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Bland Unsight

You Call That A Boom?

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Thanks to t'internet and the good people at the Bank of England it is very easy to get hold of data for free. When I first got interested in the the question of why housing was so unaffordable what struck me as problematic was that the mainstream media always reported percentage changes to a given metric (e.g. approvals) without any context or any connection to other metrics. Every few months I go to the Bank of England's excellent interactive database (Bank of England Statistical Interactive Database) and download LPMBZ2A, graph it and post the graph on hpc.

LPMBZ2A+to+August+2013.png

The other thing that is usually worth a read is of course Trends in Lending, (latest edition now out, ;) )

Headlines about booming approvals figures paint a different picture to the October 2013 Trends in Lending. On the one hand FLS and Help to Buy do seem to have goosed approvals from their very low levels.

October+2013+TiL+Approvals.png

But on the other hand market participants seem to be convinced that rates are on their way back up in due course.

October+2013+TiL+swap+rates.png

Mainstream media talk about a boom is nonsense.

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The net lending graph is the key one. All this effort just to keep still.

The world's strongest man competition often has a round where some roided up competitor holds a mass at arm's length, still, for as long as possible. No matter how big they are, or hard they try, they drop it eventually.

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As a further point on this I think it's worth considering the following chart which plots the Chairman's LPMBZ2A (outstanding household debt) against LPMBD93 (M4 less Other Financial Corporations).

debtvsmoneyAug13.gif

LPMBD93 is basically bank deposits of households and private non-financial corporations (not to be confused with M4ex which is a somewhat wider measure of broad money). Up until 2002 this metric slightly exceeded the household debt measure, but then the situation reversed and there was a growing 'funding gap'.

As we know, the household debt measure flat-lined when the credit crunch hit, and as loans create deposits we might have expected our broad money measure to do the same. However the BoE stepped in with QE with the deliberate intent of increasing the money supply in the absence of lending growth. This is why those who say QE has failed because it had no effect on lending have missed the point – the BoE made no secret of the fact that they didn't expect much of a lending response; money printing would take up the slack.

The LPMBD93 measure has increased by £211bn since QE started and the gap between the two measures has now closed. So it's going to be interesting to see what happens from here onwards because QE has finished (for the moment at least) but there's a big push from both the govt and BoE to get households to borrow more.

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@FreeTrader

Thanks for that great explanation. I wonder, are people as broke as they were back in 2001 as real incomes have declined? I guess their real income is about the same, which is great for those who bought property before the big hyperinflation.

For the younger generations, they are not going to borrow as how the heck are they going to pay it back. Kind of a catch 22.

And

The remortgaging on the Loans Secured On Dwellings is a classic, you can pinpoint the moment in 2007 when people believed their property gains were locked in as they went to the bank for the loan for a landrover secured against their home.

Edited by Gone to Ireland.

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@FreeTrader

Thanks for that great explanation. I wonder, are people as broke as they were back in 2001 as real incomes have declined? I guess their real income is about the same, which is great for those who bought property before the big hyperinflation.

For the younger generations, they are not going to borrow as how the heck are they going to pay it back. Kind of a catch 22.

The biggest problem as I see it is that the increase in money supply from QE hasn't been evenly distributed, or even proportionately distributed based on 2009 money holdings. It's gone almost exclusively to the upper tier.

A major aim of QE is the 'portfolio balancing effect' where recipients of QE money seek to normalise their extra holdings of cash by going out and buying something. This pushes up asset prices and lowers yields, creating wealth effects that encourage people to spend more.

It's fine in theory, but there's been an almost criminal neglect of the distributional effects. Whenever central bankers are questioned on this subject they just shrug their shoulders and say "we can only paint with a broad brush – it's up to politicians to deal with any subsequent inequalities".

But the politicians don't deal with the inequalities, which is why we end up as we are now. The portfolio rebalancing theory is absolutely right, but you have to consider who is holding the newly printed cash. If it's a guy with millions in the bank, he isn't going to go on an extra holiday or go down the pub three times a week instead of two...no, he's going to want to park the money somewhere where he hopes it will be safe from the same misguided central bankers who gave it to him in the first place.

Consequently our QE recipient buys 'things' – fine art, classic cars, commodities, equities (giving indirect ownership of things), but the numero uno thing he feels safe with is residential property. So we get a buying boom in prime housing, not just in London but in New York, Hong Kong, Dubai, and so on.

Meanwhile the investment injection into commodities leads to inflation in core resources, outstripping the income growth of everyone else. The result is declining purchasing power which limits household consumption, lowers GDP growth and leads to...yes, you guessed it...MORE QE.

To me it's so obvious what is happening that I can't understand why the clever economists around the world can't see it. Then again I couldn't understand a decade ago why they couldn't see that we were walking into a massive financial bust before it finally arrived.

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As a further point on this I think it's worth considering the following chart which plots the Chairman's LPMBZ2A (outstanding household debt) against LPMBD93 (M4 less Other Financial Corporations).

debtvsmoneyAug13.gif

LPMBD93 is basically bank deposits of households and private non-financial corporations (not to be confused with M4ex which is a somewhat wider measure of broad money). Up until 2002 this metric slightly exceeded the household debt measure, but then the situation reversed and there was a growing 'funding gap'.

As we know, the household debt measure flat-lined when the credit crunch hit, and as loans create deposits we might have expected our broad money measure to do the same. However the BoE stepped in with QE with the deliberate intent of increasing the money supply in the absence of lending growth. This is why those who say QE has failed because it had no effect on lending have missed the point – the BoE made no secret of the fact that they didn't expect much of a lending response; money printing would take up the slack.

The LPMBD93 measure has increased by £211bn since QE started and the gap between the two measures has now closed. So it's going to be interesting to see what happens from here onwards because QE has finished (for the moment at least) but there's a big push from both the govt and BoE to get households to borrow more.

Great posts as always FT.

That aligns nicely with 2001 being the last year that UK mortgage lending was net funded from within the UK.

Late on Friday so not necessarily thinking straight so effectively QE has closed the gap (so 50-60% effective on this measure or less is FLS is alos looked at) so what happens next?

A) lending takes off like its 2005(unlikely)

B) QE can be unwound at 50-75bn a year starting in 18 months with stabilised lending levels with improved liquidity for most UK FIs in the mean time.

On the LPMBD93 (M4 less Other Financial Corporations) line what caused the uptick in Q1 '12 as that is too early for FLS?

What are the expectation so FLS, HTB1 and 2

LPMBZ2A (outstanding household debt) should be expected to remain on a plateau as more people swap to repayment mortgages so expected non early redemption repayments go from 25-30bn to 50-60bn counteracting most of the HTB1/2 increase?

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The biggest problem as I see it is that the increase in money supply from QE hasn't been evenly distributed, or even proportionately distributed based on 2009 money holdings. It's gone almost exclusively to the upper tier.

A major aim of QE is the 'portfolio balancing effect' where recipients of QE money seek to normalise their extra holdings of cash by going out and buying something. This pushes up asset prices and lowers yields, creating wealth effects that encourage people to spend more.

It's fine in theory, but there's been an almost criminal neglect of the distributional effects. Whenever central bankers are questioned on this subject they just shrug their shoulders and say "we can only paint with a broad brush – it's up to politicians to deal with any subsequent inequalities".

But the politicians don't deal with the inequalities, which is why we end up as we are now. The portfolio rebalancing theory is absolutely right, but you have to consider who is holding the newly printed cash. If it's a guy with millions in the bank, he isn't going to go on an extra holiday or go down the pub three times a week instead of two...no, he's going to want to park the money somewhere where he hopes it will be safe from the same misguided central bankers who gave it to him in the first place.

Consequently our QE recipient buys 'things' – fine art, classic cars, commodities, equities (giving indirect ownership of things), but the numero uno thing he feels safe with is residential property. So we get a buying boom in prime housing, not just in London but in New York, Hong Kong, Dubai, and so on.

Meanwhile the investment injection into commodities leads to inflation in core resources, outstripping the income growth of everyone else. The result is declining purchasing power which limits household consumption, lowers GDP growth and leads to...yes, you guessed it...MORE QE.

To me it's so obvious what is happening that I can't understand why the clever economists around the world can't see it. Then again I couldn't understand a decade ago why they couldn't see that we were walking into a massive financial bust before it finally arrived.

Because that's just what they want to happen.This has been designed to take away the assets of the middle class.Its not a mistake.It is going just as they hoped it would.

QE at its basic self simply funds government deficits.The banks gain of course as players.The extra printing ends up with rentiers 100% certain as extra inflation always ends up with asset owners and strips away buying power from workers.

Its by design.

QE cant stop,because the deficit cant close under our set up.The top 5% are taking all the profit In the economy.If qe stops ,government cant fund the deficit and wed see the biggest deflation in history.Instead they will continue as they are until the workers stop going to work altogether.

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That aligns nicely with 2001 being the last year that UK mortgage lending was net funded from within the UK.

The funding can be domestic outside LPMBD93, but such wholesale funding tends to be shorter term and hence is less reliable. Also there's business lending on top of household lending.

All the same, the thrust of your point stands koala – the banks began to play loose with funding in the early noughties.

On the LPMBD93 (M4 less Other Financial Corporations) line what caused the uptick in Q1 '12 as that is too early for FLS?

It's really tough to ascribe any particular policy to changes in money balances because there is such a complex relationship between the banking and non-banking sectors of the economy.

The BoE has an excellent article on this in its Q4 2012 Quarterly Bulletin and I'd recommend anyone who is interested in this subject to read it (and the referenced sources) if they want to gain a deeper understanding of the interaction between QE and the money supply.

What can the money data tell us about the impact of QE?

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Because that's just what they want to happen.This has been designed to take away the assets of the middle class.Its not a mistake.It is going just as they hoped it would.

QE at its basic self simply funds government deficits.The banks gain of course as players.The extra printing ends up with rentiers 100% certain as extra inflation always ends up with asset owners and strips away buying power from workers.

Its by design.

QE cant stop,because the deficit cant close under our set up.The top 5% are taking all the profit In the economy.If qe stops ,government cant fund the deficit and wed see the biggest deflation in history.Instead they will continue as they are until the workers stop going to work altogether.

+1

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To me it's so obvious what is happening that I can't understand why the clever economists around the world can't see it. Then again I couldn't understand a decade ago why they couldn't see that we were walking into a massive financial bust before it finally arrived.

Jeez, relax and sleep;

You really think you're going to wake up and fight?

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The biggest problem as I see it is that the increase in money supply from QE hasn't been evenly distributed, or even proportionately distributed based on 2009 money holdings. It's gone almost exclusively to the upper tier.

A major aim of QE is the 'portfolio balancing effect' where recipients of QE money seek to normalise their extra holdings of cash by going out and buying something. This pushes up asset prices and lowers yields, creating wealth effects that encourage people to spend more.

It's fine in theory, but there's been an almost criminal neglect of the distributional effects. Whenever central bankers are questioned on this subject they just shrug their shoulders and say "we can only paint with a broad brush – it's up to politicians to deal with any subsequent inequalities".

But the politicians don't deal with the inequalities, which is why we end up as we are now. The portfolio rebalancing theory is absolutely right, but you have to consider who is holding the newly printed cash. If it's a guy with millions in the bank, he isn't going to go on an extra holiday or go down the pub three times a week instead of two...no, he's going to want to park the money somewhere where he hopes it will be safe from the same misguided central bankers who gave it to him in the first place.

Consequently our QE recipient buys 'things' – fine art, classic cars, commodities, equities (giving indirect ownership of things), but the numero uno thing he feels safe with is residential property. So we get a buying boom in prime housing, not just in London but in New York, Hong Kong, Dubai, and so on.

Meanwhile the investment injection into commodities leads to inflation in core resources, outstripping the income growth of everyone else. The result is declining purchasing power which limits household consumption, lowers GDP growth and leads to...yes, you guessed it...MORE QE.

To me it's so obvious what is happening that I can't understand why the clever economists around the world can't see it. Then again I couldn't understand a decade ago why they couldn't see that we were walking into a massive financial bust before it finally arrived.

I was looking for a quote by Roosevelt yesterday, and chanced upon one of those book limited extracts Google sometimes does, for 'The Roosevelt Presence: The Life and Legacy of FDR'.

There's a suggestion the wealthy did not put that wealth to work in the Great Depression, creating jobs. In part I'm not surprised given a lot of government interfering in the economy, makes you frozen on making sound business investment decisions.

I'm not against a certain level of wealth-divergence, nor think wealth-taxes are good ideas versus policies to encourage the investment of wealth in creating employment, which in part comes with allowing the bust to play out and good money to come in. Yet it's stupid to have policies now favouring the wealthy, hoping they'll put QE to work, whilst the income squeeze comes on everyone else.

In any event, by the end of 1942 unemployment had ceased to be a major problem; indeed labor shortages in strategic industries became a more serious concern. Before long, Americans were enjoying the highest standard of living in their history, even though the uncertainties of war, coupled with various shortages and inconveniences, prevented them from appreciating their good fortune.

In addition to stimulating the economy, the war brought about one of the few downward redistributions of wealth in American history. A combination of high wages, overtime pay, and graduated income tax shifted a portion of the national income from wealthy Americans to middle-and-lower class Americans. Because an excessive concentration of wealth in the hands of a few had probably helped cause the depression, the levelling effects of the war, though modest, benefited the entire nation.

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I had to sit down and properly read this thread but it was worth it, very informative.

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I had to sit down and properly read this thread but it was worth it, very informative.

+1, nice and clear for us dullards at the back ;)

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But the politicians don't deal with the inequalities, which is why we end up as we are now. The portfolio rebalancing theory is absolutely right, but you have to consider who is holding the newly printed cash. If it's a guy with millions in the bank, he isn't going to go on an extra holiday or go down the pub three times a week instead of two...no, he's going to want to park the money somewhere where he hopes it will be safe from the same misguided central bankers who gave it to him in the first place.

Consequently our QE recipient buys 'things' – fine art, classic cars, commodities, equities (giving indirect ownership of things), but the numero uno thing he feels safe with is residential property. So we get a buying boom in prime housing, not just in London but in New York, Hong Kong, Dubai, and so on.

Who gets the QE cash? The Primary Dealers!

Goldmans, JP Morgan, UBS, HSBC etc.

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+1, nice and clear for us dullards at the back ;)

That's me, but I think I get it.

Is it that inflation went a step too far, wasn't redressed, so now they have to fill the gap somehow. As wages are not rising it has to be filled with QE money.

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Is the swap rate the difference between overnight and fixed interest rates? What is that graph telling us? Thanks.

An interest rate swap is a financial transaction between two parties, let's construct an example.

A commercial property company might issue a bond and the bond is structured to pay interest according to a formula linked to LIBOR, for example LIBOR + 1.5%.

It may however also be the case that the commercial property company, let's call them Offices Limited, is using an income stream (from rents) to pay the interest and that income stream is just locked in - provided none of the tenants go bust etc - as the income is set by the contracts under which the tenants rent out the space from Office Limited.

Hence Offices Limited have an exposure to movements in market interest rates. If the Bank of England hike up the policy rate then LIBOR will follow it up and the interest that Offices Limited have to pay on their bonds will also ratchet up. Of course if the policy rate fell then LIBOR would also fall and Offices Limited would pay less interest out.

In practice commercial borrowers often eliminate their exposure to movements in LIBOR (and thus movements in market interest rates in general) by entering into contracts where they swap a commitment to pay a fixed rate of interest in exchange for the right to receive a 'floating' rate of interest, i.e. interest payments that change with market rates. For the purposes of simplicity we'll assume that the contract was with the bank, (making Office Limited's bank, say Royal Bank of Jokers, the swap counter-party).

Now if, for example, LIBOR goes ballistic the property company is fine. They use their rental income to pay the fixed rate they agreed to pay to to the Royal Bank of Jokers (RBJ) (say 5%) and in exchange they receive the floating rate interest from the RBJ (which is now say 8%). The money received from RBJ under the swap is then paid on to Offices Limited bondholders and everyone is happy, provided that the fixed rate that RBJ are receiving from Offices Limited is high enough that over the life of the swap contract RBJ don't end up paying out far more to Offices Limited than they receive from Offices Limited.

Hence when the Royal Bank of Jokers enter into the swap contract initially they need to charge an adequate premium to give them a decent chance of making money on the swap overall. In rudimentary terms this premium is locked into the fixed rate that RBJ require Offices Limited to pay to them in exchange for RBJ's commitment to meet the LIBOR +1.5%.

In reality most interest rate swap contracts exist between banks, i.e. both the party trying to get rid of the floating rate commitment and the party wishing to exchange an obligation to pay interest at a floating rate for the right to receive interest at a fixed rate are big banks.

Ordinarily the interest cost associated with a loan reflects both the prevailing market interest rate AND an additional percentage to reflect the chances of not getting paid back, (i.e. credit risk). When we look at a swap involving Offices Limited, then when the Royal Bank of Jokers need to take account of the fact that a promise from Offices Limited to pay them the interest is not the same thing as receiving the interest, (if enough of Offices Limited tenants go belly up, Offices Limited may not be able to meet their obligations to RBJ - however RBJ may have entered into other obligations to lay off some of the exposure to market rates that arose from its contract with Offices Limited, and it can't just walk away from those because its client blew up).

However quoted swap rates are for contracts between major banks. These financial institutions are essentially assumed to all have the same associated credit risk. Thus, provided that the credit risk is not expected to change markedly, then the prevailing swap rates give an indication of where market participants who are putting their money where their mouth is expect market interest rates to go next.

For example, 12 month LIBOR is presently roughly 1%. If you thought that it was going to stay there for the next 5 years you'd willingly exchange the obligation to pay LIBOR + 0.5% for 5 years for the right to receive a fixed rate of 2%. The 2%, the fixed rate in this contract is what is referred to as the swap rate.

However, if you think that LIBOR is set to rise, you might demand the right to receive 4% in exchange for the obligation to pay LIBOR + 0.5%. Hence now the swap rate would be 4%.

Clearly, the longer the swap contract rolls into the future the more potential there is for rates to move against you, so you end up with a curve with different rates being the 'right price' depending on whether it is a 3-year, 5-year or 10-year contract, and thus you end up with a forward looking curve which ought to look something like the yield curve for a government bond.

Thus swap rates give an indication of prevailing market expectations about the future movement of interest rates.

Clear as mud, I'm sure.

This is pretty good for a more detailed picture: What Are Interest Rate Swaps and How Do They Work?, and as the whole matter usually turns around LIBOR this might be worth a look if the weirdness of LIBOR is unfamiliar, London Interbank Offered Rate (LIBOR).

Edited by ChairmanOfTheBored

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Is the swap rate the difference between overnight and fixed interest rates? What is that graph telling us? Thanks.

BTW the excerpt from Trends in Lending in my OP is not a 'yield curve' type graph. It is giving the historical swap rates for contracts of different durations (2-yr, 3-yr and 5-yr) and terminates with the present swap rate.

Hence for example the 5-year rate is trending up on that Trends in Lending graph, which indicates that market participants want a greater fixed rate today than they did 12 months ago in order to take on the obligation to pay a floating rate.

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Thanks to northshore for the prompt, I'd been meaning to look at the M4 again sooner or later.

If you log the LMPBZ2A data to July 2007 and extrapolate you get this chart:

Log%2BLMPBZ2A.png

If broad money expansion had stayed on trend LPMBZ2A would be £2.8 trillion today. In fact it is barely half that and as you can see, little changed against where it stood pre-bust, at £1.5 trillion, (expressed in GBP millions it is £1,466,388, the log to the base 10 of which is 6.16).

Something fundamentally changed in 2008. Between eager BTLers and desperate wannabe owner-occupiers bank-rolled by permanent-emergency interest rates and comedy schemes from Osborne's Treasury, we have a sufficiency of market-making buyers to put a little flesh on the illusion that we are "back to normal", but something is different and it will feed through into prices eventually. I'm still staying out of the market for a while yet.

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