Be careful what you wish for

There have been various machinations of late that seem to be lining the markets up for bad news.  The latest being Ben Bernanke saying that the US economy faces “unusually uncertain” prospects, and that the Federal Reserve Bank was ready to take further steps to bolster growth if needed.
 
The UK is taking a similar stance in rhetoric and perhaps hinting at the potential for a double dip recession, with the unwanted addition of having to deal with a touch of inflation. I’m not convinced that we will see a technical recession of two quarters of negative GDP numbers from either country triggering a double dip recession.  That’s not really the point, though.  
 
I am more convinced that the ‘extended period’ of low interest rates and a rocky period of recovery, perhaps with a single quarter of negative growth here and there, will be the outlook for the next 12 to 18 months.  After that we could be in for a more intense recovery period than perhaps is currently on the cards.

 

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I am concerned that the central banks are caught on the back foot and that they will be fighting inflation, but I guess that’s a bit of a daydream for most of those policy makers at the moment.  Be careful what you wish for!  Whilst an economy in the doldrums may cause a few restless nights on how to re-ignite the fire, it does at least give you time to evaluate choices; compare that to an economy tinder dry awaiting a spark.  I just hope that all the fire fighters of nearly three decades ago are still around, otherwise “those who cannot remember the past are condemned to repeat it”.  Ever seen US interest rates at 20 percent?  History has and I hope I don’t fall victim to Santayana’s words!
 
In my view, governments around the world have a small window of opportunity to get their finances in order, or at least force through the spending controls needed to put their respective economies on a sure footing to be able to cope with an uptick in interest rates and the corresponding surge in the cost of funding their expanded borrowings.  It could be translated to a general advice for the average man on the street: get your borrowing and spending in order before the costs spiral out of control.
 
It is this very reason that markets are very wary of property – we may see a downward drag on prices as the (un) affordability of loans accelerates with an increase in interest rates.  The US may be better placed for an uptick in mortgage rates as historically they have seen a lot more fixed rate loans accepted and offered by banks. The UK is highly volatile with an opposite approach, the majority preferring a floating rate which may somewhat temper a Bank of England decision to raise rates when needed.
 
On to numbers, at the time of writing the biggest gaining currencies this month were Swiss francs at a gain over the dollar of 5.5 per cent, Japanese Yen at 4.46 per cent and the euro putting in a respectable 3.6 per cent.
 
Even the Chinese Yuan has seen a large reversal in expectations of future growth, although at the current levels it sits at it’s a relatively cheap bet to take.

Disclaimer: The views expressed are the opinions of the writer and whilst believed reliable may differ from the views of Butterfield Bank (Cayman) Limited. The Bank accepts no liability for errors or actions taken on the basis of this information.

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Money Markets by Butterfield Bank’s Phil Turnbull

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