Economists were pleased, predicting that as inflation falls, the consumer will have more real spending power towards the end of 2012, which will get businesses investing. We can hardly wait.
Going forward, there may be another explanation for the CPI decline. Maybe consumers are spending less because they are taxed too heavily when they do. Just because the VAT increase falls out of the calculation doesn't mean it's not there.
And bear in mind, UK VAT not only applies to goods such as shoes and computers, it also applies to services such as accountants and builders. Did someone mention business investment?
Think of the converse. If a tax hike caused inflation, then a tax cut would lower inflation. This would make goods and services cheaper, which as the economists say, would get the consumer spending, and which would get business investing.
So instead of the Bank of England spending another £50 bil on quantitative easing, which largely goes to the banks, how about retuning VAT to 17.5%? Or do I hear 15%?
USD/JPY. Let's have a look at another FX anomaly, namely, the strength of the Yen vs the Dollar. USD/JPY has fallen to 78-79. The cause is generally seen as a result of the Fed's willingness to continue quantitative easing.
But after the tsunami, and considering that Japan itself has limited natural resources, why is it trading like a commodities currency? For example, the current AUD/JPY is appx 85, while the 3-yr average is appx 79. If anything, the Yen should be tumbling vs the Aussie.
And bear in mind that the US is now a net exporter of fuel (Wall Street Journal 01Dec11), which should give it support with other commodities currencies vs the Yen.
So is the Yen now the world's reserve currency? Not! To my mind there may be another explanation. What follows is cynical and unfounded speculation.
Suppose Japan were opposed by another country, one to whom they have been an historical enemy. Suppose this other country were an export competitor. Suppose this country were out to tackle and appropriate Japan's manufacturing capability.
Suppose this country for the first time in the modern era (if ever) owned a hard currency, ie, warehouses full of American dollars. These dollars could be sold to buy and support Yen. This would simply be a form of currency intervention, which all central banks do.
That's not to say that such intervention could compete against the global FX market, but it could exacerbate the long-term downtrend of Dollar vs Yen.
The result would be to increase the cost of goods manufactured in Japan, which would impede Japanese exports. If maintained over some years, this currency intervention might lead to Japan's downfall.
Maybe this is why the Bank of Japan, this past week, jumped on the quantitative easing band wagon by announcing a program to buy10 trn Yen of its government bonds. Effectively this weakens the Yen while circumventing the FX market.
Will this action be enough to stabilise USD/JPY? How far is the BoJ willing to go with QE? This year will be crucial for the Yen.
After the Noise. The US keeps turning out impressive statistics. I called for non-farm payrolls to reach +200k by March, but we got +243k in Jan! Meanwhile Q4 GDP was +2.8%. Jan retail sales were lackluster (+0.4% vs expected +0.8%), but this follows a respectable holiday season, where Dec11 sales were up 4.7% from Dec10 (ShopperTrak).
But another indicator, the bell weather of tech stocks, Apple, has reached $500 per share. Yahoo.
The broad rally in stocks has stalled just where I said it would. (For once I'm right.) Check out the SPX chart below. We still need to see if resistance at 1350 holds before looking at trade ideas, but, as I said before, the covered write is the preferred strategy for range-bound stocks that are long-term investments. More on this next time.
Nasdaq. Meanwhile, the tech-weighted Nasdaq is absorbing what liquidity is available. It's going through one of those scary rallies. Historically, the Nasdaq has been an inlet for hot money. (See the chart below.) Hopefully tech investors are now more level-headed than they were during the dot com era, but probably not. The stock market doesn't have a memory.
'Till next month, LJ
