Archive for September, 2010

Gold Rush

On Tuesday afternoon, the Fed gave a statement which left the door open to further quantitative easing in the US. The dollar sold off in response and so the price of gold in dollars rose to another new record high.

So far, so reasonable sounding. The dollar has weakened by about 3% on a trade weighted basis over the last month, and gold has risen by about 4%.

There is only one problem. Over the first half of this year, the trade weighted dollar strengthened by about 5%. And gold? It went up by 10%.

It seems that in the current bull market for the metal, it’s heads you win, tails you don’t lose. Attempts to explain the behaviour of the gold price by reference to the strength of the dollar fail in the face of the facts. Likewise any effort to attribute gold’s strength to inflation, which in the US is hovering at around 1% p.a. – and whose low level is responsible for worrying the Fed in the first place. And if there’s no inflationary or devaluationary rationale for buying gold, then what’s the point? Like any commodity it yields nothing and will actually cost you money if you physically want to own it.

Gold has to be one of the biggest market bubbles around, being driven ever higher on speculative froth and spurious explanations. Admittedly this seems to be a minority view – “gold bubble” gets a mere 6 million hits on Google as opposed to 38 million for “gold fund“. Either way: how much further can the price go?

In today’s money, gold was worth more in US$ back in the early 1980s than it is now – but not for long. The inflation-adjusted price peaked at over $1,800 in early 1980, having tripled over the previous two years, before losing two thirds of its value again over the next five. The price today is touching $1,300 – almost exactly quadruple the $326 reached at the bottom nine years ago.

When you consider that during the 80s gold spike inflation in the US was running in double digits, peaking at an eye-watering 14.8%, and that today the metal is well on the way to equalling its performance back then while some commentators are still worring about deflation .. In the words of Lord Byron, a “thirst for gold” right now may well turn out to be a “beggar’s vice”.

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24/09/2010 at 11:25 am 1 comment

Hard Task

Spare a thought this week for Mervyn King. For the eighth month in a row, CPI inflation has come in at 1% or more above the 2% target set for him by the Chancellor. The Bank of England has been saying for some time that high inflation was due to temporary effects such as this year’s VAT hike or the recent weakness in sterling, and the City believed them, with headline and core CPI both forecast to fall.

However, the release of data for August on Tuesday saw the headline number stuck at 3.1%, and the core rate – which excludes the supposed distraction of more volatile items such as food and fuel – actually rise (to 2.8%).

But it is not only the level of inflation which should be giving the Governor a headache.

On Wednesday, UK earnings data showed that after a promising first half of the year, wage growth has practically stalled with average earnings for the last three months only 1.5% higher than the equivalent period last year. Adjust this for the previous day’s inflation number and we find that the purchasing power of the average employee’s pay packet will have fallen by some 1.6% during that time.

Britain’s relatively high inflation makes this a unique problem. On the latest figures, real wages are flat on the year in the Eurozone, 0.6% higher in the US and up 2.2% in Japan. So for most of our competitors, the end of recession has signalled a gradual return to increased prosperity, while British workers have got poorer.

This state of affairs has attracted relatively little comment so far, but if it persists, a prolonged period of falling real wages would undoubtedly dent consumer confidence and spending and possibly single the UK out for the rollercoaster ride of a “double dip”.

We hope that inflation falls away as the Bank expects and forecasts it to. After all, broad money growth is near zero, sterling has been getting stronger for six months and the economy is growing but slowly. So perhaps the recent data reflect little more than temporary pricing quirks – retailers who absorbed the cost of January’s VAT hike at first but have now decided not to do so, for example.

But if there is something uniquely inflationary about the UK – something in our supply chain that is causing sustained upward pressure on prices – the impoverishment of workers (and pensioners, and savers) will become ever more meaningful and the Bank will have to increase rates to kill inflation off. This is after all the whole point of having an inflation target to begin with. And in that case the nascent recovery could be choked off.

On the one hand, a policy decision that could kill the British recovery; on the other, inaction that could see recovery destroyed by the erosion of real incomes. Not an enviable choice.

Poor Mr King.

17/09/2010 at 10:31 am 4 comments

The Burden Of Debt

As equity markets consolidate their summer gains and the economic recovery continues to hold, now is a good time to remind ourselves of the serious problems still faced by many countries in the wake of the financial crisis.

Last week, Anglo Irish, the broken and soon to be broken up bank, announced that it needed a little more help from the Irish taxpayer to stay solvent:

Anglo Irish Bank Corp. said Aug. 31 it needs about 25 billion euros ($32.1 billion) in state funding, equivalent to about two-thirds of this year’s tax revenue. Standard & Poor’s, which last week cut the country’s credit rating to AA‑, said the state may have to inject as much as 35 billion euros.

The Irish finance minister has even gone on the record to say that the latest bailout bill won’t bankrupt the country. Of course, the very fact that such an assurance is necessary makes it less than entirely reassuring.

Meanwhile, over in Spain, where unemployment of 20% is even higher than it is in Ireland (14%), trade unions are planning a general strike for the end of this month to protest the enactment of labour market reforms. Said one union leader, the appropriately surnamed Ignacio Fernandez Toxo, at a rally in Madrid yesterday: “Now more than ever, a general strike makes sense.”

In Greece, the pained reaction to austerity measures continued with a transport workers’ strike on Wednesday. Further protests and more strikes are expected in the days ahead.

It would be too glib to dismiss this as isolated squealing from the PIGS. This week’s transport strikes here and in France could well foreshadow worse to come. After all, it is not just the Irish who face the prospect of having to inject more taxpayer funds into a banking system that had outgrown the national balance sheet; nor is it just the Greeks who are having to confront the problem of rising debt to avoid the nightmare of a full blown sovereign crisis.

We remain sceptical of a double dip and constructive on the economic outlook, therefore, but cautiously so. Events over the last couple of weeks should serve to remind us that along the road to recovery the world will encounter a few speed bumps – and the occasional land mine.

10/09/2010 at 11:25 am 2 comments

Looking Ahead

It has been observed that making decisions on the basis of economic releases is like driving your car while looking only in the rear view mirror. The “latest” data, as a rule, only tells you what happened in the past: that GDP number refers to last quarter, those unemployment figures are the fruit of hiring decisions taken possibly years ago, and even that inflation number only tells you what prices did last month.

As with any rule, however, there is an exception. Confidence surveys can give a reliable indication of future economic outturns as they poll people about their intentions, and private consumption is invariably the largest component of economic output.

This week, consumer confidence data was published for the US, the UK and the Eurozone. In each case confidence both rose on the month and exceeded economists’ expectations.

Regular readers will know that we believe in getting under the skin of this kind of data. So in the US, it is true that the published number of 53 remains well below the long term average for the series (going back to 1967) of 95 – but it’s way above the bottom of 25 reached in 2009. In the UK, the number was almost exactly between the highest and lowest since the series began in 1981, while the Eurozone release confirms a dramatic recovery in confidence to levels which now exceed those of 2004-5.

Consumer confidence is typically influenced by such things as employment, interest rates, inflation and asset prices (especially housing). So a sharp rise in joblessness, bank rates or inflation, or a renewed collapse in asset prices, could cloud the horizon anew.

For the moment, however, we should take some reserved comfort from the only forward looking data we have to hand. The longer they have to operate without further shocks, the further the immeasurable processes of the private microeconomy will drive the recovery.

03/09/2010 at 11:08 am 2 comments


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