Headlines wise its been a strong quarter for the UK and an out performance in terms of economic surprises. The UK is suddenly leading the pack with a rapid expansion in domestic growth. The latest data releases last week inc services growth which expanded at the fastest pace in over 6 years.Manufacturing growth last week confirmed the fastest growth seen in the last 2 years and the trade balance was the best in 12 months reflecting the increase in domestic demand was partially being met by domestic producers stepping up.
Here Reuters reporting on the data, some of which is the most positive for 15 years:
http://uk.reuters.com/article/2013/08/05/uk-britain-economy-idUKBRE9740P720130805
House prices rose at the fastest pace since 2010 and auto demand is surging with Aug data showing sales for the year to date total 1.325 million, 10.3 percent more than at the same point in 2012 paradoxically this occurred as European car sales slumped to a 20 year low in May 2013. Latest data (9 Aug) from the Finance & Leasing Association (FLA) show a 6% increase in new business consumer finance compared with June 2012. Areas of notable growth include second charge mortgages, up 52% during the same period, and point-of-sale car finance up 29%. Store installment credit also increased by 12%. Consumer credit is certainly taking off again as the UK savings rate has halved in the last year. (The correlation between rates and savings ratios once again asserting itself).
In spite of market bearishness towards the UK and a large short sterling position from q2 2012 to end q1 2013 the UK data has been consistently improving and surprising market participants to the upside. The ftse250 has surged by +45% in from high to low in the less than 12 months out performing the more internationally exposed ftse100 as a strong domestic growth cyclical story develops. From the 2009 lows she has surged +300%.
And for those interested this 2013 high was a clear +45% higher than the prior 2007 boom year bull market high. Even inflation adjusted the domestic UK economy appears to be at all time record highs as domestic corporate profits are booming well beyond the prior boom of 2007 and the number of UK bankruptcies has fallen to its lowest level in more than ten years. On the face value the UK economic data suggests the UK is in the middle of giant boom which is setting new record highs across many metrics.
This undeniably positive data stands very much at odds against a whole series of other data and reflects a very uneven boom that appears to be ‘touching’ an ever smaller group of asset holders. Whether this boom widens in the coming year will be one of the key measures to test whether this is a secular move or purely a monetary induced nominal mirage based on balance sheet wealth creation via a domestically exploding money supply at an, eye watering, annualized rate of +10% m3, +20% M1, the 2013 calendar year thus far.
The ‘transmission’ process, broken for so long, now appears to be in mean reversion and therefore playing catchup as banks seek to gain return from their excess capital reserves created from the BOE’s large QE programs. According to the FLS lending to small and medium-sized British firms grew at its fastest pace since record began for June 2013. And here below a few of the numerous announcements by lenders to reduce rates even as 10 year gilts as well as corporate high yield rates rise. Ie the spreads to 10 year public and corporate rates are seeing significant compression with the banks reducing margins to the consumer sectors to increasing lending levels.
http://www.introducertoday.co.uk/news_features/lenders-launch-more-market-leading-deals
http://www.newsroom.hsbc.co.uk/press/release/hsbc_lowers_mortgage_rates_eve
Buy to Let is enjoying another leg upwards within a massive secular boom in this sector. The latest august data point shows year-on-year, buy-to-let lending was 19% higher by volume and 31% higher by value taking it to record 2008 levels and by value new record highs. Spreads are also compressing downwards in the “btl’ sector as lending appetite increases and the cyclical and secular expansion gathers momentum. According to Rightmove the average UK buy to let gross yield is now fallen to than 5%. Given capital replacement, management accounting fees, registration, agent and finance fees the, non capital appreciation yield must now be negative for most UK “buy to let” properties.
On a micro level there are a continuous stream of new financial lenders to the rapidly expanding BTL sector with new announces every few days as LTV rates increase and margins reduce.
http://www.introducertoday.co.uk/news_features/huge-rise-in-buy-to-let-lending-by-paragon
The HSBC’s recent survey of yields across the UK buy to let market did find pockets of yields up to 7.8% in depressed illiquid property areas eg Blackpool. Yields in many zone 2 areas of London are around 3% and in Belgravia yields of 1% to 2% are not uncommon. Continual capital appreciation maintains the capital inflows to these ultra yield compressed residential property areas.
http://www.newsroom.hsbc.co.uk/press/release/hsbc_identifies_the_uks_buy_to
To most independent observers some sort of a ‘feeding’ frenzy appears to setting up and partially already underway in the UK mortgage markets.
The new BOE’s governor, Carney, last week, has further stoked the fire providing begin forward guidance and promising to increase QE if the economy shows any signs of weakening. Further measures from the UK government to encourage a cyclical and secular boom in house prices seems likely to expand the domestically lead expansion.
Clearly such an expansion of money supply via QE and credit always ends badly but the uptick in domestic nominal prices created by such policies is undeniable and powerful. If the trend sustains for long enough, which looks likely, leveraged up asset “flippers” will gain significant returns. The money supply expansion will benefit this group in particular being on the positive side of this great wealth transference from the dilution of cash savings.
The obvious questions are how far can this trend extend and how does this affect long term asset values? The only way of getting an insight to these sorts of questions other than hyperbole is to look around the world at other developed economies which have also followed such policies for an indication. The Scandinavian region is an obvious candidate for precedents as they lead the world in terms of consumer debt to income levels, GDP, LTV etc.
Here a report from Norges Bank looking at the region’s consumer credit history and long term asset prices. Its a fascinating report in terms of its implications for the UK and other “DM” economies keen to follow these policies.
In summary what their findings show is that extremely highs levels of consumer debt are possible in states where the public provision of current and future welfare is at a high level and belief in the sustainability of this provision amongst the population is also high. So it is that savings rates in Southern European nations dwarf the savings rates in Northern European nations as both belief and provision in these states is much lower than exists in their northern neighbor’s. Another interesting data point from this study is the relative house price levels that exist across the relative states with very differing consumer debt profiles. Their findings suggest a long term correlation to income levels rather than debt levels. (Emphasis added as its something i long argued). Their findings suggest price volatility rather than long term prices is what is greatly increased by government fiscally subsidies and consumer debt encouragement. In summary that governments that adopt high consumer housing debt policies will experience massive swings in house prices both to the upside and downside. (This fits perfectly with classical and contemporary Austrian credit cycle theories of course. Link for those interested here – http://mises.org/freemarket_detail.aspx?control=46 You will notice this link is from 1999 when yet another credit fueled government sponsored asset bubble was coming to its end. In economic terms, policy makers seem incapable or simply don’t want to hear the lesson provided by recent history).
Those of here at capitalsynthesis.com are not academic economists. We are speculators and investors. And as Soros famously remarked. “When i see a bubble forming I buy”. The medium and longer term issues of sustainability and long term asset prices should not blind us to the short term up side leveraged gains here. Instrument selection is key however in my mind. Its true the largest gains will be seen in domestic UK leveraged illiquid asset markets but these also the most dangerous. Housing hits all the criteria of such a market. High leverage, illiquid, limited new supply and government subsidized. Clearly price gains could on the short run be significant. The gains could be largest in specific pockets of the UK ie luxury marina fronted property in Bristol or Pool perhaps. But for those that gain entry into these markets international empirical evidence suggests you want to be a ‘flipper’ rather than a developer as getting stuck with an asset when the cyclical trend changes would be painful in the extreme.
Liquid listed assets markets in the Uk are deep and leverage plentiful. They are a more efficient forward discounting mechanism so I’m buying pull backs as sentiment is extremely bullish at present given the strong news flow we have seen in recent weeks.
This sentiment can be seen here in the following CS reports on the UK. This cyclical bull appears in her early days so I am a holder and buyer on a pull back in the shorter term. Funding wise, leverage and the equity funded as a sterling carry trade as clearly such monetary expansionary policies will have an effect on trade weighted Sterling values in the medium and long term.
Here the latest CS reports on the UK
A great thanks to the various banking teams for the reports and data. Lets, as usual, pick up the discussion on the forum pages here:
http://www.capitalsynthesis.tech/forum/topic/uk-economy-1
All the best
Rich
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