Aurelia Butler

If you started investing under lockdown, the past few weeks will have been a real test of your mettle. Global stock markets have suffered their biggest weekly drop since the start of the pandemic, and cryptocurrencies have crashed. As younger investors struggle to absorb the losses, they also have the rising cost of living to contend with. This week, presenter Claer Barrett speaks to Ashley, a 28-year-old investor who has lost thousands, about how he’s attempting to stay focused on the long term and weather the financial storm. Plus, two of the FT’s top investment brains unpick exactly what’s happened on world markets, and where things could go from here. Katie Martin, the FT’s markets editor, and Robert Armstrong, the FT’s US financial commentator and author of the Unhedged newsletter, have plenty of ideas for new investors to think about as they formulate their next move.To listen, click the link above, or search for Money Clinic wherever you get your podcasts.

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Toby Nangle was formerly Global Head of Asset Allocation at Columbia Threadneedle Investments. Tony Yates is a former professor of economics and head of monetary policy strategy at the Bank of England. The Bank of England’s rising interest bill has been of increasing focus over the past few weeks. The BOE balance sheet has swollen to close to £900bn after waves of quantitative easing. And while there were fiscal dividends attached to effectively shortening the rate structure — circa £123bn to the end of April — there could be fiscal costs as rates rise. So, what to do?First, a quick recap of the mechanics. Almost 15 years in there’s still no agreement as to how QE works as a policy, but operationally it’s straightforward. The BOE bought around £875bn of interest-bearing gilts as well as a few corporate bonds. It paid for these gilts with fresh central bank reserves. As such, the asset side of the Bank’s balance sheet ballooned (gilts!) as did liabilities (reserves!). Prior to QE, the BOE set overnight interest rates by fine-tuning the quantity of (unremunerated) reserves in the market. Commercial banks would then scramble to borrow or lend them to one another at a price, and that (market) price was Bank Rate.QE meant vast quantities of reserves were created, so fine-tuning reserve quantities to target price could no longer work. The Bank had lost its ability to put a floor on rates and recognised: a) financial institutions would face problems of such magnitude that negative rates could be contractionary rather than stimulative; and b) there could be some unpredictable adverse consequences of plunging into the world of unmanaged negative interest rates. Paying interest on reserves was a way to keep control of rates, while doing huge amounts of QE.And so QE led to the Bank receiving coupons on the gilts that they had bought and paying interest on reserves. The positive carry was, and continues to be, enormous:

But now, with interest rates rising, the interest costs attached to the liability side of the QE book (interest on reserves) threatens to exceed the income from the asset side of the QE book (the gilts).Will this bankrupt the BOE? Absolutely not! Leaving aside that it’s hard for a central bank — which can literally imagine into existence as much new money as it likes — to run out of its own claims, the Bank was careful at the inception of QE to ensure that the whole programme was indemnified by HM Treasury. In return the Treasury has received all of that enormous positive carry.But so far as described, it does sound like taxpayers are on the hook for the P&L of one of the largest long-duration trades in history. At a time when yields are moving higher. And the net cash flow does turn negative once Bank Rate moves north of 2 per cent. Two UK think tanks, The National Institute of Economic and Social Research and The New Economics Foundation, have published plans to keep that positive carry.The NIESR plan draws on the insights of Bill Allen, an ex-BoE Head of Division for Market Operations and economic historian who wrote the definitive UK monetary history of the 1950s. At the start of the decade Britain had debt to GDP of 175 per cent and by 1959 this had declined to 112 per cent in spite of modest growth and low inflation. How? Allen argues that outright financial repression — monetary authorities’ direct control of banks and credit — was the answer, and that the lessons from November 1951 can be borrowed to financially repress banks today. Specifically, NIESR argued last summer that banks should be allocated compulsorily newly created two-year gilts to the commercial banks at non-market prices in exchange for their reserves “as a means of draining liquid assets from the banking system, and of insulating the public finances in some degree from the costs incurred when short-term interest rates were increased, as they were in March 1952”. Failing to follow this plan has, according to NIESR, cost HM Treasury £11bn.The NEF plan by contrast follows Lord Turner’s suggestion to pay zero interest on a large block of commercial banks’ reserve balances, but continue to pay interest on remaining marginal balances. This approach has international precedent: it’s how things are done in the Eurozone and Japan. NEF reckons that HM Treasury would save £57bn over the next three years if their plan is taken up.Free money! Where’s the catch?Well, the NIESR plan is . . . perplexing. The authors admit that its implementation would lead to soaring yields and could disrupt the government bond market in sufficiently unpredictable ways. They recommend that “a modest first step could test the size of such an impact”. In a world where a central bank forex dealer calling around for live price checks constitutes an intervention, this “modest first step” could end . . . badly?And any scheme that forces an unplanned and fundamental reconfiguration of every commercial bank’s balance sheet would pose a variety of financial stability questions. It’s probably not a stretch to argue that implementing the plan may even have triggered a financial crisis. Still, the plan would’ve led banks’ income to be £11bn lower and the government’s income to be £11bn higher. For any policymakers reading this thinking “yeah, but ELEVEN BILLION!?”, a lower risk way to scratch that itch could be to introduce an £11bn windfall tax and maybe not accidentally trigger a financial crisis. The NEF plan by contrast looks more reasonable. It’s rooted in practices that other major central banks have operated (albeit only during periods of negative interest rates). But as Bill Allen (of the NIESR plan) writes, it could have adverse consequences for the financial system and would shift QE from an instrument of monetary policy to an instrument of taxation. Moreover, taxation would be ongoing and open-ended, with commercial banks more heavily taxed than less regulated financial channels. Increasing the stock of QE would push taxes on commercial banks higher; unwinding QE would cut taxes on commercial banks. This turns the traditional logic of balance sheet operations (where QE is more normally associated with easing) upside down. Some argue we should tax the banks more. Others argue that doing so would just push costs across society, heighten financial instability risks and stymie growth. If the Chancellor wanted to tax the banks more, why not … er … tax the banks? Binding this decision forevermore with the decision as to how desired monetary policy stance should be implemented is illogical. That said, we do see a powerful case to accelerate the Bank’s glacial timetable for unwinding QE, or to auction new sterilisation bonds into the system — and return to the reserve averaging system of yesteryear. Coincidentally, these reserves genuinely would require no remuneration. More

It was when sales of discounted cat litter started picking up that Matthew Farrell knew something new was happening with US consumer spending. For more than a year, the chief executive of Church & Dwight had seen sales of premium brands such as Arm & Hammer Platinum Clump & Seal outpace its lower-priced offerings. In its latest quarter, though, that changed. In cat litter, water flossers and laundry detergent, shoppers began favouring the company’s cheaper options.“That was a canary in a coal mine,” Farrell told analysts this month. “We would expect that to worsen.”With US inflation at 40-year highs, petrol averaging above $5 a gallon and recession fears weighing on consumer sentiment, Church & Dwight is not alone. In earnings calls and investor conferences in recent weeks, several US retailers have flagged that customers have begun migrating to cheaper products. Others are bracing for more to do so in the coming months. “Customers are aggressively starting to buy our brands,” Kroger, the $33bn grocery chain, told analysts last week. Like-for-like sales of its store brands were up 6.3 per cent in the latest quarter compared with total growth excluding fuel sales of 4.1 per cent. The trend is feeding market concerns about the sector, which is exposed to rising prices, excess inventory and unreliable supply chains, but analysts also expect it to create some winners. Discount retailers and makers of stores’ own brands, in particular, stand to benefit if more consumers switch to cheaper alternatives.About 15 per cent of US adults said they had bought lower-priced alternatives when shopping for groceries in May, up more than 3 percentage points from April, according to survey data from Morning Consult. Roughly one in five people buying a car, a computer or a mobile phone traded down — up 6 to 7 percentage points month on month.Mentions of “trade down” and “trading down” on US retail and consumer companies’ analyst calls and investor presentations are now running above the previous peak they hit in the global financial crisis of 2009, according to data provider Sentieo.And while some chains say they have yet to see signs of significant substitution, retailers including Walmart have reported incidents of shoppers buying a half-gallon of milk instead of a gallon, or choosing own-brand cooked meats and bacon over branded versions. Steven Oakland, chief executive of TreeHouse Foods, last month credited the new value-seeking mood among consumers with delivering an expectation-beating quarter for his own-brand producer, which supplies retailers with foods ranging from pita chips to pickles. Own-brand goods have gained unit share in each of the past three months, according to data from market research company IRI. Retailers as large as Best Buy, Costco and Dick’s Sporting Goods have all highlighted the acceleration. Some have detailed how stark the change has been, with SpartanNash, a Michigan-based grocery chain, reporting a near 14 per cent year-on-year increase in the first quarter. Big Lots, the household goods and grocery retailer, said that its own-brand products had reached almost 30 per cent of its total sales for the period, up “notably from the mid-20s” a year earlier.Past cycles had shown that “when disposable income becomes tighter, consumers find ways to stretch their budgets”, said Jack Kleinhenz, chief economist at the National Retail Federation, a trade organisation.

Not all consumers have been affected equally, however. Morning Consult’s polling shows that baby-boomers, who tend to allocate more of their budgets to essentials, were the most likely age group to trade down in May while lower and middle-income shoppers were also more likely to substitute goods than higher-earning Americans.“What we’re seeing is a bit of a bifurcation,” said Kohl’s chief Michelle Gass on a call with analysts last month, adding that the company had seen continued strength in luxury categories even as some shoppers traded down to cheaper products.Higher prices would force some consumers to cut out purchases altogether, said Gregory Daco, an economist at EY-Parthenon, but in relative terms “the two extremes of the retail sector are likely to outperform the others”. Discount retailers were likely to benefit from more pervasive inflation, he said, while “the luxury end of the market is more likely to outperform because of the healthier household finances of luxury individuals”.Joe Feldman, an analyst at Telsey Group, echoed the sentiment. “Discounters are where there’s going to be more strength” in the coming months, he predicted, noting that they typically performed better when consumers felt pressure on their wallets.“The inflationary environment is one that’s going to create much more polarisation in retail,” said Neil Saunders, a retail analyst at GlobalData who expects low-priced chains including Aldi, Dollar General, TJ Maxx and Walmart to benefit from the spending shift.However, he added: “Overall it’s not a very helpful environment for anyone.” More

It’s a fact that ought to be so obvious as to be banal: the most effective way to help people who don’t have enough money is to give them more of it. Cash transfers are among the most efficient ways for rich states to spend money in middle and lower-income countries. Studies show that they give better life outcomes, improve mental health, alleviate stunted growth among children and increase the number of women and girls in education. And that’s just if we restrict our analysis of cash transfers to those given by rich states to poorer ones. If we widen our gaze to include working people in the rich world transferring cash to their relatives in middle and lower-income countries (the highest source of external financing in those nations before the pandemic) then their impact is stronger still.Although studies into the efficacy of cash transfers are largely confined to poorer countries, they have big implications when used within rich nations, as well. It generally proves cheaper and more effective for both households and states to provide hungry families with cash for food rather than to provide food directly. This should inform whether rich states offer breakfast clubs and free school lunches to children or if they would be better served simply by increasing the amount of money that governments give directly to citizens on lower and middle incomes. The effectiveness of cash transfers is also in part a reminder that, most of the time, for most of us, individuals are pretty good judges of how to spend their own money. Not that this means that cash transfers are the only lever governments should reach for. Questionable Star Wars purchases aside, I am probably the best judge of how to spend my own money, but my ability to fund and run all the things I want by myself is limited. I don’t have the means or, frankly, the motivation, to run my own mass transit network, hire my own police, decarbonise my energy usage or set up my own education system. These are all things that governments should concern themselves with, as well as redistributing cash to the needy. Yes, cash transfers work, but studies also show that capacity-building measures, such as hospital and school construction, have a role in alleviating poverty. Nonetheless, despite the fact that cash transfers are so effective, states do very little of them, particularly within their own borders. Why not? One reason is simple politics: when I told a US friend the subject of this week’s column, they laughed mirthlessly. They then told me that while free school lunches might well be less effective than increasing welfare payments, these lunches are a popular government programme, while welfare is not. Political parties of any number of hues have, at one time or another, found success running on the idea that there are a large number of “undeserving” voters whose spending habits need to be checked, monitored or tackled. Very few politicians are willing to concede that many social problems can be sharply curbed simply by increasing the amount of cash people have, rather than through invasive state programmes.Another is that states are preoccupied with the handful of people who are not well served by cash transfers: what you might call the “power users” of government services. One study in New Zealand found that a fifth of the population accounted for 54 per cent of all cigarettes smoked, 57 per cent of overnight stays in hospitals and 81 per cent of criminal convictions. While most jobseekers would not, if given unconditional cash transfers, live on benefits forever or spend their money on so-called “temptation goods” like alcohol, cigarettes and other drugs, a minority would. So, who should states run their services for? The majority who would be better off with cash transfers, or the minority who require more intensive support? We see this with highly conditional benefits — which studies show consistently decrease the number of people who are long-term unemployed but with the consequence that more of them end up in lower-paid and less secure jobs than they held before. Welfare policies are constructed with the needs of “power users” in mind, rather than what might benefit the majority. The reluctance of states to adopt cash transfers, then, is in large part about what governments see as their “real” job: namely to make policy for the minority of people whose difficulties cannot solely be fixed with the injection of more money. But governments might well free up both more resources and more time if they were willing to tailor their first response to the vast majority of service users, rather than those who require more prolonged and difficult policy [email protected] More

The writer is a fund manager at M&G and author of ‘Supercharge Me: Net Zero Faster’The European Central Bank’s emergency meeting last Wednesday was a remarkable event. It could be the first time that a central bank confronted by the onset of a crisis has moved early and quickly.Concerns about the structural stability at the heart of the sovereign bond market in Europe have never been silenced. Despite the power of the “whatever it takes” pledge a decade ago by then ECB president Mario Draghi, and extensive bond-buying programmes, markets have consistently priced a credit risk premium into the sovereign debt of some countries.Europe’s sovereign bond market is unique. Debt is issued by member states, but money is created by a supranational entity, the ECB. The power to print money is the basis of the creation of benchmark risk-free assets in a financial system. Without the ECB’s backing, the eurozone has no such asset.But the ECB’s support for the sovereign bond market has always been conditional on consistency with its mandate of price stability. It was the threat of deflation in 2012, and during the pandemic, which gave the ECB the all-clear to provide the limitless support required to halt a panic.Inflation in Europe is a game-changer, and markets know this. This time, the epicentre is Italy — Europe’s largest sovereign bond market — not Greece. Italy’s debt to gross domestic product ratio is far higher than in 2010, at close to 150 per cent. When debt levels are considerably greater than GDP, changes in the interest rate on government debt dominate fiscal arithmetic. The yield on 10-year Italian bonds (BTPs) has risen from 0.5 per cent in September last year, to 4 per cent last week. No estimate of trend growth in Italy is close to 4 per cent. If the ECB had not called an emergency meeting, and sent markets a warning shot, yields could have been 5 or 6 per cent in a matter of weeks, if not days. The ECB has now bought itself time and by moving relatively early and quickly, the central bank has at least broken the psychology that selling BTPs is a one-way bet.But the detail of any serious intervention has been postponed and there is an element of can-kicking. The staff of the ECB has been tasked with drawing up plans to prevent “fragmentation”.In contrast to the pattern of the past 15 years, politics seems less of an obstacle. There are good reasons. Europe has a war on its borders, Italian elections are being held next year and Draghi, now prime minister, is likely to leave the stage. Populists and nationalists have not gone away. It is our collective responsibility to silence rather than encourage them. That must be the line that ECB president Christine Lagarde takes, and all evidence from the public statements of other board members suggests there is sufficient alignment on the need to prevent a renewed crisis.In simple terms, the task is to shrink spreads on bonds of the most vulnerable countries to the point of fiscal sustainability. Whatever measures are introduced will not be presented as such, as it opens the ECB to accusations of institutional over-reach, but we should be clear that this has to be the objective.The technical challenges should not be underestimated. There is now no alternative I can see to directly targeting sovereign spreads. This cannot be achieved by a broader programme of quantitative easing of asset purchases, as the backdrop is a tightening of monetary policy. Nor can it be achieved by tweaking the flows on the ECB’s portfolio of assets bought under its pandemic emergency purchase programme.Sovereign spread targeting by a central bank has never been done before. The outline of a programme would involve creating a reference basket of “safe” European sovereign bonds from core eurozone countries such as Germany and determining an acceptable spread for each market. The ECB would then commit to enforcing a cap on these spreads. In principle, none of the actual numbers need to be made explicit. Markets will deduce the point of intolerance from intervention.We need to be clear about the risks. In extremis, the ECB becomes the market-maker for BTPs or other bonds. Liquidity could disappear. How will Italy issue debt in the primary market, and at what price? Can the arrangements be gamed by market participants? How will the ECB exit?None of these risks are insurmountable. They are also worth taking. The alternative does not bear contemplation. The ECB will need to provide answers in the next few weeks, or markets will draw their own conclusions. More

Reserve Bank of Australia (RBA) Governor Philip Lowe said price pressures continued to build both globally and domestically and inflation was now seen reaching 7% by the end of the year, up from a previous forecast of 6%.That would be the highest pace in decades and far above the RBA’s long-term target band of 2-3%.”As we chart our way back to 2 to 3% inflation, Australians should be prepared for more interest rate increases,” warned Lowe in a speech. “The level of interest rates is still very low for an economy with low unemployment and that is experiencing high inflation.”The official cash rate is currently at 0.85% having been lifted by 50 basis points earlier this month following an initial quarter-point hike in May.Markets are priced for another half-point increase in July and then a string of rises to take rates as high as 3.75% by the end of the year.That would be one of the most aggressive tightening cycles on record and would take rates well above the 2.5% level that Lowe has indicated was around neutral for the economy.”I want to emphasise though that we are not on a pre-set path,” Lowe emphasised on Tuesday. “How fast we increase interest rates, and how far we need to go, will be guided by the incoming data and the Board’s assessment of the outlook for inflation and the labour market.”In particular, the RBA would be watching how household spending responded to rising borrowing costs given real wages were falling and house prices were easing from their highs.Still, Lowe said it was important that inflation expectations remain anchored around 2-3% and that higher prices now did not feed through to expectations of rising inflation in the future.”Higher interest rates have a role to play here, by helping ensure that spending grows broadly in line with the economy’s capacity to produce goods and services,” said Lowe. More

SYDNEY (Reuters) – Australia’s central bank said on Tuesday its pandemic stimulus programme to keep short-term bond yields low was successful for much of its life but the exit was disorderly and caused the bank some “reputational damage.”In a review of its yield target, the Reserve Bank of Australia (RBA) said it was unlikely to use any yield target again, preferring to just purchase bonds in set amounts across maturities.In particular, it was now clear the 21-month month experiment with the yield target should have ended earlier and any new programme would be shorter.”The target was met for the bulk of the period, but the exit in late 2021 was disorderly and associated with bond market volatility and some dislocation in the market,” the RBA said. “This experience caused some reputational damage to the Bank.”The programme began in March 2020 as part of a massive pandemic stimulus package. It was initially aimed at keeping yields on three-year Australian government bonds around 0.25%, though it was lowered to 0.1% later that year.For most of its life, the plan worked to keep yields and market interest rates lower than they would otherwise have been and to put downward pressure on the local dollar.However, in late 2021 yields began to rise as the market began to price in the risk of an earlier-than-expected increase in the cash rate.The RBA initially bought bonds to defend the target but in late October stepped away from the market, sending yields surging and triggering heavy losses in bond futures.”The ending of the yield target was challenging for a number of financial market participants, including those that expected the target to be retained,” the RBA said.”Additionally, Bank purchases to defend the yield target have come at a financial cost given the subsequent rise in yields.”As a result, the RBA’s decision-making Board had agreed to strengthen the way it considers the full range of scenarios when making policy decisions, especially where they involve unconventional policy measures, the review said. More