Two months ago, U.K. citizenry – much to the shock of everyone around, including themselves – decided to vote the country out of the European Union. Almost instantly, the low-information voters experienced buyer’s remorse in what is now being called Regrexit. But never mind. Cable collapsed. Business sentiment data saw the biggest drop on record and last night’s very important RICS report was a disaster.
“[Residential real estate] sales dropped the most since the financial crisis in 2008,” according to data from the Royal Institution of Chartered Surveyors. “Prices rose at the slowest pace in three years in July and new sales declined.”
Understand that in no other G-7 country is the consumer more levered to the price of real estate than in the U.K. A drop this large will almost certainly impact consumer spending going forward, which in turn could send U.K. GDP into contraction in the second half of this year.
|It’s no surprise that two weeks ago, the Bank of England decided to cut rates.|
It’s no surprise, therefore, that two weeks ago the Bank of England decided to cut rates and expand its QE program in order to stimulate demand the only way they can. But here is the rub: At the most recent U.K. gilt auction, the Bank of England could not find enough bonds. Bloomberg describes the central bank’s policy failure this way:
“The central bank failed to buy enough gilts to reach its stated goal at an operation on Tuesday – the first such failure since it initially started quantitative easing in 2009. The yield on 10- and 30-year bonds fell to records after the operation. The BOE, led by Governor Mark Carney, said on Wednesday that it will incorporate the 52-million-pound shortfall into the second half of the six-month program.”
Why did this happen? Because in a low-rate environment, pension plans have to hold on to their long-term bonds. If they think yields will continue to fall, the last thing they want to do is give up their income as their future liabilities are already under the huge threat of mismatch. So the end result is that in a country whose economic prospects look increasingly grim, investors are actually in a mad rush to buy the bonds even though tax revenue supporting those bonds is likely to shrink.
This is the upside-down world of finance that we live in now. The U.K. is headed the way of Argentina, but its bonds are at record highs and yields are at record lows as investors ignore the economic risks. Could everything turn out OK? Let’s hope so. But if it doesn’t, U.K. gilts will be one of the greatest short trades ever. Because just like with the housing crisis of 2008, everything will be OK, until it isn’t.
Internet pioneer Arianna Huffington has decided to leave her namesake The Huffington Post, reports The Wall Street Journal. AOL acquired the Huffington-founded news site for $315 million in 2011. In 2015, Verizon bought AOL. In June, she signed a four-year deal to remain president, chairman and editor-in-chief – deflecting proposals for her to take a less hands-on role. Possibly reading the writing on the wall, Huffington has jumped to the startup Thrive Global, which shows companies how to encourage their employees to improve their health and well-being.
Macy’s (M) announced it will close approximately 100 stores next year to keep up with consumers’ changing shopping patterns and more online competition. The department store’s 100 closures account for about 15% of its full-line locations, and about $1 billion in annual sales. The company didn’t comment on how many jobs would be cut as a result.
The International Energy Agency says crude oil production will fall behind demand from July through September. According to its monthly report, “Our balances show essentially no oversupply during the second half of the year.” It is yet to be seen whether this will help end the plummeting oil prices.
The Money and Markets team