Ishrc � Discussion Threads

[simon gordon] 25/1/2007 19:46

From the Business:

'There are some notable caveats, too, in the Ernst & Young analysis that merit attention. One is the vulnerability of asset prices to a modest shock that may work to break the spell of low risk aversion and the belief that volatility has been permanently banished. This may strike at confidence in the British commercial property sector where yields have fallen to 4%, lower than those available on "risk-free" gilt edged yields. Last week, Standard Life, one of Britain's biggest property investors, warned that valuations, particularly in the retail sector, have become stretched. '

.......A further rise in interest rates – possibly to 5.75% by the summer – could trigger an exodus of high-net worth investors from hedge funds and private equity vehicles. The fall-out from such a withdrawal could seriously dent confidence in the financial sector and spread very quickly out from there. '

[prokartace] 24/1/2007 08:34

Interesting comment from HSBC

King's overnight emphasis on inflation falling in H2
has taken the edge of the worst expectations for rates without
discounting the prospect of another 1/4% in Feb/Mar to ensure the
MPC are ahead of the curve.Prices paid components and wage claim
headlines will be crucial to this decision/timing.MPC minutes
at 9:30 and MPC voting patterns allied to strength of views will
clearly be keenly scrutinised for additional signs as to
whether a breach of 107 in futs can be sustained with a target
of 20dma at 107.35.Short end 2-5bp steepening early doors
should also be sustained & 2-5y could target 11Jan close of -22
from current -26.5bp if vote 5-4(otherwise ltd to -25bp?).Bund30
& tom Linker55s(=45k futs) should contain absolute progress as
well.Most positions long around here so need more to rally hard

[prokartace] 23/1/2007 09:52

Great stuff. My real concern is with longer term inflation. As we can see, those items in the RPI which have been keeping down the index are now beginning to become a problem. The area which I have concerns is the import of cheap electricals from Asia. This is a one-time only affect on inflation. As economies, particularly China, grow, internal demand will rise, pushing up prices on consumer goods. This in turn will feed thru to us as we will no longer have sources of cheap goods.

In the mean time high interest rates and therefore a stong pound mean that we will not have a chance to reduce our trade deficit, so that area of the economy cant grow. We can also no longer continue to pay for public sector job creation to boost the economy and, somewhere along the line we need to reduce our massive govt debt. This will also put pressure on longer rates. Result stag-flation.

Were all doomed Mr Mainwaring!

Mr Gordon, are you sure to want to be the PM and oversee the mess you have created?

[simon gordon] 22/1/2007 17:03

Interesting snippet from the Times last week:

"The MPC is walking a tightrope. With household debt reaching 165pc of disposable income, a rise in rates to 6pc now is the same as 11pc in the early 1990s," said Michael Taylor, the group's UK economist. "Given the time-lag effects, there is a danger that tightening too far could lead to trouble in 2008."

[simon gordon] 22/1/2007 16:47

Hi Prokartace - I am waiting to see how high interest rates are going to go and then I will look to buy. The BoE minutes are out on 24/1 and should indicate if rates will be raised in Feb.

Some analysts think they could have raised rates by 50pp in Jan. but it would have freaked the markets, so a rate raise in Feb. could happen.

This is an excellent article from yesterday's Telegraph:

It's the economy, stupid

By Liam Halligan, Economics Editor, Sunday Telegraph

Just when the Chancellor thought he'd finally secured the keys to Number 10, a storm of bad news arrives. Last week's inflation hike and rising interest rates are the early signs that Britain is heading for trouble – and it's all Mr Brown's fault

Mr Brown faces a backlash in the coming months

Could Britain get caught in a "wage-price spiral? Could our high-performance economy, "the most successful in the Western world" as Gordon Brown likes to tell us, get sucked into the kind of inflationary problems that did so much harm in the 1970s?

It is a horrifying prospect and, in the wake of last week's price data showing the most important inflation index at a 15-year high, increasing numbers of analysts think such a disaster could happen.

But inflation isn't the only threat facing the British economy. As the Chancellor returns from his tour of India, a number of other potential disasters are crowding the Downing Street doorstep. By the time he finally gets the keys to Number 10, sometime in the summer, the economic good times enjoyed by Mr Blair will be over: winter will have arrived early.

Nor will the new prime minister be able to claim that he is inheriting someone else's mistakes. He will be facing problems he created during his 10 years at the Treasury. His policies are responsible for the sharp deterioration in Government finances, despite ever-rising taxation. The NHS is bleeding red ink, despite Mr Brown's record four-year cash boost. The Private Finance Initiative (PFI), the Chancellor's preferred method of delivering "efficient" public service, looks increasingly like bad value.

The list of woes is seemingly endless: billions pumped into transport, but commuters told they can't expect a seat. The Armed Forces stretched to breaking point, with service personnel denied decent pay and conditions. Pensioners refused compensation for failed pension schemes, but still expected to pay rapidly rising council tax bills ...

So, in the coming months, as the interest rate rises bite and debt-soaked shoppers scream, the mood in the country will turn against Mr Brown. Of most immediate concern is last week's news on inflation, and the related danger of a wage-price tailspin. But that is only the latest sign that Britain's strong economy could soon go into reverse.

Were that to happen, millions of households and businesses would see a swing in their financial fortunes, just as Mr Brown moves into Number 10. His reputation for sound economic management, the centrepiece of his claim to the premiership, would be flushed away for good.

Figures published last Tuesday showed that the Consumer Price Index grew by 3 per cent during the year to December, an 11-year high. At the same time, the Retail Price Index jumped by 4.4 per cent, a rate of increase not seen since the country was in recession in the early 1990s.

This sharp rise in living costs wasn't entirely unexpected. After all, having seen a preview of the data the week before, the Bank of England imposed a "shock" interest rate rise, increasing borrowing costs from 5 to 5.25 per cent.

While expected, these eye-popping inflation numbers are significant none the less. After a year of ballooning domestic utility bills and burgeoning housing costs, price pressures are now really cranking up. Mr Brown cannot be held responsible for changes in world energy prices, but he has certainly made the situation worse with his own policies. His recent fuel-duty increase, combined with the rise in university tuition fees, have added to inflationary pressures.

Little wonder, then, that the CPI inflation index has now exceeded its 2 per cent target for eight months in a row.

Does this inflationary surge, while significant, pose a genuine economic threat? Should Mr Brown be worried that, to tame inflation, interest rates will have to rise again: a decision that would be taken by the Bank's Monetary Policy Committee (MPC) but which voters would blame on him? There are clear signs that the MPC is concerned that wages and prices could soon start bidding each other up, sparking the sort of old-fashioned wage-price spiral that could cause rates to rise further still.

As soon as it got wind of the latest inflation data, the nine-strong committee voted to take the unusual step of raising rates unexpectedly - or, at least, unexpectedly early - in a bid to convince the public that inflation needed to be brought under control. The MPC was also acutely aware that the bulk of wage deals between firms and workers are struck over the coming few weeks, and it couldn't afford to wait until February.

"This January interest rate hike was definitely a warning shot to wage negotiators that the 2 per cent inflation target is not negotiable," says Peter Spencer, the chief economic adviser to Ernst & Young's ITEM club, a forecaster using the same economic model as the Treasury.

The problem for the Bank - and, indeed, for the Chancellor - is that most wage bargainers tend to use RPI inflation as a benchmark. Now running at 4.4 per cent, it is much higher than CPI, but better captures rising living costs.
Faced with a tight labour market, and some serious skill shortages, many British employers may end up swallowing "RPI-plus" wage claims during this pay round. Companies will then try to pass these extra wage costs on to consumers later in the year in the form of higher prices. That, of course, causes more inflation, so leading to higher wage claims next time, sparking inflation anew: a self-reinforcing process that economists fear could become established.

For Mr Brown, the problem, should inflation take hold, will not be solely economic, but political, too. The electorate will not forgive lightly the man they would see as responsible for creating the problem - and then forcing them to swallow some painful medicine.

The latest data shows that, even in November, before this latest inflation increase, average wages were already growing quite quickly at 4.1 per cent. The Bank worries that, in a bid to protect their living standards, workers will try to secure inflation-busting pay deals lasting more than a year.

So, with borrowing costs already at a six-year high, and bankruptcies and house repos-sessions rising sharply, too, Mr Brown will be worrying about the political fall-out if rates rise even higher.

Much now depends on wage settlements over the coming six to 12 weeks. Survey evidence suggests some deals have already crept upward so far during January, reaching 6, 7 and even 8 per cent. The Chancellor will be fervently hoping that the Bank has done enough, not only to stop a wage-price spiral, but to prevent interest rates going above 5.25 per cent.

Mr Brown can do more than hope, though. He can play a significant role by reining in public sector wages. In recent years, the pay of state employees has grown rapidly and, on average, now exceeds wages in the private sector.

The Chancellor claims he'll keep public-sector wage growth in check, and has told the relevant pay review bodies that state workers should not get more than 2 per cent. Will that really happen? For one thing, top public-sector managers received pay awards of 7 per cent last year. Even then, union leaders were growling about the "grossly unfair gulf between the public-sector fat cats and front-line staff". And, after last week's inflation numbers, the big public sector unions warn they'll "seek wage rises significantly above RPI".

Mr Brown may well be forced to yield a lot of ground in terms of pay for state employees. Strong union backing will be crucial in securing him the leadership of the Labour party when Mr Blair eventually steps down.

If state workers do secure hefty pay deals - with the Chancellor choosing expediency over prudence - that will seriously damage the broader economy. By letting public-sector wages rip, the Chancellor would bid up wage inflation everywhere, provoking further rate rises.

Even if interest rates stay at 5.25 per cent, though, and these latest inflation numbers represent a peak, it should be remembered we've had a triple-rate increase since August. Over the coming months, those much higher borrowing costs will start to bite.

Mr Brown can rightly claim that since he took office in 1997, Britain has grown faster than much of western Europe. But that growth has been fuelled in large part by a consumer-credit frenzy. We Brits, with £1,200 billion of loans outstanding, account for two-thirds of all credit card debt across the Economic Union. The proportion of income now being gobbled up by loan payments is at levels not seen since the 1990s. The difference is that rates were above 10 per cent back then, double their level today.

So, as the recent rate hikes hit home, millions of consumers will be forced to retreat from their decade-long shopping spree. And, given the extent of our indebtedness, any further rate hikes could have serious consequences, tipping many previously comfortable households into serious difficulty.

Over the coming months, as belts are tightened, attention will shift to the Chancellor's rising tax burden: now 37.5 per cent of national income and set to reach 38.7 per cent by 2010, a 25-year high. Many voters are already fed up with Mr Brown's "stealth" taxes, not least on property and pensions. They could become downright angry when forced to keep paying from incomes depleted not only by inflation, but higher debt-service costs. And if the Chancellor has to raise taxes further, as independent experts predict, the political backlash against him could be considerable.

For many, the reluctance to pay more tax stems in part from concerns about how their money is being spent. There is a growing feeling that public services have barely improved in recent years, despite the billions Mr Brown has pumped in. Since 2000, real annual public spending growth has averaged 5 per cent, compared with 2 per cent over the previous 30 years. Taxpayers - not least the swing-voters who brought Labour to power - are now asking: "What has he done with my money?"
The NHS, in particular, is a cause for alarm. Despite the years of extra funding, it now has a £1.2 billion deficit, is having to lay off key staff, and is slipping towards a crisis. But taxpayers also worry when they learn that the Treasury has signed 700 PFI contracts, buying buildings and services worth £43 billion, but at a long-term cost to the taxpayer of £150 billion.

Over the coming months, spending on public services, already slowing, will fall back below historic norms. Brown's boom will end, public services will start to deteriorate further, and voters will complain loudly that the Chancellor has spent too much public money for not enough return.

At the same time, trade unions and Labour MPs - the very people Brown needs to secure him the leadership - will attack him for not spending nearly enough.

So, as the year progresses, Brown will find it increasingly difficult to hold together both the voters of Middle Britain and his own party machine. In other words, the New Labour coalition will crack.

The Chancellor's political power will then rest solely on his fading reputation for economic competence. For now, that reputation is still intact: just. But it is fast-diminishing and, anyway, stems almost entirely from his decision to make the Bank of England independent back in 1997 - and the MPC's subsequent ability to keep inflation under control.

That is why this latest slew of inflation data, while economically worrying for the country, is politically horrifying for the Chancellor. That is why the Treasury denies so vehemently what many economists believe, that Brown has undermined the Bank's attempts to fight inflation by bungling a succession of MPC appointments and insisting on an unsuitable CPI inflation target.

On his trip to India, Mr Brown is said to be more relaxed than he has ever been, confident as he now is of succeeding Mr Blair.

The supreme irony is that come early summer, just at the moment when he achieves his ultimate ambition, the fates have decreed that a toxic combination of rising interest rates, rising inflation, rising taxes and rising industrial discontent will rain on his coronation parade.

The gods have never much smiled on Gordon.

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So maybe SLXX will be a good buy in the Spring or Summer.

[prokartace] 22/1/2007 16:33

Simon, tks for your input. Very helpfull to see the holdings. I like this at the moment, but long term I am very frightened of what inflation is going to do to interest rates

[mctmct] 16/9/2005 09:27

I'm considering this as a reasonable place to hold trading funds for a few months, instead of getting the meager interest offered by brokers. Does that make sense? Does anyone have a better suggestion?

[marksp] 17/1/2005 15:28

people

This is showing with units of pence instead of pounds

Apart from that what do we think about the future for sterling bonds?