Tuesday 6th September 2016
In this issue of Money Truths….
- Financial weather-checking….
- Highs and lows….
- The specter of inflation?
- It’s funny how things work….
In life the biggest part of your energies are best focused on things you can actually control and make a difference to….
You will get more done if you commit to mowing the lawn than you will agonizing about world peace or worrying about how to cleanse the world’s oceans.
The state of the economy is something I can’t change or control. Maybe I shouldn’t spend so much time thinking about it.
But I think of the economy in much the same way as I think about the weather.
I have no influence on what the weather does. My input has no bearing on whether it rains or shines. But I take a keen interest in what is happening nevertheless….
I always like to take a look out of the window before I leave the house, for example, – just to establish whether or not it would be wise to carry an umbrella….
Highs and lows….
Out in the world of stocks the FTSE 100 and the FTSE 250 both sit within shouting distance of their respective 10-year highs.
It’s the same story over in the US with the Dow Jones Index and the S&P 500 Index both within touch of their high-water marks over the last decade.
It is an expensive time to purchase stocks. But not money….
Interest rates are on the floor worldwide. Money is cheaper than at any point in the last 5000 years. And you will go a long way to find someone who seriously expects the price of money to increase to any meaningful degree any time soon.
The British pound is another variable that is down in the dumps rather than flying high.
It is at a 10-year low against the dollar and close to its 10-year-low against the euro.
The fall in the value of sterling is a reflection of the concerns international investors have about the post-Brexit British economy – and the confusion that surrounds the timing of Britain’s exit from the European project.
But it is an ill wind that blows nobody no good and the falling pound is good news for British exporters.
The low value of the pound makes British goods more competitive in the global marketplace and attracts overseas buyers….
In August a survey conducted by the Confederation of British Industry reported that export orders were the strongest they’ve been in two years. And, unless sterling suddenly surges, something nobody anticipates, export counts can be expected to increase further going forward.
The specter of inflation?
But, whilst a lower value pound helps exporters, there is a flip side to coin. A lower pound means imports become more expensive….
And it is British consumers who will ultimately pay the price as producers and suppliers pass on the additional costs to the end-user. The signs of that happening are already appearing….
Consumer prices crept up by 0.6% in the 12 months to July and economists believe that figure could rise sharply over the next quarter and continue to rise throughout 2017.
The prospect of rising prices raises an interesting issue. Because if inflation takes hold, and it exceeds the Bank of England’s current target of 2%, as it might, the pointy-heads at the Bank of England will face an awkward decision….
Monetary policy is the most important tool for maintaining low inflation. Faced with rising inflation, under normal circumstances you’d expect the Bank to raise interest rates to help reduce demand in the economy – the slowdown in demand leading to slower growth which in turn would lead to lower inflation.
But we are not living in normal circumstances. Far from it.
It’s funny how things work….
Instead we are living in circumstances where the Bank of England – backed by government – is keeping the price of money (interest rates) as low as possible to encourage the borrowing, spending and consuming that is stimulating what little growth – sputtering growth – the economy is experiencing.
The finer points of monetary policy and the balancing acts it involves at any given moment in time are beyond my experience.
I’m not expecting a call from Mark Carney, governor of the Bank of England, asking for my thoughts. A man has got to know his limitations, as fictional San Francisco cop Dirty Harry Callaghan once advised. And I know mine….
But I also know this. An interest rate can’t be down in the basement stoking the fire and simultaneously up on a higher floor damping down flames with a hose. It has to be doing one thing or the other. Or it must shift to some middle-ground where it can do a bit of both….
If inflation takes hold the Bank of England will have to look very closely at the base interest rate and consider reversing the downward trajectory we’ve been on since 2009 and the onset of the global financial crisis.
Right now basement level interest rates seem fixed and immutable….
We have become so used to low interest rates, it is difficult to imagine anything else….
The direction of travel has been established in the public mind – and in the mind of economic pundits. Commentators predicting interest rate hikes are few and far between right now….
Almost everybody is anticipating that the interest rate will go further go down – if it goes anywhere at all….
But it’s funny how things work. Just when everybody believes that something can’t change or won’t happen, that’s the very signal that tells you it’s about to.
The belief that low interest rates will prevail forever and just keep on getting lower has probably reached some kind of saturation point in the public mind.
That fact – combined with the possible onset of a period of inflation – might be a contrarian signal that the next move for the interest rate will be up rather than further down as everybody appears to expect.
A rising interest rate would, of course, bring with it all its own unique implications and consequences – not all of them pleasant. It would certainly put the cat amongst the pigeons.
But that’s a subject for another day. Whatever happens in the weeks and months ahead, and we can only speculate, one thing is for certain: it is sure to be interesting….
I’ll be back with more on Friday.
All the best,