A few things that I’ve found interesting over the past week or so:
- I’m just back from a week’s holiday in France, and my news source whilst I was away was the hotel’s International New York Times. Terrible for English Championship football rumours, but lots about US politics and in particular the recent discussion about the Overton Window. Joseph Overton’s theory is that there is a limited range of policies acceptable to the voting public at any one time. To quote Wikipedia, “an idea’s political viability depends mainly on whether it falls within the window, rather than on politicians’ individual preferences”. One of the articles I read suggested that Trump’s success shows that the mainstream media has become weak at controlling the “limits of what is acceptable to say”. They no longer are aware of where the Overton Window is, and can’t act as “gatekeepers” of public opinion any more. Ideas around the limits of free trade (also coming from Sanders on the left), or the repatriation of illegal immigrants have perhaps moved into the Window without many of us noticing. It made me think – the Overton Window probably equally applies to monetary policy as to foreign or trade policy. Negative interest rates have already been normalised to many Europeans. What about helicopter money and debt monetisation? What about the electronicisation (electrification?) of money and the abolition of cash? Such ideas are still regarded as implausible by mainstream commentators, but in both academia (for example Modern Monetary Theory) and even within central banks (Bank of England’s Andy Haldane on negative rates, cash abolition) I think the Overton Window for monetary policy has shifted radically.
- The UK’s National Savings Certificates are an incredible free gift to those with the resources to buy them (generally higher rate taxpayers I’d imagine). The newspapers at the weekend told us sadly that the reinvestment rate for the National Savings Index Linked Savings Certificates has been cut to RPI (the generally higher measure of UK inflation, often 0.75% or more above the Bank of England’s targeted CPI) plus 0.01%, from RPI + 0.05%. 0.01% doesn’t sound very much I’ll admit. But RPI is running at 1.3% per year, and even at the lows of the oil price was still positive at 0.7%. And your return is tax free! To put this in perspective an index-linked gilt maturing in 2022, available to buy in the general bond market, pays me UK RPI minus 1.29%. You’d have to pay tax on that as an individual investor too. It’s unclear to me why the terms on these National Savings investments are so fantastically generous. I guess it’s the sticker shock of going below zero – and the attendant newspaper headlines that would attract.
- The Bank of England’s blog, Bank Underground, is a great read (as is the New York Fed’s blog, Liberty Street Economics). Last week it asked why sterling corporate bond issuance has collapsed. Issuance is half what it was in 2012, and sterling’s share of global corporate debt issuance is the lowest it has ever been. As a result the authors suggest that smaller UK companies without access to overseas bond markets could face higher borrowing costs. Why has sterling issuance fallen? They offer a few suggestions, including the recent ECB announcement that it would buy € denominated corporate debt, making that a “cheaper” currency to borrow in. The three main factors however might be mergers within the UK asset management industry making the investor base more concentrated; the reduced flow of cash into (credit heavy) annuities following pension reforms; and competition from euro issuance as that market finally got critical mass. The conclusion: better rated companies can borrow in euros or dollars and can swap the proceeds and coupon payments back to sterling, but lower rated companies cannot. The capital charges for the banks in entering into swaps with low rated entities are too high. So they may have to issue in “expensive” sterling, and the UK corporate bond market becomes a high yield focused one. Having said that, J P Morgan’s Daniel Lamy points out that there have been NO sterling high yield bonds at all issued this year.
- Opening my post on return from holiday I found that when a company tells you that something is “changing” it is always for the worse. It’s a euphemism for “becoming more expensive” or similar. Sky TV wrote to me to tell me that my “Sky subscription price is changing”, up £4.75 per month (about 7.5% versus CPI at +0.3%), and my credit card company tells me that the name of my credit card is changing from (bank name) Credit Card With Cashback, to (bank name) Credit Card. Grumble.
- Finally, Stefan Isaacs, deputy head of M&G’s Retail Fixed Income team amongst other things, is running the London Marathon. I know! If you’d like to sponsor him, you can find his fundraising page here. The aim is to beat the benchmark time of M&G’s Anthony Doyle in 2014 of 05:02:27 which he set wearing chainmail and pushing a cricket roller. Oh? No apparently that’s just how long he took running normally. Anyway, good luck Stefan.