Little wonder that Lewis Carroll was English, for there is no greater example of our Alice in Wonderland economy than the current state of the U.K. bond market. Let’s review.
Market Roundup
Two months ago, U.K. citizenry – much to the shock of everyone around, including themselves – decided to vote the country out of the European Union. Almost instantly, the low-information voters experienced buyer’s remorse in what is now being called Regrexit. But never mind. Cable collapsed. Business sentiment data saw the biggest drop on record and last night’s very important RICS report was a disaster.
“[Residential real estate] sales dropped the most since the financial crisis in 2008,” according to data from the Royal Institution of Chartered Surveyors. “Prices rose at the slowest pace in three years in July and new sales declined.”
Understand that in no other G-7 country is the consumer more levered to the price of real estate than in the U.K. A drop this large will almost certainly impact consumer spending going forward, which in turn could send U.K. GDP into contraction in the second half of this year.
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| It’s no surprise that two weeks ago, the Bank of England decided to cut rates. |
It’s no surprise, therefore, that two weeks ago the Bank of England decided to cut rates and expand its QE program in order to stimulate demand the only way they can. But here is the rub: At the most recent U.K. gilt auction, the Bank of England could not find enough bonds. Bloomberg describes the central bank’s policy failure this way:
“The central bank failed to buy enough gilts to reach its stated goal at an operation on Tuesday – the first such failure since it initially started quantitative easing in 2009. The yield on 10- and 30-year bonds fell to records after the operation. The BOE, led by Governor Mark Carney, said on Wednesday that it will incorporate the 52-million-pound shortfall into the second half of the six-month program.”
Why did this happen? Because in a low-rate environment, pension plans have to hold on to their long-term bonds. If they think yields will continue to fall, the last thing they want to do is give up their income as their future liabilities are already under the huge threat of mismatch. So the end result is that in a country whose economic prospects look increasingly grim, investors are actually in a mad rush to buy the bonds even though tax revenue supporting those bonds is likely to shrink.
This is the upside-down world of finance that we live in now. The U.K. is headed the way of Argentina, but its bonds are at record highs and yields are at record lows as investors ignore the economic risks. Could everything turn out OK? Let’s hope so. But if it doesn’t, U.K. gilts will be one of the greatest short trades ever. Because just like with the housing crisis of 2008, everything will be OK, until it isn’t.
Happy trading,
Boris Schlossberg
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Internet pioneer Arianna Huffington has decided to leave her namesake The Huffington Post, reports The Wall Street Journal. AOL acquired the Huffington-founded news site for $315 million in 2011. In 2015, Verizon bought AOL. In June, she signed a four-year deal to remain president, chairman and editor-in-chief – deflecting proposals for her to take a less hands-on role. Possibly reading the writing on the wall, Huffington has jumped to the startup Thrive Global, which shows companies how to encourage their employees to improve their health and well-being.
Macy’s (M) announced it will close approximately 100 stores next year to keep up with consumers’ changing shopping patterns and more online competition. The department store’s 100 closures account for about 15% of its full-line locations, and about $1 billion in annual sales. The company didn’t comment on how many jobs would be cut as a result.
The International Energy Agency says crude oil production will fall behind demand from July through September. According to its monthly report, “Our balances show essentially no oversupply during the second half of the year.” It is yet to be seen whether this will help end the plummeting oil prices.
The Money and Markets team
{ 33 comments }
HuffPo started in 2005. I don’t think I would call Huffington an “internet pioneer”.
Boris Schlossberg you do not live in the UK, i voted out and many millions more, Cable collasped!!! Only you and maybe a few of your friends are calling leaving the EU, Regrexit. Not even heard of the word( did you make it up.) In UK more people are happy that we are out of the EU.
Yes, we have problems but your problems are even bigger.
Graham’s response is typical of the Brits who know little about how the world financial system works. The poorly educated here in Britain are those that have an Island Mentality and refuse to understand that Global Trade deals help everyone. Boris is right, I have changed the minds of many who voted Brexit, but now see the problems ahead. Our Politicians lied during the run up to voting. The Referendum was the wrong instrument to use for such a serious issue!! Too many here in the UK voted with their hearts only as their brains contained no basic information about how the UK finances work with the EU. I bet that eventually the three Japanese auto plants will move into the EU. The British tax payer can ill afford the taxes payable to the EU in order to keep those jobs in the UK.
EXACTLY Graham.
As an Australian, with no vested interest in either the UK or Europe and an indepth knowledge of financial markets having worked on Wall St, been country manager for ING in Argentina and Country manager retail for ING in Spain, I agree totally with Graham. I reviewed the report and saw a very different flavour. Quotes from the report include “Going forward, sales expectations now point to a broadly stable trend over the coming months. On the 12 month horizen sales expectations series rebounded from -12% to + 13%. London has seen a notable turn around in sentiment for the year ahead as confidence towards the outlook for transactions climb to new highs. Hmmm!!! Boris seems to me you were talking your own book. On a broader view Brexit has given the UK an advantage that most central bankers would give their eye teeth for. A declining currency making their exports cheaper and hence more competitive. Facts. The UK and Germany are the only countries that have made a net financial contibution to the EU budget over the last 25 years. Britain runs a trade deficit with the EU of over 50 B pounds annually. Only 44% of the UK exports and declining go to the EU, the rest to other world markets. Free trade agreements between the EU and the rest of the world cover only 2 of the UK’s major markets. The EU is the only economic region where GDP is still below the 2008 level and is contracting at an alarming rate. The Euro is a disaster as eceonomics 101 require free flow of the 2 factors of production, labour and capital for it to work. Capital flows freely but labour is very sticky. The Euro will only work if fiscalk policy is ceeded to Brussels. I could continue for pages on the advantages that the UK will enjoy being out of the EU but for those who do understand how the system works the decision was a no brainer.
If we posit that “zero” is “nuthin”, it continues to dazzle me that central bankers think the way out is to continue to go lower. The pill today may be bitter, but the sooner it is swallowed, the sooner (all) the patient(s) will begin to recover.
Perhaps the much maligned so called low information voters are not as dumb as you think. You judge them too harshly because they were able to back out of a weasel deal, the EU. Clearly because the Brits were never all in having retained their own currency it shows that they were never truly comfortable with the EU idea. No doubt they were railroaded in the first place by the globalists. It just demonstrates that money is not the only thing that drives decisions. After all what is currency but a proxy for confidence in an economic system without which currency is just paper.
ReGrexit?
Since then the question has been asked many times-what would you vote for if there was a second Referendum?
Although a few Leavers claim that they would change to Remain, a surprisingly large number who voted for the status quo have now decided that Leave would have been a better choice.
The polls vary, but overall it would appear that any new vote would produce a 60-40%
in favour of Leave.
It is time for the politicians to get on with ruling the nation!
But there will always be an England, we hope.
we had it the incorporation of the the oil company tie up one and more companies then we resolving the demand of supply the oil at time being project
.1 demand
2, stock on tank
3. Transportation etc we meet the commodities and bargaining the demand
strong money capital on bank balance
example .Rs.76,000 corers to Bank Balance /2, Rs.10000 crores for outstanding stock on hand we manage the demand and supply and others for business activities to invest the reputed field
WHAT??
Incorrect reading of the British economy from a low-information commentator! The slowing of UK property prices is nothing to do with Brexit but is totally related to property tax changes in April designed to take the hot air out of the growing buy-to-let bubble. And I don’t see or hear any regret about Brexit here in the UK – just relief that we have managed to extricate ourselves from a sinking ship before it disappears under the waves!
i buy and the market goes down. gundlach sells and the market goes up. hey, i’m starting to feel like a real pro. :-)
I still believe the U.K would do better if they would cut spending and cut taxes at the same time . Leaving more money in peoples pockets eventually leads to more revenues as people spend more and invest whatever savings is left over .
These “low-information voters” had the insight to take the country out of this un-audited mess. “Regrexit”, well first time I heard that one! Time to come down off your high horse please, Boris!
Yes the news was dismal and many workers will lose their jobs yet the stock pops go figure. Again what I find amazing is how the markets snapped back after Brexit and the drops in January of this year and August of last year. They were big drops but in a matter of weeks lost ground was regained and new ground conquered. What was the magic pill? Corporations of course piled in buying their shares back enmass to keep the party rolling. Its in their best interests after all. When will the government and the SEC step in and put a stop to all this abuse of the rules. The small investor is not winning only the big boys who with the cooperation of corporations are yo yoing the market. Its such a blatant abuse of rules yet the government who obviously is in on these shady dealings to prop up their fiat currencies do nothing.
Gordon
I agree with you they are borrowing money to buy back their shares making the earnings look better which drives up share prices . The more shadier executives are selling their shares at those high prices while leaving there companies with mountains of debt . This could end badly if the economy goes south at the same time these loans come due !
When I look at the market indexes above all in the black I guess the party is far from over. When it is finally over it will be brutal.
Here is my opinion:
Great Britain exit from EU is very rationalistic act. EU is the state serving to the world oligarchy only.I prefer the state which will regulate the dynamics changes between the people. These changes are the source of wars, I thing ,that the only way for mankind are the human rights keeping. Excuse my bad english language,
Z, Opolzer from Czech Republic.
I live in the UK and have not seen any evidence of Regrexit in my day to day life. What I have seen is the opposite – people I talk to whether Remain or not, are beginning to realise that we don’t need the EU, and that there has been a large over-reaction by the press. I think most people accept we are leaving and it may not be a bad thing after all.
The markets going down right after the Brexit was just a temper tantrum by the elite to get the scare the British people into changing there minds about leaving the EU .
Looks like the Fed is up to their old tricks again trying to rock the boat. Williams from the Fed said rate hikes are needed this year and warranted after looking at all the “positive” (government manipulated) numbers released lately. They truly know no shame.
Gordon probably more talk to keep the Precious metals from breaking out and exposing the real economic situation .
Low information voters ???? How arrogant!! Freedom from tyranny and unelected bureaucracies will always be more valuable and precious than all the gold in the world
Stu, i think you are correct.
Unelected bureaucracies don’t like it when their value is exposed.
How pleasing to see so many other contributors agreeing with my view that this writer hasn’t got a clue about the UK. And as so many are saying, he has himself invented the word Regrexit; those few who do, for their own personal reasons, regret having voted to leave, have never been referred to in that way in the British media.
What is now developing is the fact that by the time the two years required by Article 50 to leave the EU are up, Article 50 will be totally irrelevant, because there won’t be an EU for us to leave. Events in the next nine months in Italy, the Netherlands and Austria could all lead to the implosion of firstly the euro and then the whole EU, but the most likely one now is in France. The recent murder of a priest has been the tipping point. People in France who have never in the past imagined they would ever vote for le Front National are now saying that they will do so in next April’s presidential election as none of the other parties are capable of dealing with the problem of Islamic terrorism. It could even be the case that they won’t need a second round of voting because Marine le Pen will get more than 50% of the vote in the first round. And the first thing she will do if she wins is to take France out of the euro. And with that, au revoir euro and then goodbye and good riddance EU.
What about all the stories about “New OIL”?? Not only includes Liquid Natural Gas derivative but another from sand. Texas New Oil one is called. If we have a flood of new energy products coming into stations world wide they say regular oil will drop to $5 per barrel.
I am flabbergasted at your audacity to suggest that Brexit voters, like myself, did not know the facts. Indeed, because we knew the the facts about the EU, we voted to leave. Now we can start to move forward again making our own decisions about fishing , agriculture, industry etc.
Personally, being an American born citizen of German immigrants I applaud the exit of the U.K. from the E.U.There’s much to be said for trying to maintain your customs and heritage. I can only wish you the best of luck and hope that the country of my heritage will some day follow your brave lead.
I am a middle aged Englishman who has seen the EU shambles from its inception.
As an Island nation we had our natural resource, fishing, stolen.
Our fishing industry has been decimated and the few fishermen left given hopeless quoters
due to European overfishingf our waters.
Due to free movement of people, the poorer countries of Europe have had their young workforce stolen. There are about 25 poorer countries. Who will keep the ageing population of these countries. I can see poverty and suffering of the elderly here of epic proportion.
Who was to pay for all these bailouts of the future?
Even the “richer” countries are in debt. What chance have the poor got.
The German / EU experiment is ok for the rich who have gained all this cheap labour.
There are large company conglomerates and land owners who are in control sitting pretty with concessions and rebates whilst the willing taxpayers foot the bill.
Would you want your country to be part of this disaster in the making.
The sooner we can use our empathic culture and contribute to the world the better.
England has had its influence to encourage human and animal rights by the EU.
England needs to take control of our direction.
Well an economist gave me a lesson in deleveraging. Apparently when a company has problems they should deleverage themselves. One way explained to me is sell more equity. Makes sense to me if your company is in trouble sell more stock to help correct the situation. Stick some stupid investor ends up with a problematic stock.I guess you could call it sharing the pain.
I read some of the Alice in Wonderland statements made by the Fed’s Lockhart here is the funniest most ridiculous. They all were positive comments on the economy. Does this guy even have a clue as to what reality is????? What world does this guy live in??
Quote from Lockart hillarious.
FED’S LOCKHART SAYS Q2 GDP EXAGERATES WEAKNESS, REALITY MUCH BETTER
God Bless the UK for having the good sense to flee the sinking ship that the EU is fast becoming-it is up to every nation to decide their own destiny,and they have done exactly that.While globalization is here to stay,there will always be national soveriegnty,a lesson some of our gutless pols. here in the USA would do well to remember.