Having spent the morning appearing on no less then three BBC radio programmes including the Today program as well as the BBC Business Report on BBC World, it has given me a reminder of how little time general news actually gives to financial/business news.
Trying to debate the Fed’s actions last night and the implications of QE, the prospects for growth and inflation globally and specifically in the UK in slots of 3 mins or less is very difficult and the generalizations become huge!
So what do I think? The Fed’s announcement that they would keep the balance sheet at current levels by re-investing mortgage backed coupons and redemptions in treasuries is, I’m sure better than not doing it, but is it just rearranging the deck chairs on the Titanic? It could well be, as the base case looks more and more like a double-dip - I out the odds at 50/50 this morning, but even if we don’t technically get a double-dip growth will be very sluggish for a long time.
I did a little digging on UK inflation data last night in preparation of my media appearances this morning and found that CPI-Y (that is CPI without indirect taxes such as VAT) is actually quite stable and currently running at 1.6% Y/Y, which is what the Bank of England should be focusing on when they talk to the markets and the media. Their mandate may be headline CPI, but they cannot be held responsible for, or even asked to take this into account when it is the government that is responsible for half the current annual growth in CPI i.e. taxes.
While the MPC always say they are looking ‘through’ the temporary effects of indirect taxation and the effective depreciation of sterling, why don’t they start talking about the CPI-Y, or the net-price index as I would call it ?????
Well, they can of course start that today at the press conference and if they do I will be taking all the credit!
I had the pleasure of meeting Andrew Lilico from the Policy Exchange before and after our debate on the Today program and while he thinks the economy will be weak in the short term and that more QE is forthcoming as well, but then our views are very different as Andrew believes that growth in the second half of 2011 will take off sharply and inflation will follow. I completely disagree as I see no growth of any significance in a scenario where the government is cutting expenditure aggressively and the banking system is still broken and the shadow banking system has ceased to exist. There can be no growth without access to credit, unless it’s government sponsored.
Bond markets seem to be continuing to take the cue and rally to this new economic reality, but equity markets are completely mis-priced, why on earth they think that corporate profitability can continue to grow in a no-, or low growth economy is beyond me. There are only so many costs and jobs that can be cut - and while these cost saving measures may be good for an individual company’s short-term profitability, they are terrible for the economy as a whole. The difference is that bond markets can be a leading indicator, while the equity market is clueless........!
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