Jake's View

This one indicator is a near perfect ‘crystal ball’ foretelling Fed rate increases

Hong Kong home price are signalling there won’t be a US interest rate tightening for a long time to come

PUBLISHED : Wednesday, 07 September, 2016, 5:39pm
UPDATED : Thursday, 08 September, 2016, 8:54am

Hong Kong shares traded higher for the fourth straight session yesterday, reaching their highest level since August last year as Friday’s weaker than expected US job numbers and positive sentiment from the G20 meeting continued to buoy investor sentiment ...

SCMP, September 7

How fashions come and go. There was a time that the monetary theories of Professor Milton Friedman prevailed and once a month everyone waited, eyes glued to Reuters screens (no Bloomberg then), for the latest US M2 growth figure. It would flash up and markets round the world would shake.

The theory worked perfectly in university classrooms, pity about the real world. M2 proved erratic and uncontrollable.

Our currency is formally linked to the US dollar and home prices in Hong Kong are critically sensitive to US interest rate trends

Then there was a time when the big question was whether the US government could keep its deficits under control and everyone waited for that number. The question is no longer of interest. There has been a definitive answer – no, it cannot. The US federal deficit is out of control.

Now the rage is the US monthly labour report – by how many jobs has total non-farm employment grown. Poor farmers, they don’t matter no more.

But this number has also unproved untamable. It is adjusted by something called the X11-ARIMA which is neither an experimental American jet fighter or the latest Daihatsu car but a way of tweaking numbers to make them look prettier.

If they then still don’t look pretty enough they are made subject to yet more “recalculated seasonal adjustment factors”.

A further problem, one of many, arises with finding and counting jobs that have never existed before. But it is easily dealt with. Just pretend that jobs that have vanished actually still exist. The two should cancel each other out, well, they should, you know.

And at the end of this massive manipulation exercise, the Bureau of Labor Statistics confesses that no change of less than 500,000 jobs is “statistically significant”. The latest figure was 151,000 jobs, which is an increase of one tenth of one per cent from the previous month’s doctored number.

But it was less than expected, we’re told, and on the basis of this bad news global markets went up. Further bad news that nothing was decided or done at the big G20 talk shop in Hangzhou further encouraged financial markets to rise.

Yes, it’s an upside down world.

The reason, of course, is that it all makes the US Federal Reserve Board unlikely to raise interest rates from nothing to almost nothing at its next big meeting, which means it may still be years before they go back to something.

This in turn tells markets that the party is still on and they have the Fed’s encouragement to drink up the entire punch bowl and fill it again.

Now, I accept that we don’t quite have unanimity here. Some people still believe that the Fed will raise interest rates by another 25 basis points soon and will continue raising them after that.

Thus let me invoke my version of the crystal ball. Our currency is formally linked to the US dollar and home prices in Hong Kong are critically sensitive to US interest rate trends. I think our formal residential price index foretells the future better than anything else available.

As the chart shows, this index foretold the Fed’s 25-basis point increase last year with a decline in homes prices. It now foretells that there will be no further increase for a long time to come and that property speculation is a safe business again. I expect the August figures to show an even steeper rise in home prices.

Trust me. This one is a reliable leading indicator.