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The Bank Of England’s Quarterly Fictional Novel

By Andy Shaw | January 25, 2010

Originally posted 16th February 2009

Yes it’s that time again when the Bank of England try to explain why they got it so wrong and predict how they are actually going to get it right next time. My last article said how I couldn’t be bothered to write this up further as an article as it was so depressing. This time it is slightly less depressing and they have at least mentioned half a dozen times that they did get their last one so very wrong.

In business, if you fail or get something wrong the lesson you learn is a valuable one. That lesson is to listen to the people who were telling you to do it the right way and to not make the same mistake again. In business new mistakes are wonderful opportunities to learn and mistakes you repeat are a sign of your general weakness and lack of understanding.

Guess what, they are going to make the same mistakes again…

Notes on the BoE Feb 2009 Inflation Report

I called the last one a work of fiction the day they released it.

Here are some of their words today:

“The outlook for GDP growth – GDP was estimated to have fallen by 1.5% in 2008 Q4, a substantially larger decline than envisaged at the time of the November report.” (Not by me, it wasn’t ‘click here’ to read what I said).

Check out Chart 1, they are still predicting a ‘V’ shaped recession…WRONG! These guys are the Muppets… I’m thinking is there any point in reading the other 49 pages of this report as their basic misunderstanding means they will get nothing right. These guys are running our economy…arrrgh!

They used their ‘best collective judgement’ for that, too!

Their chart also indicates a -3.75% decline in GDP as opposed to the IMF’s -2.8%. I think the BoE are nearer to the mark here than the IMF. Personally I was thinking -3.75 to -4.25% but I’m ok with their prediction. However, I am not ok with their recovery position. I would say till March 2010 we will be at the depth of the depression and then it may slowly, over the course of a year, move up to -2%.

By 2011 it maybe -1% and then finally show some minimum of positive growth in 2012. But I know my estimate is only a reasonable guess and fiscal policy could make these predictions wrong; that’s if they make the right fiscal decisions of course.

As for inflation they only predict it going negative in 2010 for a slight period of time. I disagree strongly and think we will see some negative value no later than June. I would say their fan chart is therefore off by about -1%, other than that, I am tended to agree with it’s course.

They do condescend to mention they could be wrong on the downside and on the upside because of the currency deflation. I think this will mitigate somewhat later (although it may wrongly do so) and this will mean inflation will be more negative than their projections.

Basically, this is like a football manager answering a question on how his team will do in the big game. “We’ll either win, or we’ll lose…but maybe it’ll be a draw.” At least have the cohones to give a prediction as anyone on earth could predict it going up or down!

They said that as inflation was unlikely to achieve the 2% target that, “a further easing in monetary policy was needed.” Now that should mean we really are headed for 0 – 0.25% interest rates people. Expect another 0.5% cut next month – happy days for those with variable rate mortgages!

Take a look at Chart 1.1 – this shows how terrible their August report predictions were (they were actually predicting interest rates rising then – they must’ve thought Trichet was right, given the ECB’s completely ridiculous interest rate rise in September). How awful their November report predictions were, and this report shows a ‘V’ in interest rates which they have based on a ‘V’ shaped recession!!! As I wrote earlier, they are now basing their assumptions on the wrong data.

Although this chart predicts a 0.25% cut in rates and not till later in the year, let’s see what they cut it by next month. My money is still on a 0.5% cut but then these Muppets don’t read charts very well as has been proven for so very long.

These guys still think we are in a recession. I think we will have to wait for 2 more inflation reports to hear or see the ‘depression’ word mentioned.

They see sterling recovering a little in 2009 (as do I) and then more in 2010 & 2011, but their charts have been wrong before, so now I agree with them I am getting worried that I may be wrong.

They seem to misunderstand the housing market and are like the majority of the general public; completely unaware of the true property value. No surprise there I know, but at this point it is to our benefit that they do misunderstand it.

Their global GDP forecast which is made up by a consensus is predicting -0.5% which is exactly what I thought it would be. For a rule of thumb though, 2.5% is considered a recession so this is much worse. I can’t remember which financial institutions predicts it to be 0.5% growth worldwide this year, I just knew I disagreed with them.

I do agree that there is a real possibility the recovery could be sharp when it happens because of the way they have cut interest rates but my opinion remains that it won’t be for a considerable time because of a number of factors.

Chart 2.8 shows that the surge in unemployment well and really emphasises what I have been saying about how the UK hasn’t really felt the problems yet. It shows that we haven’t even started the 2 years+ of pain from unemployment figures and echoes the figures I cited in the last article where unemployment is likely to hit +3 million during 2009.

The report states that “the likelihood of a period of persistent deflation in the United Kingdom is judged to be small,” i.e. they do not think we are going to get into, or indeed are in, a depression, which is why they are still forecasting a ‘V’ shaped recession. Let’s hope the BoE have got it right and I, together with Nouriel Roubini and George Soros, am wrong but I wouldn’t bet on the BoE!

They think the ‘V’ is coming. What this means is that they will not use all or hardly any of the measures I have been suggesting for a long time yet. This is quiet worrying as it confirms my thoughts that they would fail to act. Conclusion: the depression is here to stay.

I think that in 3 months time the economic data will still be insufficient to change this viewpoint and in fact we will have to wait until August for them to figure an increase in support is needed or even likely.

They do admit that there are ‘considerable uncertainties about the pace of recovery’ and they think a key risk is that it will take longer than anticipated to stabilise the global financial system. They do mention another big downside risk, being protectionism. So they are seeing these problems that I am anticipating to be very bad. However, in my opinion they are deluding themselves and looking on the bright side.

When you have no money on the line, it is easy to (be an optimist) not be a realist.

*End of notes*

I am seeing movement from the banks and I think that the period of real opportunity will soon be upon us, so watch out for indications of much better deals from lenders over the next 6 – 8 weeks.

Best wishes

Andy

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