A Curious Cut

This article appeared in the Economist magazine edition of September 5 and on the Economist site under the headline “Shekeled and bound”.

The Bank of Israel, the country’s central bank, is seriously concerned about the state of the Israeli economy. That, it seems, is the rationale behind the decision by the bank’s Monetary Committee, at its monthly meeting on August 25, to make another 25 basis point cut in the bank’s interest rate.

This move, seemingly unexceptional, was unforeseen by analysts and by the financial markets, where short-term bond prices were reflecting no change for the next three months. The main reasons everyone was wrong-footed was that the bank had cut in July and successive reductions are very rare, while the latest cut brought the rate to 0.25%, the lowest ever. Furthermore, the impression arising from the statement accompanying the July decision was hawkish — that the cycle of interest-rate cuts begun in September 2011 was at, or near, its end.

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What’s hot and what’s not

The gulf between the make-believe world of stock markets and the real world where real people live and work has never been clearer than over this last week. On the one hand, a Chinese internet retailer succeeded in becoming the largest IPO (initial public offering) in the history of Wall Street. On the other hand, the prices of many basic commodities continued to fall — they have been going down for months, in some cases for years, and recently their rate of decline has increased.

What is one to make of these coincident, but fundamentally contradictory developments?

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Deflation settles in

Last Monday, as on every 15th of the month that does not fall on a Sabbath or holiday, Israel’s Central Bureau of Statistics published the Consumer Price Index (CPI) for August. As usual, this datum surprised the majority of the professional forecasters whose job it is to try and predict this monthly measure of inflation. “As usual” — because this is what happens most months, that the result does not correspond to the consensus forecast. Why that happens, why it happens more frequently than it used to and why large financial institutions continue to employ highly-paid and highly-intelligent people on this thankless task — all of those question can wait for another day. For the moment, suffice it to say that the August CPI went down by 0.1%, instead of rising by a similar amount or, at least, remaining unchanged — as had been “forecast”.

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Current Account data for second quarter of 2014

Bottom line: Israel’s current account surplus on its balance of payments for the April-June 2014 quarter was $2.2bn — a reversion to ‘normal’ levels, after the record-breaking $3.5bn originally announced for January-March (and now revised up to $3.6bn!). As noted here in June, “the factors responsible for [the Q1] outcome are unlikely to be repeated, at least in the same degree, and the surplus will shrink in the current and subsequent quarters”. 

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Trade data for August and January-August 2014

Bottom line: There is no substantive news in the August trade data. The main trends that have been evident since the beginning of the year, especially the weakness in exports, are at work and, indeed, intensifying. There is no evidence of a significant impact of the Gaza fighting on trade patterns.

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Israel-Turkey commercial links: a case study in political disruption of economic logic

Anyone following the Middle East via headlines in the mainstream media would know that diplomatic and political relations between Israel and Turkey have ruptured in recent years. It would therefore seem safe to assume that the economic and commercial links that once formed a central element of a generally close relationship between the two countries had shrivelled, under the impact of the diplomatic freeze.

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Far too much of a good thing

I recently read in an item written in a usually reliable blog, that “China consumed more cement in 2011-2012 than the United States used in the whole of the twentieth century”. There was no source given for this remarkable fact/ statistic, and therefore its credibility must remain in serious doubt. The reason I mention it is because it highlights a genuine, major and extraordinary phenomenon, namely the extent of investment in China in recent years.

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TLR 165 – Gaza and Beyond

The prolonged, on-again off-again hostilities in and around Gaza made it impossible to present a summary of what was going on, let alone where it was leading. This issue attempts to do that, but it is more concerned with putting the “latest round of fighting” — as the common perception has it — into a wider context. It is, therefore, as much focused on the “beyond” of the title, than just “Gaza”.

There are at least three components to “beyond” that this newsletter needs to address, namely the geo-political, the fallout on domestic politics and the impact on the economy and economic policy. Of these, the first is by far the most important, even for Israelis — although most are unaware of, and/or don’t pay attention to that — and certainly for outside analysts. This issue is devoted to that aspect, and it includes a discussion of the important questions, which are not “who started?” and “who won?”, but rather why did Hamas choose to stir things up at that point in time and why did it keep the fighting going for so long — and, even more intriguingly, why did Prime Minister Netanyahu and Defence Minister Ya’alon insist on keeping the Israeli operation as limited as possible, in the face of tremendous domestic pressure to expand it in size, scope and goals.

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Ideas and idols

Seven years ago, as the ‘limited’, ‘contained’ subprime crash of 2006/07 morphed into the much larger and infinitely more dangerous global financial crisis of 2007/08, a whole generation of young people made a shocking discovery.

Tens of thousands of the brightest men (mostly) and women from around the world had been sucked into the financial services sector in the belief that this was where both fame and fortune were to be found easily and quickly. They were ‘educated’, first in university and then in business school, in the ‘knowledge’, the scientifically-proven certainty, that the free market was an inherently superior system for managing businesses and national economies. They were inculcated with the dogma that governments were ‘part of the problem, not part of the solution’, and that if governments and their agencies would just stay out of things, everything would work out fine and everyone would be better off. This was correct, true and valid in all areas of the economy, but especially in financial services, where the markets were the most sophisticated of all.

Those who had the good fortune to embark on a career in financial services in the 1990s had grown with the boom and proven through their own experience that if you worked hard, you would be well rewarded. They were convinced that it was their talent, brains and hard work that had brought them success — and often outright riches.

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