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Is rising inflation looming?

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richfool
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Re: Is rising inflation looming?

#302882

Postby richfool » April 24th, 2020, 11:19 am

PAT (Personal Assets Trust) recently sent me their latest Quarterly Report (April 2020), which includes their view on inflation. I note on page 5, reference as to how they feel US TIPS and gold will protect them against inflation being above real interest rates:
US Treasury Inflation-Protected Securities (TIPS) and gold will protect us from real interest rates moving more negatively, i.e. when the inflation rate stands above the rate of interest. With state forces pushing money into the economy, an inflationary outcome cannot be ruled out. Cash is likely to have its value eroded if real rates go more deeply negative, and if this happens our cash weighting is likely to fall in the years to come. For now it continues to provide essential dry powder for us to deploy.

It can be accessed through here:

https://www.patplc.co.uk/literature/quarterly-reports

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Re: Is rising inflation looming?

#303191

Postby 1nvest » April 25th, 2020, 1:37 pm

richfool wrote:PAT (Personal Assets Trust) ...
... Cash is likely to have its value eroded if real rates go more deeply negative, and if this happens our cash weighting is likely to fall in the years to come. For now it continues to provide essential dry powder for us to deploy.

Given that we've seen cases since January of where cash was buying 50% more shares than at the start of 2020, would have thought they'd have already deployed at least some of that dry powder.

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Re: Is rising inflation looming?

#303353

Postby Bathonian » April 26th, 2020, 12:02 pm

I’m not sure if Ruffer has been mentioned earlier this this thread, but an environment where we start to see rising inflation is also heavily built into their strategy with a large chunk of index linked bonds in the portfolio.

They publish the “Ruffer Review” each year with a series of articles from their staff, 2020 version can be found here https://www.ruffer.co.uk/-/media/Ruffer ... 8461B60B65

Page 62 gives their view on inflation, but there are some other good articles in there as well.

I hold some RICA which has been a drag on returns until this year where it protected from the falls pretty well indeed.

Anyway, thought I would flag in case others found it interesting to read.

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Re: Is rising inflation looming?

#303391

Postby richfool » April 26th, 2020, 3:06 pm

1nvest wrote:
richfool wrote:PAT (Personal Assets Trust) ...
... Cash is likely to have its value eroded if real rates go more deeply negative, and if this happens our cash weighting is likely to fall in the years to come. For now it continues to provide essential dry powder for us to deploy.

Given that we've seen cases since January of where cash was buying 50% more shares than at the start of 2020, would have thought they'd have already deployed at least some of that dry powder.

Yes, he's bought more Alphabet, Berkshire Hathaway, Medtronic and Visa:
Reports for Lyon’s £4.4bn Trojan fund show the manager has upped the proportion of the portfolio held in shares to 42%, up from 34% at the end of January.

The manager bought more shares in Google owner Alphabet (GOOG.O), Warren Buffett’s investment vehicle Berkshire Hathaway (BRKa.N), medical device manufacturer Medtronic (MDT.N) and payments processor Visa (V.N) last month.

https://citywire.co.uk/funds-insider/ne ... s/a1347380

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Re: Is rising inflation looming?

#303466

Postby 1nvest » April 26th, 2020, 9:35 pm

Low nominal, negative real yields (and inflation) are perhaps the new norm. Why go to the effort/bother of raising taxes when you can legally counterfeit more money and spent it. Which has the effect of devaluing all other notes in circulation such that its a form of micro-taxation.

If interest rates of current gilts in issue become too high, then get the 'independent' Bank of England to print shed-loads of money and buy up all of those gilts - whilst the treasury issues/sells new gilts at a longer maturity/lower yield. Basically that's what happened post 2009 financial crisis. £500Bn of debt costing maybe 5% bought up by the BoE, who returns all interest paid by the treasury on those gilts - back to the treasury (so much for independence), whilst the treasury sold off around £1Tn of new lower yield/longer maturity gilts (twice as many 2.5% yielders as former 5% yielders, stretched out over a longer/wider timeframe).

In many respects, ending tax collection and transitioning over to micro taxation of money would be a fairer system - the more you have/spend the more your money is devalued in £ terms. Inefficiencies of the Public Sector and its never ending desire to spend other peoples money however and that's perhaps wishful thinking, More inclined to continue do both (20% basic rate tax, 12% employee NI, 14% employer NI that near halves your money, then 20% VAT applied to that when you spend it).

Two thirds of global GDP is consumer spending based. With the president of feeding that having been set - central banks first bought up treasury bonds, then corporate bonds and now stocks, there's perhaps even more interest towards printing even more money to push up prices/lower yields as yet another form of public sector revenue stream - such that low (negative real) yields could be with us for decades to come. When 'investors' are paying to borrow from the state the national debt becomes a asset, not a liability.

Yes that could all backfire. Germany are past experts at inducing hyperinflation and its been the German led EU that has set the EU president of printing to buy treasury/corporate/stocks. The US constitution previously blocked that, but those rules have been relaxed (instead the US should have harshly penalised the EU for not following the rules). Under Trump however he's more inclined to can-kick the Euro collapse/failure issue down the road for a later President to sort out.

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Re: Is rising inflation looming?

#303519

Postby tikunetih » April 27th, 2020, 9:13 am

Hoisington Q1 review:

Not Different This Time (my title)

https://hoisingtonmgt.com/pdf/HIM2020Q1NP.pdf


I began reading Lacy Hunt and Van Hoisington's Quarterlies at the tail end of the GFC. They've been positioned towards the long end of the Treasury curve since ~1990, rejected claims from the inflationistas that post-GFC QE would spell the end of the Long Bond secular bull market and would instead prove to be disinflationary with long term economic growth being further subdued.

The above note explains why they remain positioned where they are.

In view of the initial conditions when the virus hit, the U.S. economy is facing a deflationary recession. Based on the trends at hand, this downturn will be more severe than the three previous worst post-war recessions of 1973-75, 1981-82 and 2008-09.

This will have a noticeable impact on inflation. Measured from the peak before or during the recession until the cyclical trough, the average decline in the core PCE deflator, the Fed’s preferred inflation target, was 432 basis points, with a range of 165 basis points for the 2008-09 recession to minus 696 points for the 1981-82 recession.

One of the reasons for the variability in this range was that highly volatile oil prices rose in two of the recessions and although energy prices are not measured directly in the core PCE deflator, they have a strong indirect influence. From peak to trough, oil prices declined 49.2% for the 1981-82 recession, but in all three recessions the average price was virtually unchanged. From the cyclical peak in oil prices to
the current level, the drop in oil prices is nearly 72%, unprecedented for a major recession. Extrapolating these trends from previous recessions the core PCE measure could deflate 200 to 300 basis points and possibly more while the broader PCE measure could contract 400 basis points. This means that core PCE could recede to a 1% rate of deflation, with the overall PCE measure deflating at 4% or more.

Once the virus is contained, the output gap, a measure of real GDP relative to its potential will be massive both domestically and globally. A recovery in business activity will occur and may appear to
be V shaped but will be at a much lower GDP level than the 2019 measure of activity. In other words,
the economy will stagger, not march forward. Five to seven years will likely elapse before the output
gap returns to late 2019 level.
This suggests that once the cyclical decline in inflation has occurred,
the economy will be mired in a protracted period of mild deflation and that firms with the weakest pricing power will need to try to lower nominal wages, something for which modern business managers
have no experience.

Thus, the Treasury yield curve will be anchored close to the zero bound for a very lengthy period. Without the legal and structural impediments to crossing the zero bound, both variables in the Fisher equation (the real rate and inflationary expectations) will tend to push yields toward negative territory.


GS, enjoy... ;) ‏‏‎
‏‏‎

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Re: Is rising inflation looming?

#303609

Postby TheMotorcycleBoy » April 27th, 2020, 2:43 pm

dealtn wrote:
colin wrote:Inflation falls to 1.5% , economists say it may go to .5% this year as economy shrinks.

https://www.bbc.co.uk/news/business-52371062


I think it is going to be genuinely difficult to even measure inflation, at least in a meaningful way, and it will be interesting to see how the ONS adjusts the basket. These are unprecedented times, but the basket is supposed to show a typical average spend.

Looking at the graphic on that link as an example shows the difficulty. Last month's biggest falls included Recreation and Culture, Restaurants and Hotels, Transport, and Clothing and Footwear. Now there are two difficulties, even a month into lockdown. The basket has to be representative of spend in its proportions, and also the prices need to be measured. What are we including in Recreation and Culture now that Theatres, Cinemas etc. are closed? The same is true for Restaurants and Hotels to a large extent. Transport expenditure is massively lower, with perhaps 90% of normal journeys not happening. Clothing and Footwear shops are in the main closed, but some online outlets remain in operation.

So across many categories the changes in both spend as a proportion of expenditure, and availability of prices are significantly different. Petrol is cheaper, but in much less use. Air tickets almost non-existent, but very expensive where it exists.

I doubt the ONS has the answers as to how it should properly report, and is no doubt hoping for a return to normality as soon as possible, else it faces some interesting dilemmas on how representative it needs to change. Do you replace Cinema Tickets with "free" virtual online pub quizzes?

That's very similar to my point. I noted too that food inflation was (apparently) flat - though it's worth noting that the quoted ONSs figures stopped at a certain cut-off date, and I wouldn't be surprised if food inflation is positive for April.

Anyway.... I mentioned this (the ONSs report of inflation falling by 0.2%) to Mel and she was not convinced. Mel comes from a very lower working class background (she is very fussy about finding the "best deals" and applying for every single money saving voucher/discount that she can find online) and does the bulk of the family's food shopping and she believes, that one of the many things that the ONS in particular miss is that many working class housewives have a certain pattern in their supermarket shopping, which is such that they will try to optimise by buying multiples of things "on offer". Mel reports all of the "offers" which she would previously exploit have vanished from the shelves - hence for her the reality (and don't I know it!) is that her supermarket visits are costing more currently, since she is needing to adopt a much stricter "basket filling" rule to her shop. We weren't sure whether or not, the "basket of goods" concept succeeds in capturing buying patterns adopted month-by-month in our supermarkets.

Matt

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Re: Is rising inflation looming?

#303612

Postby scrumpyjack » April 27th, 2020, 2:59 pm

Dare I suggest the office of neutered statistics will make whatever adjustments arrive at the desired inflation figure?

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Re: Is rising inflation looming?

#303613

Postby dealtn » April 27th, 2020, 3:03 pm

scrumpyjack wrote:Dare I suggest the office of neutered statistics will make whatever adjustments arrive at the desired inflation figure?


Suggest it if you like, but I would be very surprised having met a number of people who have worked there. Not an institution for doing things like that in my view.

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Re: Is rising inflation looming?

#310561

Postby dealtn » May 21st, 2020, 10:42 am

dealtn wrote:
colin wrote:Inflation falls to 1.5% , economists say it may go to .5% this year as economy shrinks.

https://www.bbc.co.uk/news/business-52371062


I think it is going to be genuinely difficult to even measure inflation, at least in a meaningful way, and it will be interesting to see how the ONS adjusts the basket. These are unprecedented times, but the basket is supposed to show a typical average spend.

Looking at the graphic on that link as an example shows the difficulty. Last month's biggest falls included Recreation and Culture, Restaurants and Hotels, Transport, and Clothing and Footwear. Now there are two difficulties, even a month into lockdown. The basket has to be representative of spend in its proportions, and also the prices need to be measured. What are we including in Recreation and Culture now that Theatres, Cinemas etc. are closed? The same is true for Restaurants and Hotels to a large extent. Transport expenditure is massively lower, with perhaps 90% of normal journeys not happening. Clothing and Footwear shops are in the main closed, but some online outlets remain in operation.

So across many categories the changes in both spend as a proportion of expenditure, and availability of prices are significantly different. Petrol is cheaper, but in much less use. Air tickets almost non-existent, but very expensive where it exists.

I doubt the ONS has the answers as to how it should properly report, and is no doubt hoping for a return to normality as soon as possible, else it faces some interesting dilemmas on how representative it needs to change. Do you replace Cinema Tickets with "free" virtual online pub quizzes?


Well the latest release came out yesterday, and the headlines are all about a drop in "measured" inflation. But as I pointed out last month the difficulties of getting a true picture, and an accurate measure are there to be seen.

Remarkably there were 90 items, representing just over 16% of the basket "unavailable". Of course it wouldn't be right to use an £infinity price, but nor is it accurate to just ignore the unavailability. Looking at some of the items missing you could claim some would be at a lower price now than before, but some might be higher. Genuinely difficult.

https://www.ons.gov.uk/economy/inflatio ... /april2020

https://www.ons.gov.uk/economy/inflatio ... able-items

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Re: Is rising inflation looming?

#310596

Postby Alaric » May 21st, 2020, 11:57 am

dealtn wrote:Well the latest release came out yesterday, and the headlines are all about a drop in "measured" inflation. But as I pointed out last month the difficulties of getting a true picture, and an accurate measure are there to be seen.


Particularly if you can afford to buy on availability regardless of price, isn't the cost of a comprehensive weekly shop creeping upwards? There are fewer loyalty card offers, fewer promotions and needing to handle shortages in the cheaper brands by substituting the more expensive ones. Equally the more expensive shops may have shorter queues.

If the only way that pubs, bars and restaurants are allowed to reopen is by reducing capacity, isn't that going to increase prices as well?

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Re: Is rising inflation looming?

#310607

Postby dealtn » May 21st, 2020, 12:11 pm

Alaric wrote:
dealtn wrote:Well the latest release came out yesterday, and the headlines are all about a drop in "measured" inflation. But as I pointed out last month the difficulties of getting a true picture, and an accurate measure are there to be seen.


Particularly if you can afford to buy on availability regardless of price, isn't the cost of a comprehensive weekly shop creeping upwards? There are fewer loyalty card offers, fewer promotions and needing to handle shortages in the cheaper brands by substituting the more expensive ones. Equally the more expensive shops may have shorter queues.

If the only way that pubs, bars and restaurants are allowed to reopen is by reducing capacity, isn't that going to increase prices as well?


Probably, and that is an issue for the ONS to accurately reflect. Any issues with non-existent prices, difficult price discovery etc. should be temporary for credibility to remain. Longer term changes in buying and selling need to be reflective too. If that means revisiting how "offers" are reflected, loyalty cards and points are used, and having a basket that doesn't just reflect cheapest available, but also reflects that some will have baskets of more expensive capturing non-price preferences to shopping to, that is appropriate.

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Re: Is rising inflation looming?

#310632

Postby ursaminortaur » May 21st, 2020, 12:52 pm

dealtn wrote:
Alaric wrote:
dealtn wrote:Well the latest release came out yesterday, and the headlines are all about a drop in "measured" inflation. But as I pointed out last month the difficulties of getting a true picture, and an accurate measure are there to be seen.


Particularly if you can afford to buy on availability regardless of price, isn't the cost of a comprehensive weekly shop creeping upwards? There are fewer loyalty card offers, fewer promotions and needing to handle shortages in the cheaper brands by substituting the more expensive ones. Equally the more expensive shops may have shorter queues.

If the only way that pubs, bars and restaurants are allowed to reopen is by reducing capacity, isn't that going to increase prices as well?


Probably, and that is an issue for the ONS to accurately reflect. Any issues with non-existent prices, difficult price discovery etc. should be temporary for credibility to remain. Longer term changes in buying and selling need to be reflective too. If that means revisiting how "offers" are reflected, loyalty cards and points are used, and having a basket that doesn't just reflect cheapest available, but also reflects that some will have baskets of more expensive capturing non-price preferences to shopping to, that is appropriate.


Some items will be going up but others such as clothing may well be coming down see

https://www.theguardian.com/business/2020/may/14/marks-spencer-holds-huge-sale-clothing-piles-up-amid-lockdown


Marks & Spencer holds huge sale after clothing piles up amid lockdown

Retailer offers discounts of at least 50% to shift unsold spring and summer styles

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Re: Is rising inflation looming?

#317870

Postby Alaric » June 12th, 2020, 12:49 pm

dealtn wrote:Any issues with non-existent prices, difficult price discovery etc. should be temporary for credibility to remain. Longer term changes in buying and selling need to be reflective too. If that means revisiting how "offers" are reflected, loyalty cards and points are used, and having a basket that doesn't just reflect cheapest available, but also reflects that some will have baskets of more expensive capturing non-price preferences to shopping to, that is appropriate.


Confirmation of a spike in grocery prices and a reduction of availability.

https://www.ifs.org.uk/uploads/BN292-In ... ckdown.pdf

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Re: Is rising inflation looming?

#318247

Postby 1nvest » June 13th, 2020, 11:45 pm

The Fed are apparently giving increased consideration towards Yield Curve Control. The difference between YCC and QE is that QE concentrates on quantities of bonds, for instance buying £400Bn of bonds. Under YCC the focus switches to buying enough of bonds to maintain a particular price/yield.

Pre financial crisis and the UK had around £500Bn of debt costing around 5% to service (interest rate). Subsequently the BoE printed around that amount of money and bought up Gilts, returning all interest it receives from the Treasury on those bought Gilts - back to the Treasury. The Treasury in turn created/sold £1Tn of new gilts, paying 2.5% yield. So overall debt expanded from 500Bn to 1.5Tn but where it costs no more or less to service that debt. The newer Gilts paying lower yields were layered over more years. Overall a form of debt restructuring.

In a near zero interest rate world, QE becomes the means to accelerate/slow the economy, replacing prior interest rates being increased/lowered as the means to steer the economy. YCC however raises warning flags. Previously that has been used as a means to deflate debt. A handful of years with interest rates being kept down at relatively low levels whilst inflation rages, and much of debt is eroded by inflation. A form of fundamental default, but where politically no one accepts/claims that such a default occurred.

The assets of choice under such cycles are gold and inflation bonds, as both tend to see prices/values rise as real interest rates (after inflation) move/spike negative.

In the past YCC has cost relatively little. Once the Fed/Central Bank/Treasury announce policies to keep interest rates at x% and will print to buy or sell enough of Treasury bonds (Gilts) to maintain that, then more often the market aligns prices to reflect a x% rate such that the Central Bank doesn't have to actually buy or sell much itself. More usually used during exceptional times such as during/after World Wars. Historically inflation has, coincidentally or otherwise, tended to spike into double digit figures a year or two after the commencement of YCC.

So yes inflation is looming, but a good guide as to when will be when the BoE or US Fed start talking about/implementing yield curve control measures. Thereafter a sequence of four years with interest rates being pegged to say 1%, whilst inflation runs at 12% and a third of debt real values are wiped out (more often to the cost of pension funds/savings).

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Re: Is rising inflation looming?

#318251

Postby Alaric » June 14th, 2020, 12:25 am

1nvest wrote:Thereafter a sequence of four years with interest rates being pegged to say 1%, whilst inflation runs at 12% and a third of debt real values are wiped out (more often to the cost of pension funds/savings).


There's a lot of indexed borrowing out there. Indeed recent borrowing has been on the basis that the annual coupon is next to zero, which leaves the Government liability almost entirely based on the inflation index. If inflation does let rip at 12%, these bonds become awfully expensive to repay or refinance when they hit their maturity date.

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Re: Is rising inflation looming?

#318293

Postby TheMotorcycleBoy » June 14th, 2020, 10:38 am

1nvest wrote:In a near zero interest rate world, QE becomes the means to accelerate/slow the economy, replacing prior interest rates being increased/lowered as the means to steer the economy. YCC however raises warning flags. Previously that has been used as a means to deflate debt. A handful of years with interest rates being kept down at relatively low levels whilst inflation rages, and much of debt is eroded by inflation. A form of fundamental default, but where politically no one accepts/claims that such a default occurred.

I get it - I think. If you lend the Government £100 over 10 years, with inflation at say 7%, then the present value of that capital when repaid will be only about £50, hence they have defaulted on half their debt. Whereas the current yield on the gilt being only 0.21% due to the low rate environment the discounted coupons received will fail to come close to compensating.

In the past YCC has cost relatively little. Once the Fed/Central Bank/Treasury announce policies to keep interest rates at x% and will print to buy or sell enough of Treasury bonds (Gilts) to maintain that, then more often the market aligns prices to reflect a x% rate such that the Central Bank doesn't have to actually buy or sell much itself. More usually used during exceptional times such as during/after World Wars. Historically inflation has, coincidentally or otherwise, tended to spike into double digit figures a year or two after the commencement of YCC.

So yes inflation is looming, but a good guide as to when will be when the BoE or US Fed start talking about/implementing yield curve control measures. Thereafter a sequence of four years with interest rates being pegged to say 1%, whilst inflation runs at 12% and a third of debt real values are wiped out (more often to the cost of pension funds/savings).

Can you elaborate on YCC a little please? Do you mean making periodic corrections, such that the curve does not invert, that is, in order that for businesses it is always possible to borrow at lower cost for short periods, than for the medium term?

Finally, and apologies for being in reverse order to your original paragraphs, but why in your cited historical context, has inflation spiked in those times?

thanks Matt

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Re: Is rising inflation looming?

#319070

Postby dealtn » June 17th, 2020, 12:39 pm

Latest figures released this morning.

Yet more "disruption" to the price gathering process, but not quite as bad as in April. In addition an admission of an error in the series for "single can tinned tuna". Luckily this didn't affect the overall numbers!

In general it continues to paint a benign picture of inflation (assuming you ignore the uncollectable data). Of some concern would be the fact the numbers are being driven down mainly by the more volatile energy and fuel components. Policy makers generally take this into account in their thinking, and it will be interesting to see how such prices potentially reverse as the economy opens up again. Restoring petrol pump prices towards their pre-Covid levels might reverse some of this "deflation talk".

Plenty of commentary out in the economic community about the rapid increases in Broad Money we are seeing with plenty of consumer debt being repaid as individuals are experiencing levels of "forced" saving not seen before with much of the economy being closed, yet wages still being paid (and rising above inflation!) either by employers, or the government via the furlough, and other schemes.

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Re: Is rising inflation looming?

#319458

Postby TheMotorcycleBoy » June 18th, 2020, 3:33 pm

More QE but 0.1% bank rate in place.
https://www.fxstreet.com/news/breaking- ... 2006181100

EDIT:
From the same website
https://www.fxstreet.com/analysis/boe-q ... 2006181124

In the coronavirus era, more money printing is better for the underlying currency – at least in the case of the pound or the euro – as it funds fiscal relief and stimulus.

I must admit that I don't quite understand the logic of that italicised remark.

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Re: Is rising inflation looming?

#319468

Postby dealtn » June 18th, 2020, 4:13 pm

TheMotorcycleBoy wrote:
I must admit that I don't quite understand the logic of that italicised remark.


Ok, firstly this is just a marketing rag, not serious financial journalism, but with that caveat in place...

"more" in that context means the £100bn, not it the £150bn - £200bn also quoted.

Basically doing "something" is better than "nothing", because stimulus means getting out of the economic mess quicker than not stimulating, which means stronger economy and stronger pound. This is an FX article after all.

Now its debateable whether many parts of that are true or not. Stimulus is better than not. Stimulus means better economy. Better economy means stronger currency. But that's the gist of the comment.

Now I will be the first to admit I despise the vast majority of financial journalism, but even if you are towards the opposite end of the "It's not news, it's noise" spectrum to me, I would still advocate using better sources for that news.


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