Zak Mir on Calamity Carney and shorting Euro / Sterling

I was appointed Editor of Spreadbet Magazine on the same day last July as Mark Carney was appointed Bank of England Governor – albeit on a slightly less generous package and with just a little less fanfare. Part of this may be explained by the way that Mr Carney is Canadian, and apparently a breath of fresh air as compared to his predecessor Mervyn King, who could have been a former cast member of Dad’s Army.

Instead, in the new incumbent we have the central bank equivalent of George Clooney, at least in terms of being media and markets friendly. The problem now, less than a year later, is that it may have been better to have chosen the actor.

The opportunity that Carney had in terms of the timing of his appointment was to cool off the already steaming housing market and to prevent a knock on destabilisation of the economy. Indeed, it could be suggested that of the triple threats to the UK economy he has described this week – low Eurozone growth, a China meltdown and rising interest rates – the latter makes the other two factors pale into insignificance. The longer the dithering on interest rates goes on, the more they will have to be raised and the worse the bust will be.

But how did we get here? Presumably, Carney was plucked out of the ether by Chancellor Osborne and friends in order to get some momentum / growth into the economy. The easiest way to do this since WWII was and usually is to allow a real estate boom to kick in, given the ropey UK manufacturing base.  Even our services sector will always struggle to deliver the goods without real estate being on the up. Just how desperate the authorities were and probably still are to get growth going (and win the next Election) was underlined by the Help To Buy scheme – a process mostly whereby rich parents in the Home Counties buy £500,000 plus homes for their children. Then there is the incredible “Forward Guidance,” which I nicknamed somewhat obviously: “Foolish Guidance.”

BoE Governor Mark Carney

This is a process whereby the Bank of England provides assurance to bricks and mortar hungry speculators that the music will not stop in terms of ultra low interest rates without plenty of notice. It would appear to be the type of assurance that Neville Chamberlain would have delivered if the former 1930s’ Prime Minister had been in Threadneedle Street now.

The implication is that everyone who is leveraged up to the eyeballs in property will have sufficient time to get out with a healthy profit before rates go back up to normal. Somehow this does not seem to be a scenario that will happen. In fact, the only way out of this fundamental minefield would appear to be to somehow create a “soft landing.” We did not get that at the end of the 1980s’ property boom, so it is unlikely that an even bigger bubble will have a happy ending either.

So do I have any advice for the Bank of England Governor? Well, of course, I would like to help out and dig him and the Government out of what is a massive hole in the making. Probably the obvious angle here would be to increase stamp duty still further and make the conditions for getting a mortgage approved even more draconian. But there would then be the problem that areas of the country outside of London would be unfairly punished and might even see house prices fall significantly. In the end it could be political uncertainty which actually blows the boom out of the water. Given how wide open next year’s General Election is, we may still have much of the hot money in real estate heading for the exit at the same time.

In the meantime it remains as mesmerising as ever keeping an eye on Sterling as a barometer for possible interest rate rises. So far, with Cable just off 5 year highs at $1.68 it would appear that there is a balance between QE tapering strengthening the Dollar and prospective fiscal tightening here. Therefore, with the prospect of new QE in the Eurozone from next month, the open door for traders looks to be shorting Euro / Sterling. This is even if the dithering (on rates) in terms of action from the Bank of England in the self constructed crisis continues longer than is currently expected.

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