Banks aren’t benefiting from low Bank of England rates by widening interest margins to boost profits as popularly supposed.

As the fund managers at Money Moves Markets write:

The chart [below] shows estimates of the weighted-average interest rates paid on sterling deposits and charged on sterling loans vis-à-vis the UK non-bank private sector (i.e. M4 deposits and lending).

The average deposit rate has been rising gradually since early 2010, probably reflecting banks competing to attract inflows to replace maturing funding, such as borrowing enabled by the special liquidity scheme.

The average lending rate, by contrast, fell during 2010 and has stabilised in recent months despite the rising cost of deposit funds.

The lending / deposit rate spread, therefore, has fallen to a new low in data extending back to 1998.

Banks: Not ripping us off after all

Yet another thing I called wrong this year. A miracle (/fluke) I’m beating the market.

(Source: Money Moves Markets)

Is “inflation rising” in the UK? So claims the Guardian, after the July inflation update from the ONS:

Sir Mervyn King shrugged off a fresh rise in inflation on Tuesday when he expressed fears about the impact of turbulence in the financial markets and the debt crisis in the eurozone on an already weak UK economy.

Here’s the relevant wiktionary definition of inflation:

• (economics) An increase in the general level of prices or in the cost of living.

If “inflation” is “rising prices”, “rising inflation” must mean an increase in the rate at which prices are rising.  But was there even an “increase in the general level of prices” in July?  Well, actually, no.  In fact, the price level (as measured by the CPI or RPI indices) has been flat since April:

CPI and RPI Index Levels. Source: ONS

As ever, the concentration on the yearly rate of inflation obscures the underlying data.  Thanks to the dip in prices in July 2010 relative to June 2010, an unchanged price level in July 2011 can result in an increase in the yearly rate in that month.  Is this significant?  I’d call it noise.

The Bank of England are predicting a rise in the yearly rate of inflation to 5% before the end of the year – and the price level is going to have to start ticking upwards again to achieve that.

Paraphrased by Paul Kedrosky of Infectious Greed:

Handy and thought-provoking chart from JPMorgan making the case that quantitative easing has had roughly the same effect on income as raising effective taxes by one-third for the average upper-middle-class family with $300k in savings.

Here’s the handy QE2 impact chart in question:

Uncle Scrooge under the cosh

Kedrosky calls it, “The euthanasia of the rentier.”

Accurate, unless the landed rentier in question is invested in seemingly indestructible prime London property.

(Source: Infectious Greed)

In the last four years, the size of the UK gilt market has increased from £444bn (2007) to a whopping £991n.  Part of this is capital appreciation… most of it is new gilt issuance.  So who bought all those new gilts?

This graph gives us a good idea, though the ONS data on the breakdown of gilt holdings is by market value, rather than nominal value; so capital appreciation also counts as an increase in the value of gilts held:

Change in Gilt Holdings between 2007Q1 and 2011Q1, by Owner, £bn. Source: ONS

The bulk of net new investment in gilts over the last four years has come from the Bank of England’s £200bn QE program, foreign investors, and domestic banks.

Inspired by looking at the implied deflator of retail sales in a previous post, let’s compare and contrast a similar index – UK goods prices as measured by RPI – with UK house prices, since 1997:

This graph “cheats” a little by using split scales; masking the fact that house prices rose by an annualised rate of 7.7% between 1997 and 2011, whereas the annualised rise in goods prices was only 1.7%.

The media narrative would have us believe all of the following are true:

1. the huge rise in house prices up to 2007 was “bad”
2. flat house prices since 2007 is “bad”
3. rising goods prices now is “bad”

Yet, curiously, it is hard to remember anybody complaining about the long period of flat goods prices (the “imported” inflation from China et al).

Something strange happened during the last recession:

British consumers discovered… Internet shopping! If you ever wonder about what happened to Woolworths, or MFI, or Habitat, or Thorntons… remember that graph.

“Non-Store Retailing”, as the Office For National Statistics likes to call the sector, now accounts for 9.4% of retail sales (excluding petrol).   This is up from a mere 3% at the beginning of 2007.

The catalyst for this shift may be simple: consumers on tighter budgets want better value for money, and the on-line stores can – literally – deliver.  The “implied deflator” is a measure of inflation used in the ONS statistics which reflects changes in volume of sales relative to changes in prices:

Even after nearly a decade of stagnant retail prices, it would seem that on-line retailers are, in aggregate, still managing to keep prices under control.

Another six months pass with the consensus of the UK’s chattering classes still forecasting doom and gloom, with particular concern for the future of the Eurozone and domestic “stagflation”, not to mention the odd war or nuclear disaster.

It may then surprise some to discover that Europe’s stockmarkets have produced the best return available for holders of UK unit trusts – and second only to the continued success of UK smallcaps:

Percentage return to UK Unit trust sectors, 6 months to July 2011

With the horrific damage inflicted on the Japanese population – and economy – by natural forces, it is sadly no surprise to see Japan languishing at the bottom of this table.  The significant underperformance of the Emerging Markets relative to the established Western markets is a break with the tradition of the last few years, however.

The other notable result here must the strength of UK index-linked gilts, especially relative to conventional gilts.  ‘Linkers‘ would be the ideal asset to buy if expecting a period of low growth and high inflation, so maybe Mr Market does share at least some of the newspapers’ consensus gloom.

Okay, so we know equities have had a bad decade. But if you look at the following graph of ten-year asset class returns and think “I’ll shun shares an invest in government bonds and gold” then slowly put down your PC and walk away from your online dealing account…

(Source: Business Insider)

More solid data on the UK economy. Reuters reports:

Wednesday’s labour market report contained some encouraging aspects. The number of people in work rose by a record 286,000 in the three months to July.

But like much of the media, it prefers to lead with the gloomy angle:

The number of Britons claiming jobless benefit rose last month for the first time since January, raising fears the recovery could be faltering even before the bulk of public spending cuts kick in.

The Office for National Statistics said claimant count unemployment rose by 2,300 in August, confounding expectations for a modest decline and bringing to an end a six-month period in which it had fallen by more than 150,000.

No, it’s good news chaps. Unemployment is a lagging indicator, remember?

What has happened is due to the continuing job creation, more people have returned to the job arena instead of going on gap years or pretending to have one leg, but not quite enough have found work to keep reducing unemployment, despite employment going up by nearly 300,000.

A more valid complaint is that a fair few of the new jobs were part-time. But it’s a start.

Bottom line: The UK recovery remains on track, but you wouldn’t know it from reading the papers this year.

(Source: Reuters)

Food for bears, and probably the reason why bank shares are falling today:

An examination of the banks’ disclosures indicates that some banks didn’t provide as comprehensive a picture of their government-debt holdings as regulators claimed. Some banks excluded certain bonds, and many reduced the sums to account for “short” positions they held—facts that neither regulators nor most banks disclosed when the test results were published in late July.

This graph showing how French bank debt is viewed by different agencies is eye-opening:

"Boff..."

However, as long as market participants understand how these figures are being reach (i.e. the data is transparent) then it’s perhaps not too much of a worry.

Admittedly this is a bit of a ‘let someone smarter than me understand it’ cop-out, so buyers of bank shares (or general recovery bulls like me!) beware.

(Source: Wall Street Journal)