Anyone who used to watch Father Ted will remember the scene in which he tries to teach Dougal about perspective. Half our readers will now be wiping tears of laughter, for the benefit of the other six readers, this involves Dougal’s inability to distinguish between small, plastic toy cows and those in a far away field. For the Father Ted afficionados the mere mention of “Small. Far away.” can spark a stitch-inducing hysteria. Otherwise, please do have a quick gander at You-Tube.
As usual, I hope that my apparently random opening gambit has some degree of relevance. Perspective in financial markets is a complex concept. If anyone had suggested under the New Year mistletoe that by mid-summer the UK’s rate of inflation would still be as high as 7.9%, they would have been shown the Uber and sent home as a misery guts. Nonetheless, last week’s news that both core and headline inflation rates for June were 0.2% lower than expected was met with bunting, marching bands, street parties and calls for an extra Bank Holiday. UK equity prices soared, gilt yields fell and everyone lived happily ever after.
As welcome as this all is, it is still bizarre. In Father Ted terms, the markets are not able to make out whether or not these rates of inflation are small or far away. The 6.9% core rate may have been lower than the 7.1% allegedly expected, but it is still miserably high and, I strongly suspect, will not dissuade the Wise People of the Monetary Policy Committee from raising interest rates yet further at their regular pow-wow next week.
Those as old as me will know that we have all worked with a great number of people. And a number of great people. I am very lucky to have spent several happy years working alongside Simon Rubinsohn (or the Prof, as we knew him), who is now the long-standing Chief Economist at the Royal Institute of Chartered Surveyors (or RICS). Anyway, the Prof has his name attached to RICS’ monthly survey of the UK’s housing market, as reported by its surveying members. This is usually as good an indicator of the state of residential property as there is. I hope it is being read in Threadneedle Street, as well as up here on a soggy Bodmin Moor. RICS is reporting that mortgage rates have started to bite, I suspect it is actually slightly more than this. I fear that that not only have they bitten, but they are now starting to chew.
The Federal Reserve’s Federal Open Markets Committee will raise American interest rates again on Wednesday evening. Strictly speaking, I am rightly not allowed to say that as a matter of fact, but you could knock me darn wiv a fevvah if they don’t. Knowing, as we do, that perspective is currently everything, the market is expecting a quarter point rise, with some wording to say that may well inflict even greater pain on the economy when they come back from their holidays in September.
The Banks have also lost their sense of perspective. Whatever happened to understanding time lags? The behaviour of economies and inflation now was determined by decisions made long ago. Economic data has been deteriorating for some while, and this morning’s updates to the Purchasing Managers Indices (PMIs) for the UK and Europe show a sharp and unexpected deterioration.
I need also to throw in one of my regular references to the rate of growth (or shrinkage) of the money supply. I have rarely written that I am indebted to Mervyn King, the erstwhile Governor of the Bank of England, but this morning I doff my cap to the Baron of Lothbury. Perhaps he has even been reading Innovation? His latest comments on the state of the world (or at least the UK) are a welcome echo of almost everything that we have been arguing through this economic cycle, including that the Bank is making an enormous mistake by ignoring the stagnation of the money supply. To be fair, we should make that a plural ‘Banks’, as it is equally applicable to the Federal Reserve and European Central Bank.
Coming back to great people with whom I have worked, I make one of my occasional visits to the help of Professor Tim Congdon (thank you, Tim). Tim’s latest calculations show that in the two years to November 2021, US M3 rose by an annual rate of 15.6%. Most recently, that annual rate has fallen (collapsed) to -0.2%. In the UK, the numbers are 10.1% and 2.3%.
So what we have is a balancing act between the pace at which economies deteriorate, caused by the rates of interest already imposed, and the time it takes for the Central Banks to realise that they have got it wrong, again. The markets are saying that the latter will happen before the former becomes too painful. We should not be surprised if the scales wobble a little, both ways, before the mistletoe is out again.
Finally, congratulations to those who spotted last week’s couplet from Don’t You Want Me? Today, a classic from two years later: “People always talkin’ about your reputation”. As a clue. Fatboy’s reworking of this seven years later is probably (unfairly) better known than the original. And we have an easy Steely Dan this week: “They got a name for the winners in the world. I want a name when I lose.”
Jim Wood-Smith – Market Commentator and Head of Climate Transition
All charts and data sourced from FactSet
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