It's How You Tell 'Em

TMM had another bout of road rage this morning. Fortunately the cause and target of the rage wasn't another road user, rather the quality of news reportage emanating from their car radio on the way to work. Don't worry, TMM are calm level headed rational beings who are not inclined to go "Falling Down" on you, but the last 36 hours exposure to mainstream reporting got us pretty close. TMM's poor car radio is beginning to resemble an old dog toy having been bombarded and cratered with any loose object to be found in the door pocket.

We weren't in the best of moods to start with, having endured a day of "Europe is Doomed" being boomed at us from every Orwellian speaker lodged in our hi-tech lives. This was followed on return home by a Channel 4 News story of 17 year olds falling down a legal loophole in UK police stations. A very valid subject and one that needs to be discussed, but preferably discussed by experts. We say experts, because radio and TV news programs have developed the appalling habit of interviewing victims (or the relatives of victims if the victims are deceased) as if they were the experts.

Whilst we understand that victims have certainly experienced the consequences of whatever they have suffered they are rarely expert into the causes (just as if TMM wander into the road after a beer and get hit by a bus it doesn't make us experts in bus mechanics, rubber friction coefficients, traffic law or alcohol/neurone transmission mechanisms). Unsurprisingly such an interview results in an emotion laden, one sided tragedy with little true insight to the issues. But then it gets worse, having used psychological anchoring to pin the listener or viewer to this base norm of expertise, the journalist will then most likely swing to a higher authority on the issue, normally with great gravitas. However, far from being an expert, this is just another journalist, introduced as "our legal/business/foreign correspondent" or some such.

TMM are opined that journalists are there to report, not give opinion as their opinion on non-journalistic issues is of as much or little importance as any other non-expert.

Financial punditry has been full of it too. The BBC have elevated (up their own elevator of self-promotion) the likes of journalist Robert Peston to "financial guru" and their economics editor, journalist Stephanie Flanders, to "Keansian" level. CNBC is also clearly full of anchors quizzing sub reporters and interviewing their own anchors to pad out the usual faces of punditry.

This evening we got around to searching to see if anyone else has remarked on this annoying trend and unsurprisingly found we aren't alone, and found much better analysis of what we are talking about. Interestingly we found this post by blogger George Snell makes the point very well, after he originally commented on the issue here, where he mentions the dangers of the Echo Chamber, "where journalists simply rely on each other for perspectives on the news. The insular mentality of “It must be true because I heard it from another journalist.”"

David Donovan, goes further here citing cases in Australia and points to the high frequency of journalists appearing on Q+A sessions and even analyses journalist's twitter profiles concluding that "Australia’s haughty "hackus majesticus" (with a few exceptions) typically only follow other members of the same, or similar, species."

So why is TMM veering away from markets into the state of journalism? Well because we feel that this style of reporting not only annoys us immensely, it is undermining information quality not only of main stream press but also in markets. We all know how fast a piece of information can go around a market (especially in todays "cut and paste" world) and we also know that each participant in the market, certainly on the sell side, will look for any form of corroboration of a news item, idea or interpretation of a news item before sending it on, reinforced, down the next wire.

Bloomberg and Reuters headlines are never challenged and whilst they stay just facts or quotes all well and good. But the problem creeps in when a market moves and a reason is required. As any journalist, analyst or sell side sales jockey knows, when asked why something has happened a reason has to be found, even if the most apt answer is "I dunno". Of course most market moves are basically down to "some one/people sold/bought a large amount of it" from there on it's normally a guess as to why they did that. Any sensible player in the market that has just sold or bought a large amount will actually be wanting both his actions and his motives kept as quiet as possible so will be reluctant to shed light on the issue. But the game of hunt is on and correlation is the usual weapon employed.

This example of journo-escalation is of course completely fictitious and bears no resemblance to reality or real characters.

Harry Hedge-Fund - "Close my gold short out, I'm off skiing and cant be bothered to watch it".

Soon on US Financial TV -

Rick Spleen - "Gold has seen a big rally today, let's hear from our correspondent Jeff on the floor (note being on the floor implies he works on the floor - wrong) - Hi Jeff I see that gold has gone up today. What's moved it?"

Jeff Epiglotis - Hi Rick yes, stocks fell in europe as the dollar fell as NFP printed low as the sun rose in the east and gold is up. But let's hear more from our economics correspondent, Scott?

Scott Tibia - Hi yes I agree with Jeff, European stocks fell and so gold went up. Here is a graph.

Rick Spleen - So there you have it. Everyone we have spoken to tells us that gold went up because of European concerns.

Next morning on UK's BBC Radio 4 Today program -
John H - Gold has risen overnight, a traditional measure of confidence in governments. Does this reflect on the UK government's economic policy? Lets hear from our own Robert P.

Robert P - Weeeell, It looks as though gold, a traditional indicator of financial stress, has risen overnight in the US and our contacts there tell us it's due to concerns over Europe where the Italian elections are in turmoil with a rise in the popularity of anti-government parties. Which could be considered similar to the rise of UKIP in the UK. But let's hear from our economics editor Stephanie

Stephanie - Yes it's true that UKIP has garnered a greater share of the vote in the UK implying government policy is receiving a resounding vote of no confidence. Gold prices traditionally reflect confidence in both governments and the value of their money, which of course is currently being devalued in the UK through QE. The rally in the gold price is therefore consistent with markets losing faith in Osborne's policies and in the government's current economic policy of cuts and austerity.

And from there on the self-feeding frenzy of speculation/fact conversion  picks up with the press quoting the BBC and then sell side cut and pasting these press links on to buy side. "Facts" have grown to fit any particular view without one "expert" being involved.

It is at this point that TMM's car radio receives another packet of mints in the tuner.

* Foot note , they've just done it again - Radio 4 - Rocket launcher found in Northern ireland - Interview with random folk in street "its terrible",  followed by an expert - the Sunday Times Security correspondent. 

Italian Job.

There you go. Spain last time, Italy this time. When you are looking for a "something" to catalyse a positional shake down you really can't do better than giving the Euro-periphery a shake and seeing what comes out.

TMM are still asking themselves the question "Is this a new theme?" or is this still a "positional shake down within the underlying trend?"

Europe - Italy. The noise function is off the scale with media and market commentary screaming return to Eurodoom. As ever, those furthest from the event end up reacting to the noise rather than the reality because we have noted that markets work a reverse physics, where sound travels faster than light as enlightenment arrives a good while after the noise. "Rest of the World" do seem to be playing this harder than Europe itself. We note that overnight European and  US equity futures traded pretty flat whilst Asia went through its catch up phase, leaving us thinking that noise vs price is, at least in the short term, overdone with the Western markets more likely to bounce from opening lows than extend yesterday's momentum. 

Is Italy important?  It's certainly a wake up call rumble from the dormant Euro-volcano but we don't think that Italy is going to drag Euro back to 2012. If the interface of Euro contagion is based on Italy's commitment to Europe combined with the management of debt load via internal economic management or European support then perhaps we should break it down. 

Commitment of Italy to internal debt management - Italy's primary surplus of 5% of GDP puts it in good stead. Its long term debt structure is well known and short of a market attack, which we think would be repelled by Dr. Aghi, we see long term Italian debt remaining as taboo to shorter term trading as is US and UK  debt. Will the new government mean new change? Well the very fact that one of the complaints is that no legislation can be passed may well mean that a move from existing policy cannot be implemented. Not all bad news.  

Commitment to Europe - The only hint of anything apart form general support for Euro membership comes from Grillo's comment that discussing it is not taboo. The success of Grillo as a whole is a vote against the current structure of Italian politics as much as it is pure anti Europe and TMM don't see a strip down and rebuild of the machine of Italian politics as a bad thing. In fact we have written various posts questioning the divergence of career politicians from both roles of representation and decision making. TMM hope the grey machine of Brussels is taking note. However, we digress. Whilst Europe is still seen as the hand that ultimately feeds, TMM don't see Italian politics doing any more to rock the boat than cause a enough ripples to persuade its occupants to sit down and shut up.  

Commitment of Europe to Italy - As an Italy departure is the nuclear option we can hardly see the self-serving Eurocrats pressing the assured mutual destruction button. What is more, with Merkle coming up to elections and the German opposition more pro-Europe than her, there is probably less likelihood of her playing hardball this time over austerity demands. We are still miles from needing the "Dr. Agahi Put" and even further off the Greek scenario. So TMM are not concerned as the current wave  hasn't even reached the first Euro-defences.

So if we are not as concerned about Europe as the media is (cue more disgust at media hyperbole. c.f. UK debt downgrade) then should we be buying Euro stuff? Very short term yes and we have just whilst the noise dies down and marries back to price action again (see above). But for the bigger picture on global markets we see the Italy story as another seed crystal dropped into the supersaturated solution of confident longs.  Last week the Fed tripped the US but the markets staggered to their feet and now Italy has delivered an upper cut that saw the market hit the canvas last night. As it now staggers around drunkenly, we don't think it would take much of tap from any bad Asian news to see it down and out. 

It was interesting to see Japan try and deliver that blow last night. Jpy retracement fitted into the general positional rather than thematic shake down and as we are judging short term noise to enlightenment signal stretched we are closing out half of our short NZD/JPY and MXN/JPY. In equities we continue to sit on our hands enjoying them getting cheaper.

"When I was a Lad" (Carney Style).

After prompting from a reader and getting bored of guessing Italian election outcomes, we have adapted Messrs Gilbert and Sullivan's "When I was a Lad" from "HMS Pinafore". Instead of the Queen's Navy, we think the B.o.E is more topical.



"When I was a Lad" (Carney Style)

When I was a lad I served a term
As a junior trader at the Goldman firm.
I cleaned the books and soon wasn't poor,
As I traded debt and made the profits soar.

Chorus.
He traded debt and made the profits soar.

I traded debt so carefully
That now I am the Governor of the B.o.E

Chorus.
He traded debt so carefully
That now he is the Governor of the B.o.E

As trading boy I made such a fee
That they gave me a post in the ministry
As Canadian minister with no recourse
I introduced a tax on income trusts at source.

Chorus.
He introduced a tax on income trusts at  source

I introduced the tax when at the ministry
So now I am the Governor of the B.o.E

Chorus.
He introduced the tax when at the ministry
So now he is the Governor of the B.o.E

In raising tax I made such a name
That a central bank governor I soon became
I saw a crash, chose policies to suit
To prevent Canada becoming destitute.

Chorus.
To prevent Canada becoming destitute.

I passed so well through the G.F.C
That now I am the Governor of the B.o.E

Chorus.
He passed so well through the G.F.C.
That now he is the Governor of the B.o.E

Of central bank skills I acquired such a grip
That they took me into the partnership.
Bernanke, Merve and then Draghi
All showed me the way to play the great Q.E.

Chorus.
All showed him the way to play the great Q.E.

Balance Sheet Constraint won't apply to me
Now that I am the Governor of the B.o.E

Chorus.
Balance Sheet Constraint won't apply to he
Now that he is the Governor of the B.o.E.

I grew so known that I was sent
By a select committee into Parliament.
I always voted for the strong growth call,
I never thought of thinking of inflation at all.

Chorus.
He never thought of thinking of inflation at all.

I thought so little, they rewarded me
By making me the Governor of the B.o.E

Chorus.
He thought so little, they rewarded he
By making him the Governor of the B.o.E

Now bankers all, (don't look at me Moody)
If you want to rise to the top of the tree,
If your soul isn't bothered by a ratings fall
Be careful to be guided by this golden rule.

Chorus.
Be careful to be guided by this golden rule.

Preach growth, restraint yet huge Q.E.
And you all may be Governors of the B.o.E

Chorus.
Preach growth, restraint yet huge Q.E.
And you all may be Governors of the B.o.E

Thursday Musings

The Fed might not have used the I-word  but their discussions behind the scenes towards continued QE must have involved it. We would like to think that they were too concerned about market reaction if they had used the i-word and judging by the reaction received to the mention of "tail" they were right. We can't say we are unhappy with the market response and do see it as the catalyst to moves that have gone global and multi-asset. All reinforced by China's comments on slowing the housing markets in overheating cities extending the pressure on yesterday's commodity moves and this morning's European data separately undermining Europe. So that's three out of three for negatives from the major global regions. 

This is  enough for us to stay seated in the bus stop letting a few more pass before getting back on. Do we go short Equities? Not yet. We still want to buy at some point and don't want to go against our core theme. Buying cheaper will be enough for us as this still looks at best like a 5% correction possibility in SPX rather than a major new bear phase.  However we are looking at tactical shorts in other recent popular trades as the "3 out of 3" should cause more of a shake down. So what else has been complacent consensus for the past few weeks? In FX land you cant get much more consensus than short yen and, on the long side, we would suggest that NZD and MXN must be up there with the best so we have taken speculative shorts in NZD/JPY and MXN/JPY (again) expecting this general correction to continue. 

Is this a new theme? Whilst the breakeven prices haven't really moved it does look as though the speculative inflation expectation trades in other markets are unwinding. Rather than a big new theme developing it so far appears to be positional as we drift back to a less exuberant trajectory in growth and inflation expectations. Equities off, metals off, oil off, USD up everywhere (except vs JPY which is basically a loaded trade) and finally Gold. Each morning we hear how heavily the Chinese are buying and every morning it falls harder. Not a bullish sign. Picking a right level for gold is pure supply, demand and, more importantly, the psychology of price anchoring, so rather than pick a target level, TMM would rather just predict "it continues to fall".   

In the UK the mighty pound is suffering a right Mervynating. to the point that we think that Merve may well have a Harold Wilson moment -"From now the pound abroad is worth 14 per cent or so less in terms of other currencies. It does not mean, of course, that the pound here in Britain, in your pocket or purse or in your bank, has been devalued."  ( Harold Wilson 1967).  Which has put GBP only just behind JPY in the league of currencies to sell. Very "Macro 1990s".

Now back to Europe. It's nearly March and March has historically seen the start of Euro-season, where happy hunters flock to the European bond markets to blast away at plumped up and overfed Euro-birds.  

Whilst today's focus has been on French and German PMIs, which in TMMs eyes may look headline soft, but do contain some structurally encouraging signs, there are signs that stresses are building again. The peripheral bond markets continue to underperform. 

The real shocker that seems to be sneaking under the radar is what's happening in Holland. This morning's collapse in consumer confidence to -44 from -35 leaves it at it's lowest level ever since the series began in 1986. House prices are accelerating downwards (-9/6 y/y from last months -6.3% y/y) and the unemployment rate rising. This leads TMM to wonder whether we are seeing Holland move from core and periphery. It's interesting to note that if there is one country which should give Fred the Shred (of RBS fame) asylum, should he lose his false nose and beard and be hounded out of wherever he is, it should be Holland. Without his wonderfully timed cash purchase of ABN, they would have had sovereign debt/GDP ratio roughly 10% higher. He saved their arses.

With that we will leave you as we return to watching the screens turn redder.

Fee Fi Fo FOMC.

Fee Fi Fo FOMC. Do the Fed Smell the Blood of Inflation?

First we must share a video produced by one of our readers under the name "Becky Quick". We have seen the Hitler rant in the "Downfall" film used many times but think this one of the ECRI facing up to their recession call is by far the best. Thank you Becky.



And once you have wiped the tears from your eyes let's move on.

Last week we mentioned that we were mulling over whether, after seeing our expected correction period in equities do little more than flatline, it's time to get back aboard the bus. Having waited dutifully for any holiday inspired dip to occur (not) or for someone in the political sphere to break ranks and go "Tourettes" on us screaming all sorts of financial profanities, we have been somewhat impressed by the the way the thin red line of Global Unity has held together. Granted, such unity resulted in probably the most custard cream of G20 statements, with sweet blandness swamping any hint of savoury nuance that the market could digest as new nourishment, but it's done its job. Well done everyone.

This leaves us wondering if this bout of STFU policy will persist long enough to allow the next run up it risk assets and currencies. But as was pointed out to us by a reader, currencies are no longer Risk On Risk Off (RORO) but rather split into Too Weak And Too Strong ( T.. ahhm never mind).

So how quiet is it likely to remain? This week sees a slew of US data, but TMM are going to use the Fed minutes, rather than the data as their pivot point. For much as we saw Dr. Aghi's ECB statement disappoint a market skewed towards valedictory expectation and much as we saw Carney's first words disappoint a market expecting him to slash rates further and confine GBP to the toilet (GBP, we hasten to add, is flushing itself down the toilet without any help from Carney), we also think there is a dramatic skew in expectation towards the Fed minutes. While the consensus view may be something along the lines of, "Head's down, no nonsense mindless QE boogie, bang your head on a wall" (prizes for the song ref there) TMM thinks that it may actually be the most interesting batch of minutes released in a while.

Recently, statements from the Fed (indeed from almost all major central banks) have started to suggest that they CB's have changed their reaction functions, placing larger weight on employment and lower weight on short term inflation. This is desirable, so the wisdom goes, because G7 economies are all dealing with liquidity traps. As a result, whilst long term inflation expectations remain anchored, the Fed can continue to conduct QE in order to help growth without losing any inflation fighting credibility. So far so good.

Note, however, that 'anchored' is VERY loosely defined. Is there a range for long term inflation expectations that is acceptable? If so, is that range itself a function of where the unemployment rate is as the FED have often hinted? Or a function of the length of a special someone's beard?

However we may get a clue tomorrow and we think it may be triggered by what has been happening to long term inflation expectations as proxied by 10 year inflation break evens, which are now at their highest level on a sustained basis in almost 2 years. The last time this occurred, both subsequent FOMC statements (dates marked by the vertical white lines on the far left of the chart) included references to them.





In the March 15th, 2011 statement, the FOMC added:
"The recent increases in the prices of energy and other commodities are currently putting upward pressure on inflation. The Committee expects these effects to be transitory, but it will pay close attention to the evolution of inflation and inflation expectations."

Now, to be clear, TMM does NOT expect a change in the size of the Fed's QE program resulting from this. But the simple introduction of inflation expectation risks to FOMC minutes, after a multi year absence, could have quite asymmetric effects on asset prices. This, of course, is because almost everyone expects the Fed to be on hold for the foreseeable future. As a result, the mere whiff of inflation concerns has the risk of changing market perceptions for the evolution of QE, and by extension, risk/reward for risk assets.

Of course, the FOMC is well aware of these issues, which means that any mention of inflation risks is likely to be tempered. But, as TMM has learned after many painful lessons, markets have a tendency to be reflexive and given that so far this issue does not seem to have received much attention in the finance community, TMM is wary.

Lastly, TMM is cognizant of the possibility that the minutes may suggest that the FOMC core may take the opposite view and discount the rise in inflation expectations altogether. If so, TMM would take that as further confirmation of the shift in the Fed's reaction function and will seek to add pro-risk assets as the medics take to the battlefield to apply ursine euthanasia.

G20 Communiqué Translated

Team Macro Man translate the G20 Communiqué. The original is in italics.

Communiqué
Meeting of Finance Ministers and Central Bank Governors
Moscow, 15-16 February 2013
1. We, the G20 Finance Ministers and Central Bank Governors, met to discuss the global economic challenges of today and to bring forward the policy agenda agreed by our Leaders.

We checked in, ticked the register, then went to lunch.

2.Global Economy and G20 Framework for Strong, Sustainable and Balanced Growth. Thanks to the important policy actions in Europe, the US, Japan, and the resilience of the Chinese economy, tail risks to the global economy have receded and financial market conditions have improved. However, we recognize that important risks remain and global growth is still too weak, with unemployment remaining unacceptably high in many countries. We agree that the weak global performance derives from policy uncertainty, private deleveraging, fiscal drag, and impaired credit intermediation, as well as incomplete rebalancing of global demand. Under these circumstances, a sustained effort is required to continue building a stronger economic and monetary union in the euro area and to resolve uncertainties related to the fiscal situation in the United States and Japan, as well as to boost domestic sources of growth in surplus economies, taking into account special circumstances of large commodity producers.

Dr.Aghi's smoke and mirrors in Europe has bought us time and Ben and new best mate Abe's liquidity cannons are holding back the crowds. Chinese data could be made up by throwing dice but we don’t care as long as they keep buying. However despite a lot of deodoriser, the world still stinks.

3. To address the weakness of the global economy, ambitious reforms and coordinated policies are key to achieving strong, sustainable and balanced growth and restoring confidence. We will continue to implement our previous commitments, including on the financial reform agenda to build a more resilient financial system and on ambitious structural reforms to lift growth. We are committed to ensuring sustainable public finances. Advanced economies will develop credible medium-term fiscal strategies in line with the commitments made by our Leaders in Los Cabos by the St Petersburg Summit. Credible medium-term fiscal consolidation plans will be put in place, and implemented taking into account near-term economic conditions and fiscal space where available. We support action to improve the flow of credit to the economy, where necessary. Monetary policy should be directed toward domestic price stability and continuing to support economic recovery according to the respective mandates. We commit to monitor and minimize the negative spillovers on other countries of policies implemented for domestic purposes. We look forward to the results of the ongoing work on spillovers in the Framework Working Group.

We are committed to commitments we committed to commit to in previous commitments. We will also recatagorise "FX wars" as "medium term domestic fiscal and monetary policy directed toward domestic price stability and continuing to support economic recovery". If you think that another country's FX policy, sorry "medium term domestic fiscal and monetary policy" is screwing you up as their currency tanks, then please write to the Framework Working Group and ask for a complaint form. All enquiries will be responded to within 15 years.

4. We have adopted an assessment process on the implementation of our structural reform commitments, which will inform the direction of our future structural policies.

To buy time we have spent a few minutes agreeing to draw up a process to implement future policies as we still can’t work out what those policies should be

5. We reaffirm our commitment to cooperate for achieving a lasting reduction in global imbalances, and pursue structural reforms affecting domestic savings and improving productivity. We reiterate our commitments to move more rapidly toward more market-determined exchange rate systems and exchange rate flexibility to reflect underlying fundamentals, and avoid persistent exchange rate misalignments and in this regard, work more closely with one another so we can grow together. We reiterate that excess volatility of financial flows and disorderly movements in exchange rates have adverse implications for economic and financial stability. We will refrain from competitive devaluation. We will not target our exchange rates for competitive purposes, will resist all forms of protectionism and keep our markets open.

See statement 3. The rebranding of "FX manipulation" into "domestic fiscal and monetary policy" will make old fashioned and non-PC terms such as "competitive devaluation" and "FX targeting" redundant. We will of course keep all our markets "open" (just as the French did with Japanese VCRs via their 9 man Poitiers customs office in 1982)

Long-term Financing for Investment
6. We recognize that long-term financing for investment, including infrastructure, is a key contributor to economic growth and job creation in all countries. We welcome the diagnostic report provided upon our request by international organizations (IOs), which assesses factors affecting long-term financing, including its availability, and which will provide a sound basis for the future G20 work. The report finds that the availability and composition of long-term investment financing have been affected by a combination of factors, with differing repercussions across borrowers and sectors. It also finds that there is scope for some sources of long-term financing, including local currency bond markets, domestic capital markets, and institutional investors to play a larger role for investment. At the same time, country-specific factors affect access to long-term financing and there is therefore much that countries can do to attract long-term financing.

We have commissioned a report to tell us what is blindingly obvious to the simplest 3 year old playing "shops". The report tells us that lots of things cause problems and there are various things that could be done, but let's not get bogged down in specifics as we may disagree on them.

7. Recognizing the essential role that the long-term financing plays in supporting our goal of strong, sustainable and balanced growth, we agreed to establish a new Study Group on Financing for Investment, which will work closely with the World Bank, OECD, IMF, FSB, UN, UNCTAD and other relevant IOs to further consider issues raised in the diagnostic report and determine a work plan for the G-20, considering the role of the private sector and official sources of long-term financing.

Ok, so if you insist that we HAVE to focus on something specific, in particular Long Term Funding, then we'll just form a study group involving consultation with so many other bureaucracies it's bound to buy us at least 10 years before we have to act on anything.

8. In support of this work, we encourage the OECD, together with other relevant IOs, to provide analysis of different government and market-based instruments and incentives used for stimulating the financing of long-term investment, as well as a survey report on pension funds’ long-term investments. We look forward to the OECD report on the “High Level Principles of Long-Term Investment Financing by Institutional Investors” by the Leaders` Summit in St Petersburg. The FSB will continue to monitor the possible effects of regulatory reforms on the supply of long-term financing. We have asked the MDBs to consider modalities to optimize their lending capacity and to enhance the catalytic role they play in mobilizing long-term financing from other sources, including through PPPs. We encourage the World Bank and other relevant IOs to intensify their efforts in addressing weaknesses in infrastructure project preparation and design and, drawing on existing G-20 work, where relevant, come up with the recommendations on how to address this challenge. We also ask the MDBs to analyze the existing modalities of interaction with the National Development Banks (NDBs).

If the group in 7) runs out of ideas we had a note from a Mr. Vince Cable in the UK suggesting we grab the pension funds. Failing that, just tell all banks to lend anyway despite us having earlier told them to rebuild their balance sheets.

9. Deep and stable local capital markets continue to play an essential role as a reliable source of long-term financing. We welcome the ongoing work of the World Bank and other IOs on implementing the G20 Action Plan to support the development of local currency bond markets (LCBMs). We look forward to full implementation of the Action Plan and a progress report by July 2013. We ask IOs to explore how LCBMs might play a bigger role in financial deepening, taking into account individual country experiences and regional initiatives.

Having broken the European Bond markets and seen UK and US markets get QE'd out of reality, perhaps we need some new bond markets to play with (fund us). There are 150 countries out there guys "Go Get"! Oh .. but don't bother with Argentina or Iceland.


Government Borrowing and Public Debt Sustainability
10. In pursuit of our goal of strengthening the public sector balance sheet, work is needed to better assess risks to public debt sustainability. This includes, inter alia, taking into account country-specific circumstances, looking at transparency and comparability of public sector reporting, and monitoring the impact of financial sector vulnerabilities on public debt. We look forward to an update from the IMF and the World Bank on these issues according to their respective mandates.

Whether your domestic bond market blows up or not probably is due to lots of things and sounds complicated so we'll sling the responsibility on the IMF and World bank.

11. The existing practices of public debt management also deserve attention. We therefore ask the IMF and the World Bank to take stock of the existing guidelines on effective management of public debt, namely the “Guidelines for Public Debt Management,” with a view to ensuring that they remain relevant and topical. We also note the ongoing work of the OECD to review leading practices for raising, managing and retiring public debt.

And while they are at it they can look at whatever we are telling people to do with their public debt as we will need someone to blame when that blows up too.

International Financial Architecture
12. We welcome progress made since the IMF and World Bank Annual Meetings in Tokyo on the G20 Leaders’ commitments in Los Cabos to provide the IMF with resources via bilateral arrangements, and call on the IMF and lending countries to finalize the remaining agreements.

Our earlier delaying tactics are still delaying things nicely, but perhaps this one does need wrapping up soon or we may run out of money.

13. We underscore the importance of enhancing the credibility, legitimacy and effectiveness of the Fund. We reaffirm the urgent need to ratify the 2010 IMF Quota and Governance Reform. We note the IMF Executive Board’s decision to integrate the process of reaching a final agreement on a new quota formula with the 15th General Review of Quotas. We commit to achieve, together with the whole IMF membership, an agreement on the quota formula and complete the General Quota Review by January 2014 as agreed at the Seoul Summit. We attach high importance to securing continued progress in meeting these objectives, including on key elements at the September St Petersburg Summit and subsequently at the October 2013 G20 Ministerial and IMFC meetings. We reaffirm our previous commitment that the distribution of quotas based on the formula should better reflect the relative weights of IMF members in the world economy, which have changed substantially in view of strong GDP growth in dynamic emerging market and developing countries. We reaffirm the need to protect the voice and representation of the IMF poorest members as part of this General Review of Quotas.

Yeah, yeah, yeah, we know we have spanked away nearly all the IMF funds on just a few Western nations and we know that lots of once EM (but now pretty large) countries are getting stiffed in their round at the bar. But we promise next time we go out we will not forget our wallets and get the beers ok? But whilst you are buying, get in another bottle of champagne will you?

14. In line with the Leaders’ Declaration at the Cannes Summit, we note the ongoing work at the IMF and BIS on global liquidity indicators and will take stock of this work at our next meetings. We call for dissemination of the BIS research and call on the IMF to explore the possibility of incorporating global liquidity issues into its surveillance.

Come on BIS, please let us have a look at your homework, we forgot to do ours. Hey IMF, you can do it instead.

15. In Seoul, Cannes and Los Cabos our Leaders recognized the importance of effective financial safety nets. Given an important role played by Regional Financial Arrangements (RFAs), we will assess scope for a more effective dialogue between RFAs, as well as enhancing cooperation and increasing complementarities between the IMF and RFAs, building on the principles for cooperation we agreed on in 2011. We take note of the ongoing work at the IMF on this issue and look forward to an update on it at our next meeting in order to assess possible options for further policy recommendations by the time of the Leaders’ Summit in St Petersburg.

Let’s ask the RFA's for IMF funding too.

Financial Regulation
16. We welcome the establishment of the FSB as a legal entity with greater financial autonomy and enhanced capacity to coordinate the development and implementation of financial regulatory policies, while maintaining strong links with the BIS. The FSB intends to review the structure of its representation, which is envisaged to be completed by the end of 2014.

We are setting up a Federation of Sneaky B*stards to implement our bidding across the globe Mwauhahaha our own Financial Stability Board as the BIS aren’t being quite as helpful as we had hoped

17. We remain committed to the full, timely and consistent implementation of the internationally agreed financial sector reforms. We urge all jurisdictions to adopt the agreed Basel III reforms as expeditiously as possible. We look forward to progress reports on implementing the Basel III framework, the FSB Key Attributes of Effective Resolution Regimes and the reforms of the over-the-counter (OTC) derivative markets at our April meeting, as well as a comprehensive report on progress in implementing all reforms at the St Petersburg Summit in September. We welcome the Basel Committee’s increased focus on comparability of risk-weighted assets and look forward to an update by our July meeting. We reiterate our commitment to take the necessary steps to ensure that all global systemically important financial institutions are resolvable, and to promptly address all impediments to the effective home-host cooperation of the resolution authorities for internationally active banks. Operational resolution plans for all global systemically important banks should be developed by end-June 2013. We ask the FSB to deliver by the time of the St Petersburg Summit an assessment of progress towards ending the problem of “too-big-to-fail”.

Despite our desire to increase lending across the globe we would still ideally like to dismantle anyone who thinks they can hold a gun to our head and turn them into subjugated corner post offices, whilst still have them shoulder the blame for any financial crisis even if it was our fault.

18. We stress that all jurisdictions should promptly complete the necessary changes to their legislative and regulatory frameworks to put the agreed OTC derivative reforms into practice. We welcome the FSB’s plan to report to the Summit on all members’ committed actions to complete these reforms. The FSB will continue to coordinate the monitoring of implementation of OTC derivative reforms. We strongly encourage all jurisdictions to continue working together to ensure national regulatory frameworks avoid cross-border conflicts, inconsistencies, gaps and duplicative requirements. We take note of the December 2012 statement by some regulatory authorities on the regulation of the OTC derivatives markets, in particular their agreement on approaches towards cross-border regulatory issues to be considered. We also look forward to the results of the macroeconomic impact assessment of the OTC derivatives regulatory reforms. The Regulatory Oversight Committee of the global Legal Entity Identifier (LEI) system was established last month and we look forward to the establishment of the LEI foundation in order to launch the global system in March 2013.

Pinning down OTC transactions is harder than tracking Starbucks' tax liabilities. Let’s nail these down now before we run out of ideas and have to resort to declaring them "morally wrong".

19. We reiterate our willingness to strengthen the oversight and regulation of the shadow banking sector. We also look forward to policy recommendations for the oversight and regulation of the shadow banking sector by the Leaders’ Summit. We note with concern the delays in the convergence of accounting standards to date and ask the IASB and the FASB to finalize by the end of 2013 their work on key outstanding projects for achieving a single set of high-quality standards. We welcome the FSB’s forthcoming peer review to assist authorities in implementing the FSB roadmap to reduce reliance on external credit ratings and we also call on Standard Setting Bodies to do further work in this area. We look forward to IOSCO’s report on enhancing transparency and competition issues of the credit rating agencies and to further work on these issues. We also expect more progress on measures to improve the oversight and governance frameworks for financial benchmarks coordinated under the current FSB agenda this year, including the promotion of widespread adoption of principles and good practices and ask for reporting to our Leaders at the St Petersburg Summit. We welcome the FSB’s intention to monitor material unintended consequences of financial regulatory reforms for EMDEs as appropriate without prejudice to our commitment to implement the agreed reforms.

The EU contingent still want Credit Ratings Agencies stamped upon and we have to agree that having our own would be a lot more .. err "helpful". Oh and as for unintended consequences arising from our policy implementation? Please write to customer complaints c/o FSB, where they will be filled in a deep dark cave and ignored.

20. In the tax area, we welcome the OECD report on addressing base erosion and profit shifting and acknowledge that an important part of fiscal sustainability is securing our revenue bases. We are determined to develop measures to address base erosion and profit shifting, take necessary collective actions and look forward to the comprehensive action plan the OECD will present to us in July. We strongly encourage all jurisdictions to sign the Multilateral Convention on Mutual Administrative Assistance. We encourage the Global Forum on Transparency and Exchange of Information to continue to make rapid progress in assessing and monitoring on a continuous basis the implementation of the international standard on information exchange and look forward to the progress report by April 2013. We reiterate our commitment to extending the practice of automatic exchange of information, as appropriate, and commend the progress made recently in this area. We support the OECD analysis for multilateral implementation in that domain.

We promise to set up a system to tell you what we are doing and use the slow establishment of said system as a reason for any failure to tell anyone else what we are up to, despite the rest of the world managing to communicate every fine detail of their lives to people who don’t even care by utilising post, phone, email and social networking sites.

21. We reiterate our commitments and encourage the FATF to continue to pursue all its objectives, and notably to continue identifying and monitoring high-risk jurisdictions with strategic Anti-Money Laundering/Counter-Terrorist Financing (AML/CFT) deficiencies. We look forward to the completion in 2013 of the revision of the FATF assessment process and support ongoing FATF work, including on identification of beneficial owners of corporate vehicles.

We hereby guarantee the jobs and future prospects of compliance department employees across the globe and the continued proliferation of on-line employee training courses.

22. In the prudential area we call for further progress within the FSB to encourage increased adherence to international regulatory and supervisory cooperation and information exchange standards.

And grant said departments judicial right to mete out summary execution should the on-line test pass rate of 80% not be attained within three attempts.

Financial Inclusion
23. We welcome the progress achieved by the Global Partnership for Financial Inclusion (GPFI) in implementing the Financial Inclusion Action Plan and look forward to the progress report at our July meeting. We reaffirm our commitment to support the implementation of the G20 Financial Inclusion Peer Learning Program through the GPFI together with its implementing partners and take note of the initiative of the World Bank and development agencies to establish a comprehensive Financial Inclusion Support Framework (FISF). We expect the GPFI to expand the G20 Basic Set of Financial Inclusion Indicators to cover innovative approaches, quality of products, financial literacy and consumer protection with support from the Alliance for Financial Inclusion, CGAP, IFC, OECD and the World Bank by our meeting in July 2013. We expect the progress report on barriers for women and youth to gain access to financial services and financial education, including policy recommendations to be delivered by the GPFI, OECD/INFE and the World Bank by the St Petersburg Summit.

We've set up a peer learning program so our kids, leaving University with no jobs to go to, can get work experience at our company. We will then tie all the institutions and bodies we have set up into such a tight Gordian Knot of cross reporting it will be impossible for anyone to work out what is going on , who reports to whom or why nothing has changed.

24. We welcome the work that the OECD/INFE and the World Bank are undertaking on the development of practical tools for financial literacy measurement and the evaluation of financial education programs and look forward to the progress report on the National Strategies for Financial Education by our July meeting. We look forward to an update report on the work undertaken by the G20/OECD Task Force to support the implementation of the G20 High-Level Principles on Financial Consumer Protection by the St Petersburg Summit. We wait for the FinCoNet Status report on consumer protection supervisory tools and best practices to support supervisory bodies, based on work undertaken by FinCoNet members and on the World Bank Global Survey on Financial Consumer Protection.

We will continue to try to learn what this "money stuff" thing is all about and set up new scapegoats to sue should we end up getting conned through our own stupidity.

Energy, Commodities, Climate Finance
25. We will produce a report to our Leaders on progress on the G20’s contribution to enhance transparency and facilitate better functioning of international commodity and energy markets. We look forward to the report by the IEA, IEF and OPEC on practical steps G20 countries could take to increase transparency in international gas and coal markets, as well as the IOSCO report on progress on the implementation of the principles for the PRAs and the assessment by IOSCO in cooperation with the IEA, IEF and OPEC of the impact of these principles on physical markets. We will continue working to improve the timeliness, completeness and reliability of JODI-Oil and look forward to a progress report this year. We welcome progress on the JODI-Gas database and look forward to its launch in 2013.

We also think something fishy may be going on in the Energy markets (ENRON, Weren't they Energy?) so better have a look at them too.

26. We will voluntarily self-report this year on our efforts to incorporate green growth and sustainable development policies into our structural reform agendas. We will report back to our Leaders on the progress made to rationalize and phase-out over the medium-term inefficient fossil fuel subsidies that encourage wasteful consumption, while providing targeted support for the poorest. We will develop methodological recommendations for and undertake a voluntary peer review process for such fossil fuel subsidies with the view to encourage broad participation and report on the outcomes to our Leaders in St Petersburg. We will continue working towards building a better understanding among G20 members of the underlying issues in the area of climate finance through voluntary knowledge and experience sharing, taking into account the objectives, provisions and principles of the UNFCCC, and report back to our Leaders in 2013.

How much are we spending on renewable subsidies? Well shut that down! Oh and we are really really committed to renewable energy.

G7 Cold War. No clear sign.

First some house keeping. EUR/GBP closed favourably but we weren't nimble enough when it dipped in eur/jpy and had to take a hit. And once again we will hit ourselves over the head with the wooden plaque on our desks engraved with the words "JPY will remain difficult  DO NOT TOUCH". Serves us right.

If the markets are a marathon race and each asset class is a runner then it looks as though FX has made a break and taken the lead with other asset classes now following behind. We see equity indices back to trading via currency values rather than in lock step, FTSE and GBP/USD, Nikkei/ jpy ( obviously), SPX/USD and so on. Old fashioned stuff. Of course having FX back at the fore is great for FX traders, but only up to a point. We are worried that FX has spent so long following other markets it may have forgotten how to do its own navigation and is likely to get lost or at least confused as to which way to go.

The market response to the G7 statement yesterday was, to us,  a clear example of a market desperate for direction, looking for a sign and yet struggling to make its mind up as to what the sign said. TMM believe that expecting any clear statement from the G7 on any policy is foolish. TMM have lived through many G7 statement events and each time we have seen a market try and pick the bones out of a statement that, by its very nature, has to couch compromise and noncommittal flexibility within a wrapper of perceptual agreement.

"We, the G7 Ministers and Governors, reaffirm our longstanding commitment to market determined exchange rates and to consult closely in regard to actions in foreign exchange markets. We reaffirm that our fiscal and monetary policies have been and will remain oriented towards meeting our respective domestic objectives using domestic instruments, and that we will not target exchange rates. We are agreed that excessive volatility and disorderly movements in exchange rates can have adverse implications for economic and financial stability. We will continue to consult closely on exchange markets and cooperate as appropriate."

Which as a sign of direction to the FX markets is as good as this




But the point we note is that "remain oriented towards meeting our respective domestic objectives using domestic instruments" does not preclude manipulation of FX as, apart from direct intervention, the tools currently being employed to manipulate FX are those very "domestic instruments". So in a way they are saying they will not directly intervene (will let the markets set the level), but they will all individually be pulling the relevant domestic levers to make the market move the way they want. In other words the FX wars are going to be fought like the Cold War. No nukes, lots of public smiles but a lot dirt, manipulation and the odd assassination behind the scenes.

This morning's statement from Mervyn King backs this up as it is clear he is going "George Smiley" on us.

Where does that leave us? Well we wonder how long the equity market will let the fickle and dithery FX market lead the way and, having got bored of waiting for something clear cut, will continue on their own path. Having had a couple of weeks of range without the correction that we were worried about we are now to get back on the train we got off. But with a US holiday ahead we will probably wait and give ourselves a couple more days.

Using the F word

Dr Aghi mentioned the F word yesterday and today Japan's Aso may or may not have used the F word depending on which news feed, associated translation and following MoF damage control story you would like to believe. But for overall effect Dr Aghi's use was as effective as an F word in a Beckett play, achieving maximum effect with Euro falling,  whereas Aso's usage ended up with him being dragged into compliance and given a roasting for damaging the reputation of the "corporate mission statement" as the JPY rallied.  The F word of course referring to FX.  So if you don't want to be a complete Aso, leave the F word to the experts.

Are we back to watching internecine squabbles within the Euro group over where Euro should be? Predictably Germany's opener with GERMAN GOV'T SPOKESMAN SAYS GERMANY BELIEVES EURO IS NOT OVERVALUED smacks of the old game of corporate squeeze knowing that German corporates are in a stronger position re Euro moves than marginal exporters in France and the periphery. Noise perhaps but with the Macro world quiet it may be a distraction to fill time.

The theme of potential tops, or at least corrective rollovers still intrigues TMM. Having cut our equities at the end of January we have been watching them trace out what almost looks like a square wave form on last week's tic charts with little confirmation either way. FX moves also appear to have flattened off as momentum in Euro and jpy recent moves start to reflect the rangy to soft nature of commodity currencies. We were staring at technicals yesterday and having seen EUR/GBP bust through its recent up trend, noted a USD/JPY doji 2 days ago following a soothsayer signal and a myriad of signals in EUR/USD too.

And the mood? Well the tone of commentaries hitting our inboxes are still massively skewed to "buy the dip". There seems to be little or no appetite (or expectation) for Euro to fall further from here and little belief that the Jpy could possibly rally much further. This leaves TMM, in their normally stroppy bolshie counter consensus way feeling the weak side is the down side in EUR/JPY. So whilst equities decide what they are going to do TMM will continue to punt in FX and the lack of much bounce in EUR/USD, has spurred us to add short Eur/Jpy to our short EUR/GBP from yesterday.

Finally, the comments coming out yesterday from FOMC's Evans reminded us of a very strange twist that supports the theory of Yin and Yang.  Every good has an equal bad to counter it. It appears that Evans, who TMM much admire, has a twin living in the UK who is as evil as Evans is good.  Can YOU spot the difference between Evans and Ed Balls?

The top picture is of Charles L. Evans, Alternate FOMC member, Chicago
The bottom picture is of Ed Balls, UK labour MP and shadow chancellor.

ECB Carney Day

A quicky pre Carney

ECB day - TMM felt that the last ECB meeting was dominated by Dr Aghi's valedictory performance not unlike a returning Caesar entering Rome after defeating the Ursine tribes. All that was missing was the laurel wreath. SO where do we go from here? Data is indeed improving but as always markets are not about working out what will happen its about marrying what you expect to happen against what everyone else expects will happen and though TMM are comfortable that Europe is economically on the mend we do feel that EL Dottore and those piling straight back into Euro  may have over counted their chickens even before they have hatched. 

Carney Day - Similarly, but conversely re market positioning, ahead of Mr. Carney's testimony to the Treasury select committee. We wrote a post on our longer term thoughts on Carney last week but the hype is that he will give an outright dovish performance with some expecting him to go completely BoJ over policy. TMM can see him doing as little as possible to rock the boat as we are still four months off his official arrival and it would be foolhardy to lay the foundations for commitments that may well need to change before he takes up his post. Why paint yourself into a corner when you could have a free option instead.  

So marrying these two events we suppose we should really be short of EUR/GBP into them.

Oh, and TMM would like to congratulate Taiwan on two fronts. On successfully launching the trading of the Taiwan offshore remimbi and, more importantly, launching the best currency code since Argentina and its ARS. We welcome the arrival of the CNT.

Bonds - Dump them like it's 1994.

Yesterday morning TMM were somewhat relieved to find Spain and Italy the focus of attention as Friday's rip higher had us feeling like passengers that had drunkenly got off the last train home a few stations early, watching it continue on up the track leaving us in the cold with a long walk to catch up. We had been thinking that HY credit was to be the populist trigger for a wobble but we are happy for an assist from any hand.

But Europe? Well as TMM says- "There are two things in life you can be sure of - "Death" and "A peripheral European country tripping over the last step up out of the darkened cellar and smashing its nose on the concrete"". Spain and Italy? TMM thank you. But special thanks has to go to Rajoy for adding a new precedent to political get out clauses with his statement that all the information that has been published by the media "is untrue - except for some things". Bet Chris Huhne wishes he'd thought of that one.

But thanks also have to go to to the supporting cast of European technicals, a monster stop-loss post NFP towel-chuck, the odd ratings company being gunned down (just when they thought they'd got away over the horizon) and an army of extrapolationists and their straight lines (did you see how many calls to new extremes came out from various research houses over the weekend? NZD/USD parity?).

Overnight falls in Asia have confirmed the globalness of this pullback but the tussel between improving ecomomic data, Spain PMIs very good, and the new euro political news has seen Europe open to a rebound. But TMM think the anatomy of a wash out will naturally see the buy-the-dippers first appear before another down move takes them out too with a collective "urghh". So with that in mind TMM are today sell-the-ralliers thinking this dip has more to it.

However though the new paradigmers have gone temporarily quiet we don't think it will be long before the bond market are belting out their new favourite tune. We've been hearing more and more of it from various sources and it's based on Prince's "1999"



Dump 'em like it's 1994

Don't worry, I won't hurt you
I only want you to buy my bonds

I was dreamin' when I bought these
Forgive me as it goes astray
But when I woke up this mornin'
Coulda sworn it was judgment day
The sky was all purple,
There were yields rising everywhere,
Tryin' to run from bond destruction,
Just gimme a price that's fair.

Cuz' they say two thousand twelve bond QE party over,
Oops, through the floor.
So tonight I'm gonna sell 'em like it's 1994.

I was dreamin' when I bought these
Thinking Fed would buy and buy 'em fast.
But QE is just a party. QE parties weren't meant to last
Growth is all around us, my mind says prepare for flight
So if I gotta deal, I'm gonna sell my bonds tonight.

Yeah, they say two thousand twelve bond QE party over,
Oops, through the floor
So tonight I'm gonna sell 'em like it's 1994

Yeah
Lemme tell ya somethin'
If you didn't come to dump them.
Don't bother knockin on my door
I got some stocks in my pocket,
And baby they're ready to roar
Yeah, everybody's got some bonds,
Watch 'em all dive late today
But before I'll let that happen,
I'll have sold my lot anyway.

Oh, they say two thousand twelve bond QE party over,
Oops, through the floor,
Were runnin' out the door (tonight I'm gonna)
So tonight we gonna (dump 'em like it's 1994)
We gonna, oww

Say it one more time
Two thousand twelve bond QE party over,
Oops, through the floor,
Were runnin out the door (tonight I'm gonna)
So tonight we gonna (dump 'em like it's 1994)
We gonna, oww

Alright, it's 1994
You say it, 1994
1994
1994 don't stop, don't stop, say it one more time
Two thousand twelve bond QE party over,
Oops, through the floor,
Yeah, yeah (tonight Im gonna)
So tonight we gonna (dump 'em like it's 1994)
We gonna, oww

Yeah, 1994 (1994)
Don'tcha wanna go (1994)
Don'tcha wanna go (1994)
We should all sell anyway (1994)
I don't wanna loss,
I'd rather give all my bonds away (1994)
Listen to what I'm tryin to say
Everybody, everybody say dump 'em
Cmon now, u say sell 'em
That's right, everybody say (dump 'em)
Cant run from the revelation, no (dump 'em)
Sell em, watch the govies fall (dump 'em)
Tell me as your rates are rising, baby sell (dump 'em)
Telephones a-ringin, broker (dump 'em)
Cmon, cmon, you sell (dump 'em)
Everybody, (dump 'em )
Sell 'em down to the ground, sell (dump 'em )
(dump them )
Come on, take my bonds, baby (dump 'em)
That's right, and go long S+P (dump 'em )
(dump 'em )
That's right (dump 'em)
Got stocks 'n' shares in my pocket man and Bonds? (dump 'em )
Oh, they've dumped right through the floor (dump 'em)

Mommy, why is everybody selling bonds?
Mommy, why is everybody selling bonds?

2013 Non-Prediction No. 13

13) The UK will NOT adopt either a Nominal GDP level or growth target.

Since George Osborne surprised the Establishment by appointing the Bank of Canada’s Mark Carney as Bank of England Governor and his subsequent comments on the potential virtues of Nominal GDP targeting, there has been much discussion and anticipation that the UK is about to abandon the inflation targeting regime and opt instead for a Nominal GDP target. Without beating about the bush, TMM think this is a load of codswallop. Notwithstanding the fact that Mr Osborne has publicly stated that any new regime would need to have demonstrable benefits over the existing one – and was reported to have had “a quiet word” with Mr Carney at Davos – TMM reckon that there are several reasons why adopting a Nominal GDP target in the UK in particular just wouldn’t work. As regular readers will attest, TMM are not fans of Mervyn King, but find themselves completely agreeing with his recent comments on the topic.

Firstly, it’s worth noting that in the late-1970s/early-1980s (at least, according to one of TMM’s colleagues who was there at the time) the Treasury had a look the possibility of such a regime, when deciding upon monetary frameworks. This was rejected as the data was not available on a timely enough basis, while also not exactly being a million miles away from targeting broad money growth & excess liquidity (i.e. how much more liquidity there is than required to support nominal GDP). We all know that this fell down as monetary velocity proved unstable.

There are here, perhaps, parallels for a potential Nominal GDP target. If real GDP growth is a function of labour force & productivity growth, setting a Nominal GDP target of say 5%, which TMM presume means inflation of 2-2.5%% and real trend growth of say 2.5-2.75%, makes two pretty big assumptions (that may or may not be correct) in addition to those of the New-Keynesian Phillips Curve. The UK has seen large changes in the size & composition of its labour force over the past decade and demographics are likely to further alter this in the coming years and decades. And while, over the very long term (decades), it seems that productivity growth has managed around a 1-1.5% trend, the Japanese experience, recent discussions in the Economist (and elsewhere) about innovation, as well as the UK’s own post-crisis productivity puzzle argue that we should not take the past trends for granted. [As an aside, TMM are optimists on the productivity & trend growth front, but there is enough evidence to suggest that we may be wrong]. The Philips Curve may prove vertical, productivity growth low, and monetary easing merely result in higher inflation as expectations lose their anchor and second round effects send wages spiraling. Inflation targeting alone makes fewer assumptions about the economy and is less complex in its operation – the 1970s experience with NAIRU demonstrates that it is difficult enough looking at just one variable without adding additional ones to muddy the waters.

Governor-elect Carney has mooted a Nominal GDP Level target, rather than a growth target, and looking at the lost output to past trends, Nominal GDP is something like 15-20% below those. TMM are highly sceptical that regaining this trend by exceptionally aggressive monetary policy will work. The gap is just too large to be credibly closed in a relatively short period of time (e.g. 5years), and the spector of the BoE buying everything under the Sun to get there provides a huge risk to inflation expectations. This of course has a corollary for the future when presumably the economy is eventually at trend and suddenly faced with a supply shock. The current inflation targeting regime allows the Bank of England to look through short term price shocks that are “one-offs”. A Nominal GDP Level target would presumably required the BoE to tighten policy when faced with such events. It is clear that the path dependency embedded in such a regime is attractive when the economy is operating below capacity (as is now), but let’s be honest with ourselves that this will not always be the case. In contrast to the implied counter-cyclical price assumption in a level target (when the level of GDP is above trend, tightening is implied, and vice versa), public inflation expectations are inherently backward-looking in their formation.

TMM’s simple conclusion to the above is that level targeting is just unrealistic, and very unlikely to get past Sir Humphrey.

So perhaps Nominal GDP growth targets are possibly a better idea?

Well, as TMM pointed out above, while more realistic in terms of policy slippage vs. gaps, these still involve trying to distill several variables into one number. And that may well work (though TMM are sceptical). But the real bug bear TMM have with this is that UK policymakers don’t know within a reasonable margin of error where the economy is *now*, primarily a result of the ONS’s inability to measure activity. As the below chart of the first release of real GDP vs. the current revision shows, the differences are huge, and not really known to any appreciable degree until 2-3 years after the event when the Income accounts have been properly reconciled from tax receipts. TMM will cheekily suggest that this represents the public sector’s misallocation of resources to Her Majesty’s Customs & Revenue, rather than to the ONS. But on a more serious note, economic policymaking is hard enough without having little confidence in the data.



The primary (though not only) reason for these large revisions is the GDP deflator. So the data is subject to large revisions, but it is also only available on a quarterly basis anyway. TMM would argue that is inferior to the timely, monthly CPI prints which are rarely revised, and significantly easier to collect & measure than activity. Of course, there will always be arguments about index construction (e.g. chain weighting, how to deal with housing/shelter costs etc), but in the grand scheme of things, these are irrelevant.

The below chart shows TMM’s attempt to get initial & final revised Nominal GDP data, which having abandoned the horrific ONS website we have settled for the intuitively simple proxy of Real GDP growth plus CPI. While the weights & constituents in CPI vs. the GDP deflator are different, TMM don’t think this invalidates the broad conclusion of this essentially broad strokes piece. Handily, this means that we can pull in the BoE’s implied Nominal GDP forecast 2-years ahead (taking real GDP & RPI/CPI wedge-adjusted forecasts assuming unchanged policy rates over the forecast period).

Proponents of Nominal GDP targeting often posit that it would have led to tighter policy in the 2003-7 period. Looking at the early GDP releases this would indeed have been the case, but the latest revisions would suggest that under the Nominal GDP targeting framework, policy would have been too tight in hindsight, as the overall nominal strength was revised away. In fact, the synthetic BoE 2yr ahead Nominal GDP average forecast for the period was 4.7%, the first print was 5.95%, but was subsequently revised to 4.9% - pretty close to the BoE’s average forecast. TMM would argue that the fact that these initially reported numbers would've likely resulted in tighter policy at that period and presumably would've prevented (or at least reduced) the credit bubble in this period is merely a coincidence caused, primarily, by the incompetence of the ONS, and should NOT be used as evidence in favour of Nominal GDP targeting. In fact, if statistical collection were better in the UK and the initial prints closer to the currently revised numbers, it is eminently possible that under this framework, policy would, in fact, have been *even looser* in the period 2004-7! [TMM will caveat that with the usual disclaimer around counter-factuals]



Interestingly enough it appears, coincidently, that in attempting to target inflation, the BoE has also effectively synthetically shadowed a Nominal GDP target of around 4.7%. This is hardly surprising, given that over the period, trend real GDP has been around 2.5-2.75% and the inflation target has been 2%. Given this, does a Nominal GDP target really provide additional flexibility for targeting growth? An ex-MPC member once admitted to TMM (though this was pre-crisis) that the bulk of what they did was to look at the PMIs and adjust policy (if needed) on the back of that (i.e. - significant attention is paid to growth, in practise). Together with the fact that until only a few months ago the BoE had the easiest monetary policy within the G4, it is hardly credible to suggest that the current inflation targeting regime does not allow plenty of flexibility for supporting growth.

Finally, and arguably most importantly, Nominal GDP growth & level targeting is far too esoteric and complex for the public to easily understand. If expectations are important (and TMM would argue they are very much so), then unpredictable outcomes may result as households & businesses try and interpret policy. For all their failings, the economic policy regimes that the UK has adopted over the decades have *all* been easily communicated to the public: the fixed exchange rate systems of Bretton Woods & ERM require no further explanation, nor do the attempts at targeting “full employment”, managing "incomes policies" by government stimuli/wage freezes etc. Even though targeting the growth rate of monetary aggregates is a somewhat complex topic, it was easily communicated and widely understood as “preventing too much money chasing too few goods and pushing up prices”. Again, targeting an inflation rate of 2% is a very simple & well-understood concept that has significantly contributed to the de-indexation of wages in both the private & public sectors in recent decades.

To conclude, TMM reckon that there is plenty to lose and not really very much to gain in departing from the current inflation targeting framework that has served the UK for the past 20 years. As noted above, it has proved amply flexible in allowing the BoE to look through supply shocks, concentrate on growth while capacity is large & wages are well-behaved. Inflation expectations have incredibly stayed well-anchored, despite the continued above-target inflation prints in recent years. This credibility has been hard won, the framework is well-understood by both the public and the markets, and could easily be “enhanced” without endangering this (perhaps by widening the range before a letter is required to be written, lengthening out the understanding of “medium term” to be 3-4 years rather than 2 years etc).

TMM reckon that a 5% Nominal GDP target (i.e. 2% inflation plus 3% growth) would merely end up being 5% inflation and zero growth. That is not something the Treasury & BoE are likely to risk in our opinion, no matter how much the transfer fee for their new star player.

With that, we wish Mr Carney (who TMM do believe was the best person for the job) the very best of luck in his new role.