Welcome to our #196 weekly newsletter.
“For women taking control of their financial future”
-Jana Hlistova
From The Purse
In this week’s newsletter, we highlight the interview with the independent UK economist Shaun Richards who rejoins us on The Purse Podcast.
We talk about the Bank of England (BoE) and how credible are they, having increased interest rates 14 times in a row? We also talk about inflation, the cost of living crisis, CBDCs, the energy debate and what can we be optimistic about in the UK economy?
Listen here to the full interview.
***
And you can review the news in brief so you stay on top of global financial, economic and investing trends.
I hope you enjoy this week’s newsletter.
Until next week,
Jana
The BoE, rising interest rates and is inflation under control?
We talk to the independent UK economist, Shaun Richards on The Purse Podcast about the UK economy and what’s ahead.
Shaun Richards rejoined us on The Purse Podcast.
Shaun is an independent economist who specialises in inflation measurement and monetary economics. This follows a career in the City of London where he specialised in derivatives (mainly options) on interest rates and bonds.
He is a Bank of England watcher which covers the issues of monetary policy and money printing or quantitative easing (QE).
In this podcast interview we talk about the Bank of England (BoE)-are they doing a good job? Rising interest rates, is inflation under control, the cost of living crisis, CBDCs (digital currency), the energy debate and what can we be optimistic about in the UK economy?
Below is a short extract from the interview:
Jana: …And of course, here we are, the Bank of England has increased the base rate again to 5.25%. And it's probably going higher. The good news is that inflation has dipped a little bit in June to 7.9%. It was 8.7% in May. The obvious question, Shaun, is how effective do you think increasing interest rates in this market and economy is?
Because it doesn't really feel like we do have inflation under control in the UK or anywhere, although in the U.S. they're doing a lot better…
Shaun’s response:
Well, it depends how you measure it.
It's one of my specialist areas, but going back to your question: interest rates. You see what we've lost is what I would call the delta of an interest rate rise.
What happens in response to it?
Because the world's changed since the last time anyone did this, for a start. In the UK, last time interest rates were anything like this was back in 2007. We haven't seen a rise like this (which I think is also an important point, how quickly they've done it) for decades.
And then it was at very different levels and very different times. So there's quite a bit of uncertainty in that.
I run an analogy which goes as follows:
Interest rate rises are like a brick on a piece of elastic: nothing happens, nothing happens, nothing happens, nothing happens. Whack!
Where this time around, I think the risk is, they’ve done this in a rush ie 14 times in a row they've raised interest rates.
So the risk is, in the future, that we'll be hit by the brick. And then we will be wondering, what's happened?
And that's the problem.
What has changed in the meantime? I can give you two specific things which have slowed things up. You see, the old theory was you change interest rates and the full impact is felt about 18 months to two years later.
This time around things were different. Why?
In the UK there are a lot more fixed rate mortgages. Now they doesn’t last forever ie they are usually two, three, four or five year terms but that means to some extent people have bought time.
Now that's actually a good thing if you think about it.
Because central banks were saying all sorts of things when interest rates were very low, but it shows people were brighter than that… and it was best to get a bit of insurance.
…So there's a slower reaction function. And there's been some research in the United States saying that quite a lot of companies, particularly the bigger ones, borrowed when things were cheap.
They need to borrow less now. So the point of those two factors is that they're slowing the impact and that's probably why.. in these circumstances, the economy is doing quite well.
…We're doing better now, I think partly because of those two factors.
I think there's a third one. And the Bank of England won't like me for saying this:
I don't think people actually believe them and think that they'll cut again as soon as they can. So they're seeing this as a temporary phase. Of course, the problem is how long that lasts…
So they are the factors. I have a bit of relative optimism.
Now, I don't know what the Friday GDP numbers are saying this, but it looks as if there'll be positive for the second quarter (note: it was reported Friday that the UK GDP grew by 0.2% between April and June). It's quite tight.
..So we're moving forward, whereas… the Bank of England and the Office for Budget Responsibility were incredibly negative. I think that was wrong… And the risk was some sort of downward spiral, which hasn't happened…
Listen to the full interview with Shaun Richards.
News in Brief
Financial news
China doom deepens. Nasdaq Golden Dragon Index which tracks China Tech tumbled 3.7%.
US President Joe Biden warns China economy is ‘ticking time bomb.’ Biden’s swipes at China’s $18tn economy come at a sensitive time for Xi. China’s GDP grew at slower-than-expected pace of 5.5% in H1 2023 YoY, leading to worries about ripple effects for global economy.
The US Federal Reserve paused quantitative tightening (QT) last week. Balance sheet remain almost unchanged at $8,208.2bn, equal to 30.6% of US's GDP vs ECB's 52.4%, SNB's 121% and BoJ's 130%.
The comeback of bond vigilantes: US 10 year real rates have jumped to 1.77%, almost the highest level since 2009.
US inflation a tad lower than what economists expected: US July CPI accelerates to 3.2% YoY from 3% in June vs 3.3% expected. But the first acceleration after 12 consecutive months of decline. Core CPI slows to 4.7% YoY from 4.8% in June as expected.
UK GDP increased by 0.2% in April to June, up from 0.1% in the previous three months and the best quarterly reading in more than a year, according to the Office for National Statistics (ONS).
UK house price gauge falls to lowest since 2009 as interest rates rise. But the tide may be turning, with Halifax, HSBC, TSB and Nationwide all announced cuts to their mortgage rates, in what the Daily Mail is dubbing a “mortgage price war”.
Emerging market EM) returns over past 5-10 years have been lackluster, with most EM equities returning low-to-mid single digits. Over longer-term, returns range from extraordinary (India: 1000%) to respectable (Indonesia: 469%) despite volatility & some prolonged periods of choppy trading, Bank of America (BoA) has calculated. All EMs have outperformed China's 22% total return.
Crypto: bitcoin, ethereum, DeFi & NFTs
Market leader Bitcoin (BTC) added a modest 1.5% to its market value over the seven days to trade at $29,300+ on Sunday.
Ethereum (ETH), the second-largest coin by market capitalisation, appeared to match the top coin’s pace, adding 1.3% to enter the weekend at $1,850+
Solana (SOL) grew 8.5% to its current price of $24.55; Toncoin (TON) added 10.1% to hit $1.32, and Shiba Inu (SHIB) blew up 17.8% to trade at $0.00001108.
On Monday, payments giant PayPal announced it would be releasing an Ethereum-based dollar-pegged stablecoin called PayPal USD (PYUSD).
Brazil has announced the name of its new central bank digital currency (CBDC): DREX, or the “digital real”— the name being a near-acronym for “digital real electronic transaction.”
Paradigm, a16z file brief supporting Coinbase in battle with SEC. “The SEC’s regulatory overreach, coupled with the unpredictability and arbitrariness of its actions, threatens the development of blockchain technology in the United States,” the firms said in their brief.
Pending Grayscale ruling could tip balance in race for bitcoin ETF. It is possible that a favourable Grayscale ruling and the Coinbase surveillance sharing agreements “will be enough to get the SEC over the finish line on spot bitcoin ETF approval.”
The Purse Podcast
We cover the following in our conversation:
How credible is the Bank of England (BoE)?
Rise in interest rates
The cost of living crisis
The energy debate
CBDCs (digital currency)
What can we be optimistic about in the UK economy?
Please enjoy! Listen on Apple Podcasts and Spotify+
Coffee Break? Read This
A smart way to handle anxiety — courtesy of soccer great Lionel Messi
Between the World Cup and Barbie, we’re finally having an honest discussion about girlhood.
We’d love to hear from you. Get in touch with Jana via the The Purse website or tweet @jointhepurse and janicka.
The Purse Ltd. Copyright 2023 & All Rights Reserved.
The Purse provides content for informational purposes only, we do not provide investment advice. Please do your own research or speak to a financial adviser.
Share this post