By Jonathan Punter
Unless you count mobile phones and forestry, Finland is not renowned for much else. Apart from being there or thereabouts in the Winter Olympics. And Lasse Viren (look him up). Up until recently, that is.
Sorry if that sounds disobliging to those of you with more knowledge of this starkly beautiful country overlapped by the Arctic Circle but, recently, it has become better known in bond-dealing circles, at least.
Earlier this month, Finland became the first eurozone country to sell five-year government debt. Effectively, investors are paying to lend to the country.
But isn’t the eurozone now one big bloc? How can bonds from different countries command different prices? Therein lies the dichotomy (and more than one blog – a book, even). It’s precisely because it is so fragmented in terms of value, risk and economic character that the whole shooting match carries on and on.
Back to Finland. I suppose it’s a bit like the worried owner of a Ferrari who needs safe and secure storage but has lost confidence in his normal garaging arrangements because things have changed. How does he simply protect the value of his cherished asset? By paying a lot more for peace of mind, whatever the cost.
Now Denmark has also said it will do whatever it takes to retain the peg of the krone to the euro (the only country to do so). This has led to negative interest rates of minus 0.75 per cent. And the Danes are happy to carry on cutting.
So, it’s turning out to be a topsy-turvy 2015 and we’re only into February. We have the spectacle of investors paying for the privilege of allocating their cash. A bit like taking out a bank loan except the bank says it will pay YOU the interest you normally have to stump up – not the other way around.
And we’re seeing the prediction of negative rates becoming normal starting to be borne out.
Gargantuan EU QE, insipid inflation and a shrinking oil price are all, by themselves, significant market events but they are now part of what seems to be a permanent, familiar landscape.
Take QE. When I’m asked by a particularly wet-behind-the-ears colleague as to what will happen, it’s clear that I, along with everyone else, don’t really know.
What’s equally obvious, though, is that this episode is the latest in a long line of the same kind of behaviour. The political and financial elite conveniently ignoring the facts.
Yes, the eurozone casualty needs drastic attention. Whether or not €1trn becomes transformative or just leaves the patient sitting up in bed, rather than simply comatose, is anyone’s guess.
But it ignores the facts. Will this injection create growth, defy deflation (thus creating manageable inflation, boosting spending) over and above the mountain of debt which hangs over the eurozone and the rest of us?
As a collective liability, it has to be tackled but the only workable solution seems to be: let’s borrow more.
Inspid inflation or deflation? The financial press have been debating whether deflation can be good, bad or both. Deflation is essentially benign unless accompanied by “nominal falling demand,” which, presumably, is the point at which it begins to bite and become a demand death-spiral. Bad news.
So is the oil price fall good news? Yes, if the savings on fuel bills flow into consumer spending.
Spain has had deflation for some months. Consumer spending has grown – good deflation?
Technology goods have deflated in price for 20 years or more. We still buy new wall-size flat screen TV’s – good deflation?
We hold off from buying a car now because it will be cheaper in six months time – bad deflation?
As I have said in a previous blog, we are all economists now. The balance between good and bad deflation hinges on the balance between buying now or deferred gratification against a cheaper price. My father’s view on that balance would have been very different from that of my daughters.
But given that there’s some evidence of domestic demand in a number of eurozone economies, it might be that QE will fuel this nascent blossoming of consumer confidence into something more fully fledged, bringing with it a likely rise in interest rates, even if they are a long way out.
My own finger-in-the-wind on rates is a three-question-summary, which can be found at www.puntersouthall.com (it’s on the front page). Latest results show a majority (50%) believe rates should rise even later than a year after this May’s election, compared to those who go for before the election (20%) and the year after (30%).
As to when they will rise, most (60%) believe it will be in 2016, with the remaining 40% saying even later. None think it will happen before the election.
Will QE become a turning point? It seems there’s precious little by way of an alternative.
And as we wait and see, can I leave you with the thought that negative inflation, or close to zero inflation, probably makes the long bond good value.
Jonathan Punter is chief executive of Punter Southall.
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