It is becoming increasingly difficult for central banks to surprise the markets with good news. No matter how dovish they are, investors expect them to be even more dovish still. This financial repression has facilitated the rise of populist politicians, who threaten to bring the end of central banks’ independence.
I know the chances of anyone paying attention to this article are slim, but it’s worth putting it out there nevertheless. If you are stockpiling to prepare for Brexit, as it increasingly is the fashion, you need to stop. You are doing yourself and the others around you more harm than good.
How afraid should investors be of the end of quantitative easing? Judging by recent comments, but also by the markets’ reaction until now, not too afraid.
As the major central banks are slowly retreating from their policy of asset purchases, we will probably witness some of the side effects of this withdrawal.
Warren Buffett famously said that “Only when the tide goes out do you discover who’s been swimming naked.” The tide is going out only slowly, but we are beginning to see, at least in the UK, the damage the ultra loose monetary policy has done.
Central banks are still worried about the danger of deflation, even though they have timidly started to lift interest rates. How else would they explain real negative rates almost everywhere in the developed economies?
As if we didn’t know already, last week we got another reminder of the economic disaster that Brexit is shaping up to be: Retail sales weakened in the UK, as price rises eat into consumers’ purchasing power.
The Bank of England will publish its inflation report next Thursday, and this time it will get even more attention than usual.
Brexit is being felt in prices more and more now, with the cost of grocery bills jumping and prices for essentials going up. The phenomenon of “shrinkflation” is in full swing as well; many products are mysteriously losing weight, but maintain their price.
No matter how much it would like to help (or to meet its inflation target), the Bank of England cannot do anything to prevent prices from rising. In fact, to be more accurate, it could, but it will not. The central bank could raise interest rates, stopping the pound’s depreciation — but if it does this, the housing market would crash.
Among the analysts and politicians criticising the single European currency, perhaps the most numerous (and vocal) come from Britain.
This should be no surprise: the UK itself is a currency union, and those working within it should know a thing or two about why such a regime does not really work.
After the vote by the British people to leave the European Union, we keep waiting for the adults to take control of the situation. If they did, this whole process would be much easier. They could sit down and discuss ways to proceed with the separation with minimum damage for both sides.
“Happiness is a candle. In fact, don’t laugh too loud, you risk putting it out.”
— Christophe Maé – Il est où le bonheur
“Brexit Armageddon simply hasn’t happened,” writes with delight the Guardian’s economics editor, Larry Elliot.
“The 1.4% jump in retail sales in July showed that consumers have not stopped spending, and seem to be more influenced by the weather than they are by fear of the consequences of what happened on 23 June. Retailers are licking their lips in anticipation of an Olympics feelgood factor.
The financial markets are serene. Share prices are close to a record high, and fears that companies would find it difficult and expensive to borrow have proved wide of the mark. Far from dumping UK government gilts, pension funds and insurance companies have been keen to hold on to them,” writes Elliot.
Perhaps this optimism is partly justified. After all, confidence goes a long way in financial markets, as any observer of emerging markets can testify. As long as you can project confidence, the battle is, if not won, at least not entirely lost. In most cases, anyway.