The 2022-23 Economic Crisis Megathread

[mongers]

My energy provider is going to triple gas and electricity rates in October, after doubling them in April. I'm not up for renewal until January, any chance the war is over by then? 

 

I'm currently on 0.30 GBP per kwH for electricity and I think about 0.08GBP for gas kwh, no idea what they're going up to in October. Gas isn't an issue at the moment as I'm not using any, at all. 

[Josquius]

I don't want to look at what mine is. I'm stuck with it anyway. The press are finally starting to take notice that energy companies are shirking their legal responsibilities and not letting people switch.
Really at this point there's zero point in a privatised system at all. Yet we have tories.

[Tamas]

I don't want to look at what mine is. I'm stuck with it anyway. The press are finally starting to take notice that energy companies are shirking their legal responsibilities and not letting people switch.
Really at this point there's zero point in a privatised system at all. Yet we have tories.

I don't get it. If people switched now that would be great for energy companies wouldn't it? If you have a fixed rate agreed last year or before (like I do), your provider is likely losing money on you at this stage, so the best thing that could happen to them is if you switched to a current tariff fixed or otherwise. Whether with them or with another provider, they'll end up with more money than before.

[Josquius]

I don't want to look at what mine is. I'm stuck with it anyway. The press are finally starting to take notice that energy companies are shirking their legal responsibilities and not letting people switch.
Really at this point there's zero point in a privatised system at all. Yet we have tories.

I don't get it. If people switched now that would be great for energy companies wouldn't it? If you have a fixed rate agreed last year or before (like I do), your provider is likely losing money on you at this stage, so the best thing that could happen to them is if you switched to a current tariff fixed or otherwise. Whether with them or with another provider, they'll end up with more money than before.

I think the legal max for what they can charge still puts them at a loss.

[Tamas]

I don't want to look at what mine is. I'm stuck with it anyway. The press are finally starting to take notice that energy companies are shirking their legal responsibilities and not letting people switch.
Really at this point there's zero point in a privatised system at all. Yet we have tories.

I don't get it. If people switched now that would be great for energy companies wouldn't it? If you have a fixed rate agreed last year or before (like I do), your provider is likely losing money on you at this stage, so the best thing that could happen to them is if you switched to a current tariff fixed or otherwise. Whether with them or with another provider, they'll end up with more money than before.

I think the legal max for what they can charge still puts them at a loss.

Ok but the legal max now is higher than it was before so why not want people to switch?

[Josquius]

Ok but the legal max now is higher than it was before so why not want people to switch?

If your competitor is earning -10 you're still losing out if you take on a customer that earns you -5.

[Tamas]

Ok but the legal max now is higher than it was before so why not want people to switch?

If your competitor is earning -10 you're still losing out if you take on a customer that earns you -5.

I don't think I am explaining it well, but whatever. How are the energy companies supposed to be stopping people from switching anyhow? They cannot forbid you from switching, most they can do is charge you the penalty fee you agreed to when signing up with them.

[Sheilbh]

Also I thought Martin Lewis and all of the comparison sites were basically saying that people shouldn't switch?

[Josquius]

Ok but the legal max now is higher than it was before so why not want people to switch?

If your competitor is earning -10 you're still losing out if you take on a customer that earns you -5.

I don't think I am explaining it well, but whatever. How are the energy companies supposed to be stopping people from switching anyhow? They cannot forbid you from switching, most they can do is charge you the penalty fee you agreed to when signing up with them.

Legally they can't but in practice they are. They're just plain telling anyone who tries that they aren't accepting new customers.

[Tamas]

Ok but the legal max now is higher than it was before so why not want people to switch?

If your competitor is earning -10 you're still losing out if you take on a customer that earns you -5.

I don't think I am explaining it well, but whatever. How are the energy companies supposed to be stopping people from switching anyhow? They cannot forbid you from switching, most they can do is charge you the penalty fee you agreed to when signing up with them.

Legally they can't but in practice they are. They're just plain telling anyone who tries that they aren't accepting new customers.

Ah so its not your current one keeping you but new ones rejecting you? Ok makes more sense now, but I guess that's because they don't want to take your business even at the max price allowed. But if you could only switch at the max price allowed why would you want to switch? You literally cannot get a worse deal with your current supplier.

[Josquius]

Ah so its not your current one keeping you but new ones rejecting you? Ok makes more sense now, but I guess that's because they don't want to take your business even at the max price allowed. But if you could only switch at the max price allowed why would you want to switch? You literally cannot get a worse deal with your current supplier.

Generally yes. As Sheilbh says switching isn't recommended for most anyway.
Though there are situations where people might want to open an account- moving into a renovated wreck, currently on a payment meter, etc... and are hitting trouble.

[Tamas]

Ah so its not your current one keeping you but new ones rejecting you? Ok makes more sense now, but I guess that's because they don't want to take your business even at the max price allowed. But if you could only switch at the max price allowed why would you want to switch? You literally cannot get a worse deal with your current supplier.

Generally yes. As Sheilbh says switching isn't recommended for most anyway.
Though there are situations where people might want to open an account- moving into a renovated wreck, currently on a payment meter, etc... and are hitting trouble.

Fair enough.

[Tamas]

https://www.bloomberg.com/opinion/articles/2022-09-23/bond-yields-leave-the-ice-age-as-post-volcker-trend-ends-for-world-economy?leadSource=uverify%20wall

What Comes After a Week That Shook the World
The 'Ice Age' for bond yields is melting. The ripple effects mean that the rules most investors have learned to live by no longer apply.

Divide and Rule
We're living through arguably the most truly global attempt to tighten financial conditions in memory. This is shifting the tectonic plates beneath the world economy, and threatens dangerous developments in society and in politics as we all try to adapt. And yet what strikes the eye after a week of market landmarks and aggressive interventions by central banks is the continuing discord. There's a broad acknowledgement that the future involves tighter conditions to combat inflation, and with it an elevated risk of recession; but even though these sobering things are now widely accepted, deep differences remain. This is an attempt to sum up the most important developments after an epochal week.

The Ice Age Is Over (Really)
The downward trend in 10-year Treasury yields that has persisted ever since the Fed under Paul Volcker slew inflation is over. There have been false alarms before. Dig through the archives and you'll find I wrote at very great length about what appeared to be the end of the trend during a bond selloff as long ago as 2007. But that market seizure triggered the credit crisis, which would bring Treasury yields to previously unimaginable lows. High inflation in 2022 will make that prohibitively difficult to repeat.

There are many ways to measure a trend, and I want to resist any temptation toward pseudo-scientific technical analysis. But on any sensible approach, the trend has been broken. If Jerome Powell and the Fed succeed as they hope, and replicate Volcker, then maybe they can start another downward wave. But that will be a new trend, not a resumption of this one.

The following chart (a screenshot from the terminal because I had problems with my graphic software, for which I apologize), shows various trend lines that might link the high points for the 10-year yield since Black Monday in 1987. Any version of the line has been breached. And critically, after a series of lower highs, this cycle has left the yield significantly higher than at the top of the previous cycle. Traders can no longer rely on the post-Volcker momentum behind falling rates, which explains why the Fed feels the need to replicate its illustrious former chairman:



....

Inversion Submersion
One more reason to think that things have changed is that we now have an extreme inversion of the yield curve. In other words, the 10-year yield is lower than the two-year yield, even though it would usually be higher to account for the extra uncertainty that goes with investing further into the future. When the curve inverts, it's often regarded as a recession indicator. It's also a sign that the market thinks that the Federal Reserve is about to overdo it, raising rates a lot in the short run to drive slower growth in the longer term.

It's thus pretty significant that the yield curve has now inverted to the extent of more than 50 basis points for the first time in more than 40 years (since, not coincidentally, Volcker was hiking rates to fight inflation):

The Treasury Yield Curve Hits its Deepest Inversion in 4 Decades
The traditional recession indicator looks very, very negative


Source: Bloomberg

The curve has steepened slightly since I drew this chart, but the market's basic message remains. Why is the bond market so concerned? As this chart from SocGen shows, this is now the fastest tightening, in terms of the number of extra basis points added, since Volcker in the summer of 1980. Interestingly, this tightening is slightly slower than the one overseen by Arthur Burns (to whom history has been much harsher than Volcker).



In terms of the last four decades, it really is different this time. It's not so different from what came before, but the rules that most people now active in markets have learned to live by no longer apply.

Keeping a United Front
Yesterday I commented on the wide spread of opinions within the Fed on where they think the fed funds rate will be in 2024. That's concerning. Then on Thursday, the Bank of England's monetary policy committee split three ways over what the rate should be now; one member voted for a 25 basis-point hike, three voted for 75 basis points, and five — the minimum needed for a majority — opted for 50 basis points. That's not exactly clear. As a result, gilt yields surged, and yet the pound managed to drop to yet another 37-year low against the dollar.

The UK also has a specific issue with the clash between fiscal and monetary policy. The BOE is prompted to tighten, despite the grim economic conditions, because the new government under Liz Truss says that it's about to embark on a fiscal splurge, focused around tax cuts and handouts to alleviate the energy crisis. Are they going to coexist, or will the UK's financial authorities cancel each other out?

Japan suffers on a variation of that dynamic. The Bank of Japan and the Ministry of Finance are traditionally at loggerheads. In the wake of the Fed's rate hike, the BOJ reaffirmed that it was doing nothing at all to change its monetary policy, which remains the most lenient in the world. That prompted the ministry to make its first intervention to prop up the yen in 24 years, pulling the currency back to its level of early last week.

Meanwhile, the Swiss National Bank met and agreed to a hike of 50 basis points, meaning that it leaves the ranks of countries with a negative base rate. This was a big deal. Switzerland is a sanctuary of low inflation in the middle of Europe, and its currency continues to be regarded, like the yen, as a haven. But thanks to the intervention in the yen, and an environment in which other central banks were hiking even more aggressively, the yen rose and the franc fell. Yes, that is the exact opposite of what should be expected to happen when the yen was backed by a central bank that stood pat, and the franc was backed by a historically important hike

etc

[Tamas]

I mentioned in the Brexit thread but an excellent example just happened of the challenge the Federal Reserve faces.

They are dedicated to cool down the economy, remove excess liquidity and thus reduce inflation. You can argue whether that's a good idea or not, but that's what they intend to do.

The problem is, significant portion of the financial market thinks they are bluffing and do not have the guts to see this through. The US stock market rallied hard throughout August because the Fed chair Powell gave what was read as signs that interest rate hikes may be coming to an end. There were also signs the US might be entering a recession, which in this warped world of "investing" via borrowed/printed money was bullish for the markets, as it showed the Fed would need to reverse their rate hikes - the Fed Pivot.

Now since August Powell has found his balls somewhere, and on a couple of occasions made very clear that they are going to hike as long as necessary, and while not wanting to trigger a recession, they don't mind doing so if that's what it takes. Coupled with positive economic data showing recession is not quite here YET, markets fell hard the last couple of weeks.

Then today, in comes the Bank of England, announcing what amounts to renewed Quantitative Easing: purchase of government bonds to stop yields from going to the moon.

This triggered an immediate 0.7% jump in American stock market futures, reversing a 1.5% fall at the time - the only possible explanation for that which I see is that the Bank of England pivoting back to QE gave markets the hope that if they cannot stay the course, the Fed won't either.

It's kind of incredible in a way, that we have stock markets actively hoping for and reacting positively for bad economic/fiscal news, simply because they see that as the catalyst for a new round of money printing they can pump into the asset bubble.

[Admiral Yi]

The US market rallied in August because there were indications inflation was not going to be as high as forecast, therefore the Fed would not have to hike as much.

Powell "found his balls" when these indications proved to be false and inflation did in fact stay high.

A hike of 50 bips instead of 75 is not "a new round of money printing."  It's less contractionary than had been expected.