It’s been another light 24 hours for news from capital markets. There has been some news on the paltry (and vanishing) rate British savers can earn with banks. More on those vanishing rates and the possibility of another Bank of England (BoE) rate cut in a moment. But first a note about the past and the future.
Do you know the story about how Nathan Rothschild supposedly made his fortune? It was betting the family fortune on the outcome of the Battle of Waterloo in 1815. The story – probably apocryphal – is that Rothschild learned that the British had defeated Napoleon ahead of everyone else, via carrier pigeon. He bought British government bonds. The news that Britain would survive as a sovereign state was pretty bullish. The rest is history.
Whether the story is entirely true or not, there’s a point to be made. Having better information (and knowing what that information means) has always been a kind of “holy grail” for investors. Today, high frequency traders and algorithms try and take advantage of minute mispricings in the markets (small information asymmetries) to take lots of little profits (which add up to one big profit).
Here’s the problem: carrier pigeons can’t time travel.
If Bank of England governor Mark Carney could send one back to the future, he probably would. The pigeon would come back with a copy of Money Morning from this time next year. It would tell Carney when Britain triggered Article 50 of the Lisbon treaty, what consumer price inflation was running at a year from now, whether the pound and property had crashed, and whether the economy was in a recession.
But again, to my knowledge, pigeons can’t time travel. Thus, the BoE is making policy based on sentiment, based on how people have reacted to Brexit.
Now, it’s fair to say that someone’s emotional reaction to an event is a fact itself. If someone takes action, the action is a fact. Even an emotional reaction is an action. Which raises an interesting question: do objective facts matter at all, or only our reactions to them?
Hold that thought. An answer to a philosophical question is beyond the scope of today’s Capital & Conflict. What I’m getting at is much more practical: you can’t ever predict the future. All you can do is observe patterns of human behaviour from the past.
What the BoE is doing seems to be counter-productive. It’s reading early sentiment surveys on Brexit and then predicting behaviour to follow from that sentiment – and then making monetary policy to correct/address that predicted behaviour. It’s pretty audacious. And not confidence inspiring.
More cuts to come
And if you thought interest rates couldn’t go any lower, you’re wrong. They can and probably will, according to Ian McCafferty writing in today’s Times. McCafferty is an external member of the BoE’s Monetary Policy Committee. Here’s what he wrote today:
| Our [the Bank’s] information about exactly how the economy has reacted to the referendum decision is still very limited. Almost off what we have to go on so far is survey data and, while surveys mostly provide good advance signals of the path of the economy, they can, when unusual shocks such as Black Monday, the Asian crisis, and 9/11 have hit the economy, prove to be false friends, with the initial hit to both sentiment and expected activity not always sustained. Our current forecast is surrounded by a much higher degree of uncertainty than normal. |
But that didn’t stop it from acting decisively now did it! I’m also struck by how the BoE, like Tim Price, looks for signals to indicate what’s really going on in the economy. There’s a key difference, though. Tim looks for price signals, which indicate actual behaviour by actual people. The BoE is using surveys, which measure what people say or intend to do, not what they’ve done or will actually do.
In the meantime, the BoE controls a price which sends a signal to commercial banks. And that price signal has already had consequences. The Times also reports that First Direct has “slashed its savings rate by almost 0.4 per centage points — far in excess of the 0.25 point cut to the base rate announced by the Bank of England last week.”
Imagine that
Other banks and building societies have done the same. According to The Times, “Several other banks and building societies have closed accounts to new customers and relaunched them at lower rates. This includes Skipton Building Society’s five-year fixed-rate bond, which is now paying 1.5%–before the base rate change it offered a return of 2.01%.”
And the punishment goes on, with Isas included in the carnage. My prediction: the “zero lower bound” is not about the theoretical lowest point to which a central bank can lower interest rates. It’s about how low rates go before there’s a popular political and financial revolt. As safe assets get slaughtered and savers are sacrificed on the altar of low rates, the political pressure will mount.
More on the revolutionary crisis tomorrow. But with a surprising twist. Technology could be the golden parachute, the brass ring, and the deus ex machina all in one!
Category: Central Banks