The Daily Update - Yellen / BIS / The great storm

30 years ago today, London and the South East of the UK was hit by what is now known as the Great Storm, a 1 in 200 year event. Michael Fish, the BBC’s weather man, famously said before the storm had hit ‘Earlier on today, apparently, a woman rang the BBC and said she heard there was a hurricane on the way... well, if you're watching, don't worry, there isn't!’ Within hours the storm had caused record damage with the loss of 19 lives. Six of the seven oak trees - after which the town of Sevenoaks is named - were blown down. Overall 15 million trees were felled by the storm.

Over the weekend we had the IMF conference where Fed chair Yellen spoke; the market’s take was that Yellen reaffirmed the FOMC’s path towards tightening, noting their belief that the slightly softer CPI was likely to accelerate. Yellen said, 'my best guess is that these soft readings will not persist', adding  'with the ongoing strengthening of labour markets, I expect inflation to move higher next year'. With regards to rates she noted, ‘we expect the neutral level of the federal fund rates to rise somewhat over time' with 'additional gradual rate hikes are likely to be appropriate over the next few years to sustain the economic expansion’.

However, not all are in agreement with Yellen. Waiting for Godot is a play written by Samuel Beckett, in which the two leading characters, Estragon and Vladimir, wait for the arrival of a person named Godot, who never arrives.

‘Waiting for Godot’ is how Claudio Borio, the Bank for International Settlements (BIS) head of the monetary and economic department described the feeling of  waiting for inflation to start filtering through the system. The BIS reckons that so far no one has worked out why inflation has remained so subdued while some economies are either at or close to full employment and central banks having pumped vast amounts of money as stimulus. ‘This is the trillion-dollar question that will define the global economy’s path in the years ahead and determine, in all probability, the future of current policy frameworks’ Borio states in the latest  quarterly report. The BIS also believes that there are warning signs of ‘exuberance’ in financial markets at the heart of the GFC.

The report studies the case of companies in the US. As it states, ‘ There, overall private sector debt in relation to GDP has actually declined post-crisis. But the adjustment has taken place only in households; whose overstretch was a key cause of the problems. Corporate debt is now considerably higher than it was pre-crisis. As a result, corporate leverage indicators have reached levels reminiscent of those that prevailed during previous corporate credit booms, such as the one in the late 1980s, although debt service burdens remain lower because of the historically low level of interest rates. Other signals point in a similar direction: strong high-yield debt issuance, the growing proportion of covenant-lite debt and narrowing credit spreads. Indeed, despite large cash holdings at many firms, the -distribution of credit ratings has continued to deteriorate.’

The report went on to say, ‘Naturally, very accommodative monetary policy has played a part in all this. This puts a premium on understanding the 'missing inflation', because inflation is the lodestar for central banks. Why has inflation remained so stubbornly low despite economies approaching or surpassing estimates of full employment and unprecedented central bank efforts to push it up? Worryingly, no one really knows the answer.’

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