2013-05-22T11:16:43-04:00 Jeremy Cook http://www.huffingtonpost.co.uk/author/index.php?author=jeremy-cook Copyright 2008, HuffingtonPost.com, Inc. HuffingtonPost Blogger Feed for Jeremy Cook Good old fashioned elbow grease. tag:www.huffingtonpost.com,2013:/theblog//3.3207103 2013-05-03T06:58:29-04:00 2013-05-03T09:41:02-04:00

Jeremy Cook http://www.huffingtonpost.com/jeremy-cook/
I would hope to see some other measures introduced to ensure that people and businesses get some more support in this difficult time. Something similar to that of the UK's Funding for Lending Scheme, which ensures a smooth transmission of cheap credit to SMEs, would work. Looking at some of the commentary from the ECB meetings, it sounds like consultations on these matters have started but, and the Bank of England would back up their European counterparts on this, these things take time to come into effect.

Draghi's remarks about the possibility of negative interest rates are rather out of character and have destroyed all of the euro's gains through the past few days. The most poisonous thing for a currency is negative interest rates. Late last year we saw major Swiss banks like UBS and Credit Suisse impose negative interest rates on Swiss franc accounts, so although they seem like a last resort there is a recent precedent.

Paul Tucker, Deputy Governor of the Bank of England, in recent testimony to the UK government's Treasury Select Committee spoke of a Bank of England conversation that considered negative interest rates here in the UK. Tucker's comments were yet another overt example of an attempt to weaken the currency disguised as policy to get consumers and business spending. It's a bluff though.

This week's US Federal Reserve meeting was different in so much that the rate setting committee openly criticised the fiscal policy of the US government. The FOMC said the nation's fiscal policy is holding back the recovery and that, as a result, they may have to loosen monetary policy further.
The sequestration of spending cuts in the US was a terrible way to cut government expense and the impact has been felt in pretty much every data point in the past month. Indeed, the past month's deterioration has seen the US economy stall quite violently and further call into question the wisdom of the fiscal tightening that has been a key feature of the austerity we have seen on both sides of the Atlantic.

It seems the opposition to fiscal tightening is finally starting to gain higher-level political traction in Europe as opposed to simply being expressed by the people banging drums and waving placards in the streets. Members of the upper echelons of European politics like Olli Rehn and Jose Manuel Barroso, who are the arch advocates of fiscal responsibility, are wavering. The latter said earlier this month that; "while I think this policy is fundamentally right, I think it has reached its limits."

However, the main difference between the Eurozone and the United States right now is the political atmosphere. Businesses want loans to invest in capital and people want mortgages to get their foot on the property ladder and secure a future for their family. The demand for credit is there, but the environment in which either businesses or individuals feel comfortable securing themselves to long-term financing is not.

The lack of predictable market conditions or political stability is what is eating away at the world's confidence. Unlocking that is key to the European future.]]> tag:www.huffingtonpost.com,2013:/theblog//3.3144507 2013-04-24T04:14:03-04:00 2013-04-24T06:06:45-04:00

Jeremy Cook http://www.huffingtonpost.com/jeremy-cook/
The essential argument in this latest round of debate is what happens to the pound if Scotland votes to break-away from the Union?

The 'Yes' campaign wants to keep the pound for obvious reasons. Sterling is, for all its recent travails as a result of the economic crisis, still viewed as one of the world's major currencies and has been used by investors as a haven away from the European debt crisis. Other currencies with reserve status include the US dollar and the Japanese yen, but nobody serious is talking about the possibility of a Scottish tie up with those two.

Setting up an alternative new currency, unless you absolutely need to, comes at a huge cost. Moreover, unless there is a dramatic sea change in the trade ties of companies north of the border, their main partners will remain England, Wales and Northern Ireland. A barrier to entry into these markets, such as different currency, provides absolutely no benefit to Scottish businesses.

There is also no guarantee of the resilience of any new 'Scottish pound'. The argument that 'Yes' campaigners make is that the balance of payments of an independent Scotland would be a lot better than that of the rest of the UK, given its heavily export-centric economy of whiskey, oil and other popular international goods. This is true but an AAA, or even AA rating and security in the debt markets are far from assured because of the country's financial services system.

We all, as UK taxpayers, have bailed out large Scottish banks to the tune of billions of pounds in this financial crisis. Taking the profits of the North Sea oil fields as a major advantage has to come with a major caveat that the debt of those same banks is also transferred to the balance sheet of the new independent Scottish government. This will impact on any credit rating an independent Scotland is assigned.

There are fears that Scotland would have to adopt the euro in order to join the EU but then again the EU is 27 countries with only 17 using the euro at the moment. Suggestions that they would have to join the single currency club, can be seen as scaremongering from the 'No' camp. However, in truth the prospect of joining an ailing Eurozone can hardly be appealing to even the most committed independence campaigner - such is the extent of the uncertainty in the region.

The truth is that a new national currency would be an entirely unappealing prospect, but the options outside of that scenario are hardly appealing either. It's going to be one of the key issues that the people of Scotland will have to think hard about, before the big vote in 2014.]]> tag:www.huffingtonpost.com,2013:/theblog//3.3092468 2013-04-16T10:59:13-04:00 2013-04-16T11:10:07-04:00

Jeremy Cook http://www.huffingtonpost.com/jeremy-cook/ The organisation has cut its forecasts for the average growth levels in the world's advanced economies to a meagre 1.2% for 2013 - with the UK, typically, having its growth forecast lowered by the most (0.7% from 1.0% in 2013 and 1.5% from 1.8% in 2014). This latest set of figures will only serve to strain the already fractious relationship between the Chancellor George Osborne and the IMF even further.
The IMF has previously called for Osborne to relax the pace of the government's austerity plan and reiterated their concern that the fiscal plans of the coalition government are still doing more harm to our economy than good. In this latest report they stated that the "recovery is weak owing to lacklustre demand", and that "consideration should be given to greater near-term flexibility in the fiscal adjustment path." It doesn't really get much clearer than that.
Allies of the Chancellor will say that the IMF's latest comments about the Bank of England and its use of monetary policy justify his quest to bring Mark Carney into the position. However, that would be generous in the extreme. Since the appointment of Dr Carney, it has been clear that unless the UK shows signs of a turnaround quickly, then the Bank of England would be cleared to engage in some more aggressive monetary policy to try to boost growth.
Throughout the financial crisis commentators have been quick to draw comparisons between the UK and the Japanese economies and, in particular, the levels of debt compared to GDP. Japan has been through a couple of 'lost decades' since the 1990s - with growth slowing to a crawl and banks kept alive by a government with a mandate to invest in unprofitable, dying companies. This life support system has done nothing for the economy. 30% of Japanese companies have simply turned into 'zombies' - living off hand-outs that only pay off existing debt and nothing more.
To drag itself out of this slow, yet crushing lack of performance the Japanese government and the central bank have come to together to throw a 'revolutionary' series of stimulus measures at the problem, including asset purchases of a similar size to the ones currently being done in the US but in an economy 1/3rd of the size.
It has been clear for a few months now that the Bank of England's 'Funding for Lending Scheme' has not seen and adequate transmission of cheap credit through to the private sector - and that direct purchases of private sector assets, such as corporate debt, could bypass the still sclerotic banking sector.
With this new report from the IMF bringing the issue of UK growth - or lack thereof - back into the spotlight, it's clear that the government and the BOE need to think fast and come up with a new, legitimate plan to get things going. They need to keep the experiences of Japan in mind and be aware of the fact if our recovery doesn't pick-up soon, there is a real chance that this 'year of slow grind' will turn into a 'lost decade'.]]> tag:www.huffingtonpost.com,2013:/theblog//3.3090077 2013-04-16T04:17:48-04:00 2013-04-17T06:35:32-04:00

Jeremy Cook http://www.huffingtonpost.com/jeremy-cook/ For them, the world of 'fiat' currency - money backed by the full faith and credit of a government and/or central bank who issues that currency under 'fiat' - is doomed to fail. Gold and its inherent tangibility will be the currency to survive through the flaming ashes. The limited supply of gold is central to their belief system.
Of course, it's fair to say that gold has played a central role in global economy for a long time. Before the 19th century factors like exchange rates were not as much of an issue as they are today. Devaluation of currency did occur, but mainly via reducing the amount of gold and silver used within the actual tokens of money in the economy.
With the advent of global trade, exchange rates became more relevant leading up to the big crash in 1929. Countries devalued their currencies within quick succession of each other in order to try and gain an advantage, but it was a false process and following collapse the world moved into the Bretton Wood's system of semi-fixed rates until the 1970s, with the aim being to prevent this kind of thing from happening again.
Participants also agreed to fix their exchange rates by tying their respective currencies to the US dollar, keeping a range around that peg of 1% to maintain stability. Separately, the US dollar was also pegged to the price of gold at $35 per ounce to try and give the dollar credibility.
It all amounted to what John Maynard Keynes, the main architect behind the Bretton Woods system, referred to as the complete opposite of the Gold Standard which had dominated international trade before the Great Depression and war that followed. But that is history now.
Over the past two trading sessions we have seen gold lose around 11% of its value as investors have been dumping this supposed 'haven' of wealth. They're doing this for one reason, and it is not because the world's economy is all fixed and the need for security is therefore at an end. The key is yield or gold's lack thereof.
Investors are looking for a return and, with global interest rates so low, the search for yield has become more difficult. The best performing sovereign bonds over the past few months have been those in the European periphery that pay a decent yield, the best performing stocks are ones that pay a decent dividend and the top currencies come in with interest rates of between 2.5 and 5%.
Gold offers no yield. There is no reward for holding it other than the smug feeling that you are protected from any potential economic Armageddon that's on the horizon. If you believe that's on the cards, then go right ahead and back up the truck and load up on the yellow metal until you're heart's content. Otherwise, you're best to leave it well alone.]]> tag:www.huffingtonpost.com,2013:/theblog//3.2923085 2013-03-21T08:30:34-04:00 2013-05-21T05:12:01-04:00

Jeremy Cook http://www.huffingtonpost.com/jeremy-cook/
I will leave the intricate takedowns of the coalition's housing, corporation tax and fuel duty escalator plans for the broadsheet newspapers - they do it better than most everyone else. I wish to focus on the macro side of things and, in particular, the role of the Bank of England in this year's and further budgets.

Much like the UK has long since shown a preference for outsourcing certain operations to far-flung climes, the overall feeling from this Budget was that the Chancellor is looking to outsource the government's efforts at economic recovery to the incoming governor of the Bank of England, Canadian Mark Carney.

This speech was never going to see a big shift away from the fiscal conservatism which is Osborne's calling card, and therefore the appeals for growth have been met by a nod of the head in the direction of Threadneedle Street.

Osborne spoke of the need for "monetary activism" on Wednesday - something that you could argue that has already been in place here in the UK given the £375bn of asset purchases (QE) the Bank of England has already undertaken, and comments from Committee members around negative interest rates. Newer elements such as forward guidance should help smooth and configure rate expectations further out, but without a change in the Bank's inflation target the MPC will not be let off the leash to employ too many unconventional measures.

It seems more than likely that the first forward guidance projection will show that the Bank of England is unlikely to raise rates here in the UK until 2015.

On a month by month basis the Bank will now be allowed more latitude to consider unemployment and growth when looking to control inflation. However, the fact that the inflation target has not been changed from 2% means that the "monetary activism" which Osborne has promised cannot get too far out of control. It does mean that inflation is only likely to run higher under Carney, maybe that's why he asked for such a large salary in the first place.

How this impacts on growth is obviously the key and given the lack of success we've had in this area, from recent QE and the much-maligned Funding for Lending Scheme, some may see all of this as 'pushing on a string'. The OBR's growth expectation for this year (0.6% down from 1.2%) now match ours, moving forward, although we are prepared to lower that number even further, depending on Q1 data.

The shift in debt dynamics also means that the main indicator that ratings agencies look at for deciding whether a country should be downgraded is looking increasingly perilous. Yesterday's debt/GDP predictions saw the ratio rise to 85.6% through 2015/16 - that is not in keeping with a AAA rating. Moody's have already downgraded us and with Fitch and S&P already having the UK on negative watch I would suspect that we may lose another AAA notch within the next few weeks.

Put all this together and it is clear that the most important member of the UK economy through the coming years will be Mr Carney and not Mr Osborne and it seems that Westminster is more than happy for this to be the case.]]> tag:www.huffingtonpost.com,2013:/theblog//3.2900875 2013-03-18T11:27:29-04:00 2013-05-18T05:12:01-04:00

Jeremy Cook http://www.huffingtonpost.com/jeremy-cook/
Recently we found out that inflation expectations in the UK had moved up to levels not seen since September 2008. This is on the basis that investors expect further quantitative easing (QE) from the Bank of England to once again boost the UK economy, while the collapse of sterling since the beginning of the year has caused our imports to become more expensive.
Like many other central banks around the world, since the financial crisis the Bank of England has used loose monetary policy, via the control of interest rates and the use of QE (or the threat of it in any case), in an attempt to engineer growth.

Whilst the theory goes that currency devaluation should help to make a country's exports more appealing to foreign buyers, there are clear implications for the general public. The primary effect of currency devaluation on the individual is that imported goods become a lot more expensive. In the UK we import a large amount of our food, fuel and machinery from abroad - tomatoes from Morocco, oil from the Middle East, tools from Mexico, the list goes on.

However, it does mean that alongside the oil, food and machinery that form our major imports we are also importing inflation on every boat, truck and airplane that arrives at our docks.
Inflation in itself is not a bad thing for an economy and is considerably more helpful than its 'brother' deflation. Increases in prices and the erosion of the purchasing power of money leads consumers to buy products and services sooner rather than later as they know that, in real terms, the longer they wait the more expensive they will become.

This differs from deflation which sees prices continually falling - which sounds like a great thing - until consumers decide to hold off on purchases in the belief that the goods will be even cheaper next month, and cheaper still later in the year. You then have a scenario where nobody buys anything apart from the bare essentials, and the economy grinds to halt.

The key comes in the relationship between prices and wages. The higher inflation that the Bank of England will force upon the UK populace by devaluing the pound and increasing import prices will be made more painful by the ongoing stagnation in UK wages. If wages are moving 3.5% higher and inflation sits at 2% then people in real and nominal terms are getting richer. The situation we have at the moment is that prices are increasing by 3% but wages are only increasing by 1.5% and so, in real terms, we are getting poorer by 1.5%.

This is the real impact of the 'currency war' that everyone keeps harping on about. While they may have the best intentions, the Bank of England, much like the majority of the world's central banks, are cranking up the pressure on households by continuing to pursue a policy of competitive currency devaluation. You only have to pop to your local supermarket to find the evidence of the real impact of this on-going 'fiscal conflict'.]]> tag:www.huffingtonpost.com,2013:/theblog//3.2876012 2013-03-17T19:00:00-04:00 2013-05-17T05:12:02-04:00

Jeremy Cook http://www.huffingtonpost.com/jeremy-cook/
I've been wrong before and I look forward to being wrong again. Learning is, after all, driven by a desire to avoid later pitfalls.

One thing that I have been wrong on recently is in backing the UK government's austerity plans that have been part of our fiscal landscape since 2010. It has been clear for a fair while now that the prescribed 'medicine' is now doing more harm to the 'patient' than the disease it set out to combat, to use the oft-cited analogy.

I think we can all agree that the level of debt and deficit within government and consumer accounts needs to be reduced in the long-term. Debt is no gift to leave to future generations, as Ralph Waldo Emerson said; 'a man in debt is so far a slave'.

Osborne's first mistake was tying the perception of his performance to a largely meaningless measure of financial security in the form of our credit rating, and not to something more tangible like GDP or unemployment. The Bank of England has a mandate to target inflation and their policy tool-kit is set up to directly allow for adjustments to be made to the economy depending on whether its velocity needs to be slowed or quickened.

The Bank of England has sacrificed itself and the pound on the altar of loose monetary policy throughout the past three years, with little to no success in promoting growth. It's time for the government to take over the hard yards and give British industry a helping hand.

The Moody's downgrade has been hailed as further evidence that the UK should 'double down' on its deficit reduction efforts. This would be true had the ratings agency not stressed that the greatest issue the UK faces at the moment is a lack of short and medium term growth.

I'm not asking for huge amounts of infrastructure spending with Chinese 'ghost towns' and 'bridges to nowhere' for the sake of occupying a stagnant construction industry, but rather I'm suggesting that a relaxation of the spending cuts through the next two years could provide the breathing space the UK economy needs. The fact that we have stopped sinking doesn't mean we haven't stopped drowning.

Mr Osborne has the perfect opportunity to say to his party, the rest of the House of Commons, the country and the markets on Wednesday, that the UK is going to start growing again. He has the power to do so and it seems that it is nothing but pride that stopping him from changing course. And we all know what pride comes before...]]> tag:www.huffingtonpost.com,2013:/theblog//3.2772513 2013-02-27T07:14:13-05:00 2013-04-29T05:12:01-04:00

Jeremy Cook http://www.huffingtonpost.com/jeremy-cook/
Statistically this does mean that the fear factor surrounding the prospect of a 'double-dip' recession last year were very much overdone, much like the concern over a 'triple-dip' through Q1 of this year. However, the fact remains that the growth profile of the UK economy has been one of stagnation for basically three years now. Oscillations around the 0% growth mark are all much of a muchness; the trend is still one of negligible improvement.

Looking into these figures there are some good signs. A revision to construction sector growth to 0.9% from 0.3% is most welcome, and it goes along with an improving set of sector data which we've seen since Q3. Consumer spending rose by 0.2% and services overall were also revised higher by 0.1%. Unfortunately, all of this has been overshadowed by some awful trade figures. Export growth shrank by 1.5% while imports were 1.2% lower.

The recent depreciation of sterling is a good thing if you believe that a lower pound will lead to a rebalancing of the UK economy towards export growth. Exports can be made more attractive by pricing or by simply making products that are so much better than their competitors' that there is no choice to be made.

The Bank of England cannot engineer the latter and will instead go with the former of these two options. The problem is that this plan hasn't worked over the past four years and I would like to know why they think that this time will be any different. Metaphorically speaking, you can give an athlete great running spikes, but if he's half as fit as the competitors he's never going to win.

Regardless, they are certainly giving it their best shot it seems. The latest minutes from the Bank of England suggested that, alongside another round of quantitative easing, a cut in interest rates or a plan to invest in corporate debt may be forthcoming. The Deputy Governor, Paul Tucker, in testimony to the House of Commons Treasury Select Committee yesterday, twice mentioned the possibility of negative interest rates; a phenomenon where depositors would have to pay to hold money in a bank - a de facto incentive to spend and not save. A scary prospect, and although this is highly unlikely to happen, the damage to the pound was already done.

However, a fall in imports can also be tied back to the weaker pound as companies either seek cheaper local alternatives or, more likely, are importing less from abroad in reaction to lower demand from customers. Given we are an island nation, reliant on inward trade, the increased inflation from our imports will outweigh the benefit from exports massively.

Wednesday's figure has only really served to underline the general sloth of the UK economy and does nothing to change my expectation that the UK economy will grow by no more than 0.6% this year, which is hardly a cause for celebration.]]> tag:www.huffingtonpost.com,2013:/theblog//3.2765024 2013-02-26T09:32:51-05:00 2013-04-28T05:12:01-04:00

Jeremy Cook http://www.huffingtonpost.com/jeremy-cook/
Moody's downgrade of the UK economy last week was not a surprise for anyone who takes even a passing interest in the world of finance. Some had predicted that the loss of Britain's prized AAA rating would spark a run on the pound and UK debt, however the markets have not even broken into a brisk walk. Instead, the predicted 'humiliation' of sterling and UK debt assets has, as of yet, failed to materialise. Hopefully this will allow for some clearer thinking from Westminster.

The influence of these ratings agencies is often overplayed. Tying the perception of your economic performance to someone else's opinion is, and always has been, a recipe for disappointment. The question is, with the single-mindedness of keeping our rating at AAA now out of the way, what else is there to fill the policy gap? The sacred calf has been slain and Osborne has been given a one-time opportunity to change the tack of UK fiscal policy. In next month's Budget he has the perfect setting.

This is not to say that we won't come in for another round of downgrades by other ratings agencies in the coming months. Ratings agencies typically like to base their decisions around large trigger events - the major surprise of the Moody's downgrade was the timing - and with the initial reading of UK GDP for Q4 out of the way the market was looking at March's Budget as the next signpost.
S&P seem to be waiting until then, with Fitch saying as much in recent weeks. They will be looking to see how Osborne balances the expectations of the markets, politicians and the voters; it's difficult to put those in order from highest to lowest as it stands at the moment.

Moody's and Osborne have warned that deviation from the deficit reduction plan may prompt 'further ratings action' and so, unfortunately, the chance of a real change of course remains slim. It's an adjustment which is needed - the UK has been asleep at the wheel of growth for too long now.]]> tag:www.huffingtonpost.com,2013:/theblog//3.2494455 2013-01-17T07:54:20-05:00 2013-03-19T05:12:01-04:00

Jeremy Cook http://www.huffingtonpost.com/jeremy-cook/
Firstly, the UK's economic footing is by no means secure enough for us to even hint at an exit from the EU let alone actually go ahead with it. While our debt/GDP levels are relatively good by EU standards, factoring in the amount of household debt elevates this level to one of the worst globally. The Chancellor's plan to retool the UK economy via "a march of the makers" has failed spectacularly despite the support of a central bank that has been in the business of weakening its currency for the best part of four years.

The argument that the UK will come under further rule from a 'United States of Europe' is also fear-mongering of a childish level. Monetary policy unity enforced by the ECB can survive if the pace of the fiscal reconciliation within in each member state also continues. The political will to keep the status quo and not mutualise debt in Europe seems to be at a high point, and, alongside improving financial conditions for the region's banks, this allows the foundations for future prosperity to be settled as they are, without a centralised office in Frankfurt sending down befehl from on high.

That is not to say that the EU is by any means perfect. A union of countries that was set up to help the weakest has instead acted as a feeding pond for the strongest. Germany benefits from its industrial prowess and has been stealing productivity from other eurozone economies for years. A more equal, not a smaller, Europe is what is needed.

This can be solved by deepening investment within peripheral Europe in digital services, renewable energy, and improved agriculture. Greece cannot fight Germany on cars and high-tooled machine parts so why bother trying?

The speech comes at a difficult time for the PM. The UK is likely to lose its AAA rating following a poor Q4 GDP release next week, while the current deficit reduction plan looks to be no longer be fit for purpose. These issues would not be a problem had they not been exclusively tied to each other as an indicator of progress. In doing so, the political pressure will be more crushing than the economic or market reaction.

This is not an argument calling for complete integration. The clans of 'In or Out' spasming with each cough of anti-EU bile are part of an old squabble. 'Opt-outs', which fell by the wayside in the early days of the Labour government that came to power in 1997, provide the UK with its own back pocket veto. Anything else reduces our bargaining position.

As much as the Europhiles like to applaud the impact of the EU on trade, the old reasons of containing the march of political extremism are no longer valid and a new EU will evolve from the current crisis. We may not like them, and they certainly don't like us at the moment, but isn't that what international relations are about anyway?]]> tag:www.huffingtonpost.com,2013:/theblog//3.2431637 2013-01-08T19:00:00-05:00 2013-03-10T05:12:01-04:00

Jeremy Cook http://www.huffingtonpost.com/jeremy-cook/
That's of course not to say that we don't expect the Monetary Policy Committee (MPC) to continue its quantitative easing program through 2013, taking the total amount purchased from its current level of £375bn towards £500bn by the end of the year. The minutes of the latest meeting did not explicitly call for further action but did note that business surveys pointed to little more than output subsistence in the latter part of last year. A continuation of those conditions alongside the paucity of consumer confidence, regardless of a spike in inflation, would see further loosening of monetary policy.

Inflation is going to be a big story in 2013 worldwide but especially for the UK. While the Bank of England's asset purchase program isn't in itself inflationary, the devaluation of sterling is. We think of imports and exports as goods and services, lorries and ships, planes and electronic transfers. Our largest import through 2013, because of the Bank's monetary policy, will be inflation.

Away from rent and mortgage payments, consumer expenditure is largely taken up by food and energy and, unfortunately, the prices for these are only going one way. All the larger utilities companies increased prices anywhere between 6% and 11% in Q4 while we have seen the Chairmen of two of the largest UK supermarkets, Sainsbury's and Waitrose warn about food prices.

Most of us will have moaned a bit about the weather in 2012, it was the second wettest on record after all. While for us city-dwellers that meant soggy socks and a continual need to replace the umbrella you left on the train, for apple farmers, for example, it meant the worst harvest in 15 years and a decline in production of some 45%. The lack of supply will cause prices to rise alongside whatever expensive imports our weaker sterling can garner.

I have been wary of calling for extra asset purchases from the Bank of England of late given our belief that they are susceptible to the law of diminishing marginal returns. Mark Carney, the new Bank of England Governor due to take over on July 1st, has suggested in the past that the Bank of England moves from an inflation targeting regime to one that targets nominal GDP.

Nominal GDP is simply GDP that hasn't seen adjusted for inflation. Targeting both would lessen the risk of knee-jerk reactions to spikes in inflation, such as the ECB's hike in rates in 2008 as the world economy started to circle the drain. With a nominal GDP target the ECB would have seen the slip in growth and may have been given pause. The risks are that, should the slowdown be as a result of supply issues and not one of demand, then the relative increase in inflation could see wobbles in the gilt markets and cause consumers' expectations of inflation to go bananas.

This is a risk that would likely see the chancellor oppose any change in plans as Carney takes the stage. The Bank of England needs shaking up, but we think that it may be too much for us Brits just yet.]]> tag:www.huffingtonpost.com,2012:/theblog//3.2291030 2012-12-13T05:12:47-05:00 2013-02-12T05:12:01-05:00

Jeremy Cook http://www.huffingtonpost.com/jeremy-cook/
There has been a noticeable dip in activity when it comes to UK SMEs taking action to hedge their international payments. In fact, a recent survey we commissioned revealed that only 8% have any protection in place for more than 6 months in advance. This is despite the fact that the debt crisis in the Eurozone has not been resolved and the threat of the US 'fiscal cliff' looms across the pond.

Fluctuations in the value of currencies have been a hallmark of the financial crisis to date. And, if you are looking at a long term budget plan, leaving yourself unhedged might be a dangerous tactic despite this short term lull.

Recent comments from ECB chief Mario Draghi that the euro is 'irreversible', and the extension of quantitative easing in the United States for seemingly forever, has combined to reassure investors that the central banks will act as a more substantial backstop in future. I envisage that we are going to see a strong shift away from debt dynamics in the coming few years.

The debt crisis panic which has characterised 2012 will turn into a lingering, nagging fear over growth. The translation of this in the currency markets may mean that volatility continues to slip for now, but businesses should not confuse this for an indication that range-bound trading is here to stay.

The levels of volatility in the major pairs are currently returning to the levels seen pre-crisis. It may however, come as a surprise to most businesses that in GBPUSD for example, the swing between the high and low in the course of a trading year averaged at 12.3% between 2003 and 2006; a time that was typified by calm, almost predictable markets.

Factor in the credit crunch, recessions, debt defaults and bank bailouts and that average has only increased to 14.77% and anybody suggesting that you would be better off to not hedge against your exposure during that period was clearly mistaken.

In fact nobody knows when things may change, and anyone who tells you otherwise is bluffing. It's all about protecting yourself and taking a long term view. Effective planning is very difficult unless you take a strategic viewpoint on the currency markets because they are notoriously fickle.]]> tag:www.huffingtonpost.com,2012:/theblog//3.2249382 2012-12-06T05:43:43-05:00 2013-02-05T05:12:01-05:00

Jeremy Cook http://www.huffingtonpost.com/jeremy-cook/
The market expected cuts to growth and that is what we got. Likewise news of rising debt and an increased period of austerity did not come as a surprise to sterling markets, with both the pound and the yield on UK debt remaining largely ambivalent to the Chancellor's speech.

The fact is that the poor growth - Q3 aside - that the UK has been saddled with throughout the year made the Chancellor's task easier in some ways. He attempted to pull some 'rabbits out of the hat' in the form of lower corporation tax and the permanent delay of a planned 3p increase in fuel duty. These measures were welcome, but they failed to mask the grave nature of his message.

This was an Autumn Statement aimed at maintaining the status quo and, politically, maintaining the AAA rating. Within the first 2 minutes of his speech the Chancellor was extolling the benefits of the UK being a 'safe haven', with interest payments on our country's debt falling by £33bn due to the fall in gilt yields; an amount equalling the budget of the Ministry of Defence. To jeopardise our rating would be to place the future of the UK economy in danger, he said... but would it?

Our fiscal position and lack of growth would have seen us lose our rating a decent time ago had we been part of the Eurozone. The independence of our central bank and the essential control of our own currency has insulated us against much of the fallout of the crisis. The only real market consequence has been that the outlook on our credit ratings has been placed as 'negative' by both Fitch and Moody's; two of the three largest ratings agencies.

However, in its most recent assessment of the UK economy back in September, Fitch accounted for its negative outlook on the basis that weaker growth twinned with debt rising close to 100% as proportion of GDP would put pressure on our AAA rating.

This week's assessment from the Chancellor and the Office of Budgetary Responsibility will be viewed as optimistic by those in the market, including those at the rating agencies. For example, I believe that the expectation of 1.2% growth next year is around double what eventually will come to pass. On this basis the AAA goose is cooked.

What this government must realise is that the preservation of the AAA rating is not the be-all-and-end-all. France's downgrade from AAA by S&P at the beginning of the year saw the euro rally and in the months since has seen yields come lower to around 2%, only 20bps higher than that of the UK's. The yield on its debt due to be repaid in 5 years' time hit a record low this morning, hardly a sign that the market is getting increasingly concerned about the French's ability to repay their debts.

It also follows that if the US, the printer of the global reserve currency and the largest economy in the world, is no longer viewed as an AAA entity, then nobody should be. The quicker the government revises policy away from not slaying a sacred political cow the better.

The glaring fact about the Chancellor's latest figures is that we are on track to have the worst deficit in the industrialised Western world by 2016. The Chancellor warned us that the "road is hard". However, someone should remind him that taking the right road in the first place is also a very good idea.]]> tag:www.huffingtonpost.com,2012:/theblog//3.2197231 2012-11-27T08:50:38-05:00 2013-01-27T05:12:01-05:00

Jeremy Cook http://www.huffingtonpost.com/jeremy-cook/
Carney's job running the national central bank will have been easier in Canada than it will be in the UK. Canada is viewed to have had a 'good crisis' and the Bank of Canada was one of the torchbearers for the ultra-loose monetary policy from central banks that we have at the moment.

The make-up of its economy has also helped; it has a natural export base of commodities to fall back upon, while its main export partner in the US is growing at around 2.5% on an annualised basis. The UK has strived to retool its economy towards exports in the recent few years with little success and our main export market is continental Europe; hardly the greatest market place for goods and services at the moment.

The fact is that, from a markets point of view, we can expect that the monetary policy landscape in the near-term in the UK is unlikely to change with the appointment of Dr Carney. Every central bank in the developed world has followed a similar policy of slashing interest rates and promising to keep them lower for extended periods; we see no reason why the appointment of Dr Carney should change that.

One difference between Carney and King is towards the use of quantitative easing (QE). King has been one of the asset purchase scheme's biggest supporters, twice this year voting for an increase when the majority of the Monetary Policy Committee did not. Carney has instead been a bigger fan of what we call 'extended rate guidance'; pre-committing to ultra-low rates for an extended period to assure borrowers that rates will not surprise them anytime soon and encourage spending. King wouldn't pre-commit to what day it was, let alone to the path of rates in the future.

The place where policy is more likely to change is in the regulatory landscape. Much has been made of the need for regulation of the UK banking sector and the governor's job has morphed from a fairly targeted monetary policy job to one of over-arching financial tsar with responsibility over bank stability seen as a new dual-core duty for the top man on Threadneedle Street.

However, the comparisons with the UK and Canadian banking systems are few and far between. Canada's banks are a lot smaller than that of the UK, make up significantly less of the country's GDP and have lot less competition domestically and globally. The difference, without being discourteous or demeaning to the Canadians, is similar to playing a Premiership football match to one in the Champion's League. In short, the Bank of England job is one of the most important in global finance.

That said, the consensus is that the BOE have got the best man available for the job, and it's hard to disagree. Carney's standing as the head of the Financial Stability Board is an obvious arrow in his quiver on the issue of regulation and only served to enhance his credentials. Sterling has reacted positively to Carney's announcement, while the Canadian dollar slipped to a two-week low following the news and the inevitable uncertainty over his successor. I hear Mervyn King's free.]]> tag:www.huffingtonpost.com,2012:/theblog//3.2000589 2012-10-22T09:26:26-04:00 2012-12-22T05:12:01-05:00

Jeremy Cook http://www.huffingtonpost.com/jeremy-cook/
In fact, the only people who are throwing cash at the markets at the moment are the central banks, with the Bank of England the next "on deck" and expected to inject another £50bn into the UK economy at its November meeting.

This would take the Bank's holding of UK debt to £425bn so far and questions are now arising as to what they, plus those other central banks that have engaged in similar policies (Federal Reserve, Bank of Japan and to a lesser extent the ECB), will do with these holdings of debt once they mature.

Quantitative easing involves the purchasing of debt which at some point must be paid back to the bondholder. The difference in QE is that the government is the issuer and the buyer; it pays itself interest and would, in theory, pay back the principal as well.

The economic argument that is becoming en vogue at the moment is a very neat way of potentially dealing with these huge debts. And it basically boils down to cancelling it.

The government would simply not elect to take the principal when it came for value with the central bank taking a "loss". When you take into account the amounts of debt we're talking about here, the argument moves from being an elegant one to being a downright tempting option.

The Bank of England holds around 25% of the gilts in issuance at the moment; billions that sit on the debt levels of the UK and therefore billions that could be lifted from the debt/GDP ratio and allow the government to relax its austerity push. As I said, tempting.

The problem is once again what we warned of last week; the threat of inflation. Bonds are an investment product and investment into those bonds needs money that would otherwise be spent on consumption; the monetisation of these bonds reverses this, leaves more money to be spent elsewhere, by governments or you and me driving up inflation.

Given that the recent comments from central bankers were more about avoiding deflation than being worried about inflation in the long term, this novel suggestion might become more than just an idea and could legitimately be pursued as a solution.

We got into this mess through financial engineering and manipulation for individual profit. Maybe it's time we considered some more manipulation, this time for the benefit of everyone and not a greedy few.]]>