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Expectations management

The Bank has however used limited amounts of this overall capacity, buying less than £6bn out of its £65bn potential total so far.

12 thoughts on “Expectations management”

  1. The BoE has now got the tiger by the tail, and daren’t let go. It set a deadline of Friday to end its buying programme, regardless of how much they’ve spent so far, the issue is whether they end it on Friday, and let it be known the markets (and the government) are on their own (in which case there will be a meltdown of prices, and melt up of rates) or extend the deadline for ‘a few more weeks’, as suggested by the talking head quoted in the article. And once they’ve extended it once, of course the next extension is a cinch. And so on and so forth.

    My guess is that they will extend nominally at least until after the end of the month, to give Kwarteng the space to make his emergency budget cuts. Then its up to whether the markets think what is proposed in that is viable, both economically and politically. If they don’t like it the proverbial will hit the fan big time and the BoE will be forced to step in yet again, with another ‘temporary’ gilt buying programme.

    Which is my point I’ve been banging on about ad nauseam until everyone is sick of it – the BoE has made itself into the backstop of all government activity now. If governments do something economically stupid (or even something that isn’t stupid, but for some reason the markets see as stupid) then in steps the money printer to ‘calm the markets’. So governments never have to deal with the consequences of their actions. They always get bailed out by printed money, because of ‘market turmoil’. So in effect, thanks to QE we now have monetisation of government debt. And the markets know it. They are addicted to money printing and are all predicating their actions on when central banks will be forced to start throwing money at them again. The entire US market is convinced that the Fed will ‘pivot’ from its current policy at some point, end QT, start reducing rates, and if things get really tough, start up QE again. They are like heroin addicts, just looking for the next hit. And the central banks can’t stop giving it to them. And its all down to the fact QE was allowed in the first place.

  2. 30y trading MUCH wider at COB yesterday. Slightly lower yield this morning. But price has gone from 85 on Fri am to <70 this morning. It shows the power of compounding, non linearity and low interest rates.

    20y RPI swap is 3.3% which is WAY higher than the 2% target. IE you are paying a lot to get protection from higher inflation, which means the bias is towards higher inflation as far as the market views go.

    They’ve lost control of monetary tightening. It isn’t a KK/LT point. That was the catalyst for a massive failure. And it won’t have been £2bn from the 45p tax rate which did it but the massive splurge of state spending over the last decades that is now seen as a problem.

  3. “And it won’t have been £2bn from the 45p tax rate which did it but the massive splurge of state spending over the last decades that is now seen as a problem.”

    Precisely. I have to have a sneaking bit of agreement with old Spud – markets really are remarkably stupid. Everything is rosy, until suddenly it isn’t and everyone is running around like Chicken Licken. All the information about excessive government spending, rising government debt, rising inflation, rising rates etc etc has been out there for ages, yet everyone just ignored it. Now they’re having kittens over it. Hardly the best advertisement for ‘markets are great!’ is it?

  4. > So in effect, thanks to QE we now have monetisation of government debt. And the markets know it.
    This is spot on.

  5. QE has created a doom loop.

    An economy (due to poor economic management) gets into bad habits. Lots of debt, bad investment, money chasing all the wrong things. Eventually there’s a crash. Which is what is needed to flush out the bad investments, reward the good and allow new growth to start from firmer foundations. And to teach people what is sensible behaviour and what isn’t. But instead of taking its medicine the country decides to print money to bail out all those who had made bad investments. Initially this seems to work. Everything goes back to ‘normal’. Hey this money printing thing is great, how come no one every did it before? And this of course teaches everyone else that the bad investment decisions are in fact good ones, and thus the very actions that created the crash in the first place get repeated over and over again. Any time it looks like the edifice is wobbling, bit more printed money, push it upright, jobs a good ‘un. Eventually the money printing gets so egregious and done for no other reason than ‘We want to do that but can’t afford it from our own efforts’ that inflation kicks in and interest rates start to rise. At which point all the debt that has been accumulated through the years of misdirected economic activity is unaffordable. The entire economy has been built on sand. And any attempts to reform things just make them worse. You eventually arrive at a position where every avenue of escape is cut off by horrendous consequences.

    This is where the entire Western world is today.

  6. Thank you, Jim. Now, tell me: when should we sell our ETCs of gold and silver and buy Index-Linked Gilts instead? Start now? Wait a week or two? Get out of ETFs anyway because they are largely based in Ireland and therefore don’t have a lot of investor protection?

    How about cash? Be happy earning positive nominal interest but large negative real interest? Buy gold sovereigns? Buy Premium Bonds and pray? Buy Swiss Francs and Singapore Dollars and US Dollars? Move money out of the UK? (How does one do that?)

    If we don’t know how to protect our savings how the hell will we be able to pay for “Care” when the time comes? Our annual income won’t remotely cover the cost.

    By way of background: just as I viewed the run on Northern Rock as a predictor of serious trouble ahead, I take the same view of the current travails of the pension schemes. And if we’re to be in the merde just picture how hapless the EU will prove to be. Eventually the USA too. Time for a mug of coffee, I think, to cheer me up. Decaff would probably be wisest.

  7. Wholeheartedly agree with Jim.
    But worth pointing out what the effect of money printing is. It’s a transfer of wealth from savers to borrowers. So it’ll continue until they run out of our savings, won’t it? Because the people in charge of it are all debtors.

  8. How about a rough equation?

    Cost of post-Lehman’s bailouts + cost of furlough = pension fund crash + house price crash.

    Of course, there’s still scope to add to the left-hand side of that equation, in the form of “cost of ‘managing’ the gilts market”. Goodness knows what gets added to the right-hand side to balance it.

  9. “Buy gold sovereigns?”

    Back in the GFC when I first thought about the S H-ing the F big time, I bought some gold sovereigns. I figured that there’s never been a point in human history where gold wasn’t a universally acceptable swap for real resources (food/energy/stuff). Something tells me that in real hard times bits of paper or zeros and ones in a computer may not cut it, even if the electric to run the computers is still there. Its given me a great deal of comfort ever since to know that if push came to shove I’ve got a tangible and historically dependable source of claims on real resources. How long they would last I don’t know, hopefully long enough to get me and those close to me out of the country and to somewhere a bit less lively. They are my SHTF insurance policy.

    As for the rest, who knows? My personal theory is that the best investments (assuming we don’t go completely Mad Max) will be ones that while they can go down, they won’t go to zero. Plenty will go to zero, and in the kingdom of the blind the one eyed man is king. Its all about relatives – if you lose 20% while everyone else loses 50% then in relative terms you’ve improved your position wealth-wise. And the things that won’t go to zero are the things that are the basics of life- food, energy and commodities. I’m currently entirely in cash (other than my sovereigns) and waiting for opportunities to present themselves.

    [Investments may go up and down, I am not a licenced financial advisor, past performance is no guide to future returns blah blah blah]

  10. Jesus I’ve just read what Andrew Bailey said in Washington today. Everyone’s got 3 days to sell all their cr*p to the BoE then then its goodbye from me and goodbye from him. If thats how the BoE attempts to calm things down in a crisis God help us if they ever want to shake things up a bit…..

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