more economic shock therapy. Here’s the situation the country’s leaders face:

“Japan has the world’s oldest population, as well as a low birth rate and little immigration, but its growth problems go far deeper. In the early 1990s, the country’s postwar growth boom collapsed—decades of deflation followed and Japan started to suffer a shortage of workers….

“Japan’s debt burden far outstrips that of other countries, largely a result of the stimulus introduced to help fix the economy. Abenomics, Prime Minister Shinzo Abe’s rescue plan, has helped to weaken the yen and boost corporate profits but wages and domestic spending have remained fragile.

“Higher debt led the government to consider a sales tax increase for revenue. But the last time it was imposed in 2014, consumer spending and gross domestic product fell, sending the economy into a recession.”

The chart (interactive on Bloomberg itself) confirms this analysis:

  26% of Japan’s population is aged over-65.  And the OECD median is now 18%.  People of this age already own most of what they need or want, and their incomes are declining as they enter retirement
  Japan’s fertility rate is just 1.4 babies/woman, only 2/3rds of the 2.1 replacement level needed to maintain a stable population.  The OECD median is almost as low at 1.7 babies
  Immigration might just be a way of compensating for these factors, but only 1.6% of Japan’s population are immigrants.  The OECD median is also too low to really make a difference at just 12%
  Japanese government debt is more than twice GDP at 247%.  The OECD median is equally worrying at 82%: debt in the other G7 economies ranges from 82% (Germany) up to 156% for Italy.

Fertility Oct13Slowly but surely, the world is realising that central bank policies have been a disaster for the global economy.

Common sense tells us that simplistic “solutions”, such as printing money and lowering interest rates, will never succeed in creating sustainable economic growth.  The real need is for policy to address the cause of the growth slowdown – the impact of the 50% rise in global life expectancy since 1950, and the  50% fall in fertility rates.

Until discussion takes place around the implications of these key facts (highlighted in the second chart), nothing will change, and the debt will continue to rise.  And as the Financial Times commented at the weekend:

The problem with the authorities rigging the markets is it could be painful when they stop doing it.”

 

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 56%
Naphtha Europe, down 53%. “A build-up in products supply has punctured refiners’ margins, according to the International Energy Agency, which warned that global refinery runs are experiencing their lowest growth rates in a decade.”
Benzene Europe, down 54%. “A drop in consumption was felt by numerous players”
PTA China, down 41%. “Bearish demand for spot cargoes as endusers laid off buying due to the proximity to the upcoming week-long National Day celebrations in China”
HDPE US export, down 27%. “Weak overall demand in China weighed down on prices”
S&P 500 stock market index, up 11%

Central banks head for currency wars as growth policies fail

Deflation Jul13The world’s central bankers would have been sacked long ago if they were CEOs running companies.  They would also have been voted out, if they were elected officials. Not only have they failed to achieve their promised objectives – constant growth and 2% inflation – they have kept failing to achieve them since the Crisis began in 2008.

But they are neither,  So instead, they cling on to office, becoming more discredited with every year that passes. Even the IMF is now warning that:

“Advanced economies are facing the triple threat of low growth, low inflation, and high public debt. This combination of factors could create downward spirals where economic activity and prices decline—leading to increases in the ratio of debt to GDP—and further, self-defeating attempts to reduce debt.”

Much of the IMF’s analysis could easily have come from the blog – with just one exception. It, like central bankers themselves, is still too proud to admit that demographics drive the world’s economies – not central bankers:

  • Central banks revelled in the idea they were geniuses during the Boomer-led SuperCycle
  • Like UK Finance Minister, Gordon Brown, they claimed to have conquered the cycle of “boom and bust”
  • But their economic models were so out of date, they couldn’t even forecast the subprime crash
  • Yet its inevitability was obvious even to the blog, long before it happened, as documented in “The Crystal Blog

Finally, however, 8 years later,  the voice of common sense is starting to be heard.  As the World Bank’s country director for Indonesia told the Financial Times:

No country becomes rich after it gets old.  The rate at which you grow [with] a whole bunch of old people on your back is much lower than the rate of growth at which you can grow when people are active, are educated, are healthy.

Nobel Prize-winner, Prof Joseph Stiglitz has also argued the need for change:

“It should have been apparent that most central banks’ pre-crisis models – both the formal models and the mental models that guide policymakers’ thinking – were badly wrong. None predicted the crisis; and in very few of these economies has a semblance of full employment been restored. The ECB famously raised interest rates twice in 2011, just as the euro crisis was worsening and unemployment was increasing to double-digit levels, bringing deflation ever closer.

“They continue to use the old discredited models, perhaps slightly modified. In these models, the interest rate is the key policy tool, to be dialled up and down to ensure good economic performance. If a positive interest rate doesn’t suffice, then a negative interest rate should do the trick….If central banks continue to use the wrong models, they will continue to do the wrong thing.

But central bankers can’t be sacked by shareholders or voted out by the electorate.  And now they are starting to cover up for their own mistakes by blaming each other.  Thus as the Wall Street Journal headlined over the weekend:

“U.S. chides five economic powers over policies
U.S. officials are increasingly concerned other countries aren’t doing enough to boost demand at home, relying too heavily on exports to bolster growth. “Counting on cheap currencies as a shortcut to boosting exports can create risks across the global economy, as nations fight to stay ahead of their competitors”.

This would be sound advice, if it wasn’t for the awkward fact that the US Federal Reserve is currently relying on a devaluation of the US$ to support the US economy.  Just as in Japan and Europe, the Fed’s optimism about its policies creating the magical 2% inflation and a return to SuperCycle growth have just been proved wrong again:

But still, they refuse to recognise the economic impact of  demographic change.  Instead central bankers are now starting to fight amongst themselves.  Each wants a lower value for their currency – even though common sense says this is impossible – and is also irrelevant to meeting the challenge of ageing populations.

So we continue to move through the Cycle of Deflation, as the chart shows.  We are heading, if nothing changes, towards major currency wars.  And it is no surprise that populist politicians such as likely Republican Presidential candidate, Donald Trump, are now starting to argue for trade protectionism to preserve jobs.

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 58%
Naphtha Europe, down 53%. “Naphtha prices rise to fresh 2016 highs on Brent crude”
Benzene Europe, down 53%. “Both benzene and oil initially moved lower due to uncertainty deriving from the decisions expected from the Bank of Japan and the US Federal Reserve”
PTA China, down 39%. “Buyers could book PTA cargoes earlier in the May/June period due to the upcoming preparations for the G20 meetings in China from July onwards, when producers in the entire polyester chain are expected to reduce operating rates.”
HDPE US export, down 27%. “Continuous weak buying interest weighed on the market sentiment in China.”
¥:$, down 4%
S&P 500 stock market index, up 5%

Tokyo, Shanghai stock markets crash; yen rises 8% in 2 weeks

Nikkei v Shang Feb16Pity poor Janet Yellen, you might say.  The head of the US Federal Reserve told the Senate this week that she had been “quite surprised” by the collapse of oil prices since mid-2014.  And she added that the rise of the US$ was similarly “not something that we had expected” (you can see the testimony by clicking here).

But then you might wonder why she doesn’t have people on her staff whose job is to seek out different viewpoints?  Or, indeed, why she didn’t apologise for these critical mistakes and offer to review the Fed’s methodologies?

Instead, she claimed that the mistakes didn’t really matter, and that the Fed’s policy was still correct.  In other words, the Fed is still convinced that it is right, and anyone who disagrees with them is wrong.  This suggests it is still failing to learn the lessons of the past, as I discussed in July:

Previous chairs of the US Federal Reserve had a poor record when it came to forecasting key events:

  • Alan Greenspan, at the peak of the subprime housing bubble in 2005, published a detailed analysis that emphasised how house prices had never declined on a national basis
  • Ben Bernanke, at the start of the financial crisis in 2007, reassured everyone that at worst, the cost would be no more than $100bn

“So we must hope that current chair, Janet Yellen, has better luck with her forecast last week that: “Looking forward, prospects are favorable for further improvement in the U.S. labor market and the economy more broadly”

My concern is that markets are telling us that something is very definitely nor right in the Fed’s models. This is surely the message of the chart above, showing the performance of the Tokyo and Shanghai stock markets over the past 3 months. Suddenly, and quite unusually, both are moving downwards together, despite occasional rallies:

  • Somebody is doing a lot of selling, as both markets are down over 20% in this short space of time
  • The sellers desperately need cash, and they keep selling – Tokyo went into into freefall on Friday, falling 4.8%

Who might these people be?  In Shanghai, they are perhaps property developers, desperate for cash to support their investments.  In Tokyo – Asia’s largest market – they are perhaps oil-based Sovereign Wealth Funds responding to cash calls from governments with urgent bills to pay.

JPY Feb16And then we mustn’t forget that the yen has suddenly jumped by an astonishing 8% since the start of February. Somebody must really need a lot of yen in a hurry, to cause that jump in the currency.  Presumably the money came from selling stocks in the US and Europe – helping to cause the downturn these have seen since the start of the year.

We should all be very worried when moves of this size take place in major Asian stock markets in such a short space of time.  And the yen, after all, is the major currency in Asia after the dollar.

These moves are further evidence that the cracks are opening the the debt-fuelled ‘ring of fire’ created by the central banks with their stimulus programmes.  We can only guess where they will next appear.

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 70%
Naphtha Europe, down 66%. “Naphtha price volatility in line with Brent”
Benzene Europe, down 58%. “Trading was limited due to the IP Week event in London”
PTA China, down 46%. Market closed for Lunar New Year holiday”
HDPE US export, down 42%. “Domestic prices for export material remained stable this week”
¥:$, down 11%
S&P 500 stock market index, down 5%