City Job Axe Starts to Swing
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Monetary policy “walking a tightrope”…1,300 jobs go in the Square Mile… Britain’s second largest bank to go cap in hand to shareholders for a large dollop of cash..? Rice hits a record $1,000 a tonne…and one in ten face that old wealth destroyer from the early ‘90s: negative equity. So where to start..?
The inflation monster, perhaps…given it’s straining hard at its leash and threatening to break loose altogether. The Bank of England’s chief economist Charles Bean says they are “walking a tightrope” with monetary policy (ie principally calling the shots on interest rates). On the one side they’ve got mischievous commodity prices pushing up prices and stoking inflation and on the other side they are trying to keep the economy growing, even if it’s only at a crawl. The credit crunch has proved “more pervasive and longer lasting” than expected says Mr Bean. The black holes it has left in bank balance sheets has been felt on the high street in the form of as the shrivelled mortgage market.75% of the deals available last summer have now gone reports the Daily Mail which has heaped further pressure on bloated house prices. Morgan Stanley calculate one in ten mortgagees could be looking at negative equity. With recent purchases probably under water already.
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As commodity prices continue a renewed push higher, the Bank of England’s job does not get any easier. There must be considerable nostalgia welling in the panelled walls of Threadneedle Street for the NICE old days - Non-Inflationary Continuous Growth. Now the opposite beckons. Mr. Bean sees CPI inflation topping 3% later this year. That’s more than 1% over the Bank’s target and triggers a letter from Mr King to the government to explain how it happened. As if they don’t know.
That CPI inflation figure is way off anyway says the Daily Mail. It’s put together its own cost of living index in cahoots with uswitch.com and moneysupermarket.co.uk. Together they find inflation coming in at 15.5%. That means the average family will be paying an extra £100 a year for higher costs of food, energy and transport.
Oil we noted yesterday at $115. Veteran oil investor T Boone Pickens sees more upside still - $125 on the horizon. That’s more unwelcome news for car drivers but perhaps of qualified good news for the Exchequer. North Sea oil may be running out fast but what’s left is selling for more than ever and should offer some sustenance to empty government coffers. Britain’s budget deficit for March was £10.2bn. The highest since records began in 1993. Better news for the Chancellor elsewhere as public borrowing for the past financial year at £35.6bn comes within his budget forecast of £36.4bn.
As for food prices, the rice crisis took another turn. The Philippines has failed for the fourth time to secure the rice it needs. Bangladesh has come away empty handed too this week. This from the FT.
“Rice prices hit the $1,000-a-tonne level for the first time on Thursday as panicking importers scrambled to secure supplies, exacerbating the tightness already provoked by export restrictions in Vietnam, India, Egypt, China and Cambodia.”
On a humanitarian level this is a global crisis threatening the world’s poor. 100m could be affected says the World Bank. At the economic level, the idea of the commodity super-cycle is back on track following a pull back. Now it’s the ‘softs’ leading the charge in higher prices…wheat, maize (corn), rice. But if you’re considering a leap on this investment bandwagon thinking this is a one way ticket, ponder a moment the cautionary words of George Soros.
“You have a generalised commodity bubble due to commodities having become an asset class that institutions use to an increasing extent.”
So now the big money is buying up the farm as well as the mining supply, prices are heading for the moon seems to be his message. Commodity investment increased by 20% to $400bn in the first quarter according to Citigroup. But it is a bubble still in the “growth phase” says Soros implying there’s some way to go yet. A view shared by his ex-partner and long-time commodity bull, Jim Rogers. Having identified the commodity boom in 1999, he sees it lasting for years yet, to 2014 at least.
The price of rice is now three times higher than it was a year ago and buyers are attempting to buy additional supply to stockpile. Gold meanwhile “holds steady as market eyes $950,” reports Reuters first thing this morning. The market’s eyes must have wandered since as it’s slipped back to $4 to $935. Another commodity to have soared is coal which has turned the old pit pony business of UK Coal into something of a thoroughbred. It quadrupled profits for the year. Up from £17.6m to £69m.
In the US market, Citigroup has written down another $12bn. These monstrous numbers appear to have lost anyshock value long ago. Better news from internet search engine business and mother of all online knowledge (or what passes for it), Google It announced forecast-beating revenues up 42%.
Back in London, the stock market welcomes a new name today in the merged financial information group Thomson Reuters. They promptly get marked down 14% in early trading. Not the best time to be launching any kind of financially-related company in the public domain.
Record high employment numbers reported earlier in the week are now being assaulted by news of job losses. On the high street, JJB Sports is closing branches and laying off 800 and in the City the long expected cull is starting to happen. 1,300 are being culled reported London’s Evening Standard last night – 900 from UBS and 400 from Merrill Lynch. A further 1,000 are expected to go at Citigroup with an announcement expected later today.
Job losses are not the only feature of bank retrenchment as we see from reports today concerning RBS. They’re considering going cap in hand to shareholders with a £12bn rights issue to shore up their balance sheet say reports. Such a move if it happens might see CEO Fred ‘the Shred’ Goodwin get shredded himself as shareholders seek vengeance.
Intriguing news from the mortgage market… In spite of much reduced consumer choice, rate increases and larger deposits, mortgage lending rose 5% in March according to numbers from the Council of Mortgage Lenders. Still 17% down on a year ago and the CML think overall lending this year could be half the level of 2007.
They’re hopeful the Bank will deliver lower interest rates but have they clocked the oil and wheat prices of late..? Some small encouragement comes from the closely watched Libor rate for interbank lending. The key 3-month lending rate has edged down slightly to 5.91% (if we can trust the read). More needed.
Regards,
Rob Mackrill
The Daily Reckoning
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