“These Guys Are Either Incompetent or Dishonest” – Betting Against the Bank of England

by Ben Tippet and Jack Browne

10 May 2018

When it comes to interest rates, the only thing reliable about the Bank of England’s predictions is that they’re consistently wrong.

This latest failure to raise interest rates may be recent news, but it’s by no means a new story. For the last decade, the Bank of England have been making optimistic predictions about the future of the economy, only to reverse them a few months later. That’s what jargonistic talk in the press about “interest rates” ultimately means. Whenever the Bank of England suggests they are going to raise interest rates, as they did two months ago, they are implying a return to a healthy economy – one in which the public is confident enough to spend and borrow without artificial incentives. But a decade on from the crash, their promises keep on coming to nothing.

The most profitable trader at Citibank.

“These guys are either incompetent or dishonest”, Gary Stevenson told us last week. Gary knows better than most. At only 25 years old, he became the most globally profitable trader at the major investment bank, Citibank, where his trading specialism was interest rates. Gary’s methods seem obvious in hindsight, but they were almost heretical at the time. Before anyone else at Citibank, he realised that the central banks could not raise interest rates any time soon. In direct contradiction to the advice of the media, leading economists and the UK government, Gary bet aggressively against the Bank of England’s forecasts and made millions.

Gary is not from your cliché City stock. He grew up in Ilford, and comes from what he describes as “quite a poor background.” After graduating from the London School of Economics with a degree in maths and economics, he started looking for a job in the City. “At that time,” he explains, “getting a job as a trader was the best job – it was a job that everybody wanted.” But without any contacts in the financial sector he wasn’t sure where to start with the application process. Rather than apply for interviews, he took a punt at a competition run by Citibank – a maths-based card game used by the investment bank to find undiscovered talent. Gary entered, came first in the country, and was promptly offered a place on Citibank’s interest rate trading team.

He entered the financial sector in June 2008, when the impacts of 2007’s credit crunch were rippling through the economy. Gordon Brown would bail out the UK banks that autumn and, across the world, central banks were preparing to introduce unprecedented monetary measures to keep capitalism from failing entirely. From the Federal Reserve to the Eurozone, central bankers flattened their interest rates to levels fractionally above the lowest they can possibly go: 0%. In theory, reducing interest rates means that commercial banks, too, can charge lower interest on their loans to the public. In the face of intense economic anxiety – and the lack of consumer spending that comes with it – the cutting of interest was intended to make it considerably cheaper to borrow money from the bank. And like a Jager Bomb before breakfast, that cheap credit would breathe excited energy into the economic system. It would get Britain spending again.

To be clear, this is not normal behaviour from central banks. Historically central bankers have had a decidedly beige role in the monetary system: they finesse interest rates to keep things running normally. Pre-crisis, those technocratic tweaks had concrete and predictable results – even a slight move in interest rates (cutting them from 5.5% to 5.25%, say) would have a clear impact on lending and borrowing. So much so that when central banks across the developed world collectively reduced interest rates to less than one percent within a year of the crash, analysts expected a steroid-pumped global economy to emerge out of the ashes of recession. It was the stuff of monetary sci-fi, not tried-and-tested economics. The central banks found themselves marooned on a desert island and, instead of building a raft, they fabricated a jetpack and shot off giddily into the air.

It’s in this context that Gary found himself at Citibank. “I didn’t really know what I was doing”, he remembers, so initially, he stuck to the standard line. There was a lot of faith across the industry that the central banks’ extraordinary measures would precipitate an economic boom and the traders in his department were betting accordingly. According to Gary, virtually everybody in finance was expecting the economy to be fully resuscitated within a couple of years. “We were going to have a big recovery and it was going to happen quickly”, he remembers his colleagues saying.  

But after three years working at the bank, it became apparent to Gary that recovery wasn’t coming any time soon. For three years the Bank of England had consistently failed to carry out its claims that it would raise rates – a farcical cycle that, to reiterate, is still ongoing today. Gary was interested to know why this was happening, although most of his colleagues didn’t even clock the groundhog day they’d been looped into for the last three years. “They were just thinking about the next meeting, next meeting”. It can be difficult for junior traders to notice long term trends, he suggests, when the entire system is maniacally gearing them to make short-term profits.

So, where’s the money?

Gary’s career took an unorthodox turn after a meeting in 2011 with leading Citibank economist, Matt King. King’s presentation emphasised the dire fiscal situation in a cornucopia of major economies. Not just obvious candidates like Greece – but also Spain, Italy, the UK and Japan. These were states with austere deficit scenarios, chronically poor productivity and no clear pathway out of the woods.

Most crucially, however, the embattled condition of national economies reflected a scenario that Gary had seen amongst several old friends and family back in Ilford. Both state and consumer were caught in an ever-deepening whirlpool of debt. “The people around me in Ilford, I couldn’t see any way this monetary policy was going to get them spending,” Gary told us last week. “Because in the end, that’s what it’s supposed to do. It’s supposed to get people out there spending. And I just couldn’t see it happening.”

It didn’t take long, after hearing King’s presentation, for Gary to develop a theory of the economy that would shape the next seven years of his life. “I came out of this meeting thinking, OK, people can’t spend because they’re wealth constrained – the government’s are wealth constrained as well”. The wealth generated by low interest rates was disappearing down a mysterious well. “Everyone’s got debt, everybody’s got deficits. But at the same time, you can see all of this wealth flowing around this system. Who has it, where is it?”

And that was when the penny dropped. Most of the cheap credit in the system was flowing only one way: to the very richest beneficiaries of global capital. And as a result, their wealth was inflating at a monumental rate – a process that continues today. The unprecedented bonanza of low interest rates wasn’t reaching ordinary people, who in real terms have been getting incrementally poorer every year since the crash. A veritable banquet was underway, but only the super-rich could get past the bouncer at the door.

But the rub for the central bankers – both in 2011 and today – is that the super rich are not adequately strengthening the wider economy. Their inflated assets froth ineffectually to the top of the economy, while the government and wider population are burdened by debt and emaciated resources. That is, Gary decided, the cause of a “demand crisis”. “You’re living in an economy where the problem isn’t production – it’s spending. So you can produce the stuff, but you can’t buy the stuff that you’re able to produce as a society. Seems mad, right?” He pauses. “And that’s when I realised: the governments are bankrupt. Everybody’s bankrupt. It must be inequality.”

Betting against the Bank of England.

So, in total opposition to everyone else’s advice, Gary quietly began betting against the Bank of England’s predictions that it would raise rates. The economy, he realised, simply would never be strong enough for them to return to business as usual. Hit by debt, an increasingly precarious job market and sharp reductions in their personal income, people weren’t borrowing and spending enough. The central bankers had jet-packed into the sky but a strong tailwind – caused, Gary sensed, by inequality – meant they couldn’t make it back to firm ground. Ultimately, their extraordinary reduction of interest rates was irreversible because the economy wasn’t (and still isn’t) going anywhere. Monetary stimulus has simply put our heads in the clouds.

Interest rate trading is a monomaniacal profession. Traders obsessively follow the movements of central bankers – picking apart their speeches, monitoring their meeting patterns, and even making assumptions based on the size of their files as they walk into work in the morning. Meanwhile, Gary was stoically following through the logic of his new economic theory of inequality, and out-performing all of them. We asked him if any of his colleagues were interested in how he was making so much money so quickly, as just a junior trader.

“The senior guys didn’t ask, if I’m honest. Because they think that if some guy comes and speaks like I speak and starts making a lot of money, it’s better not to ask questions.” The senior traders had assumed he was bending the rules somehow – and were happy to profit from him now and let him take the fall later.

Gary’s success thrust him into a prominent position at Citibank that he quickly grew to resent. “You don’t want to be involved with senior management at an investment bank. A lot of traders are nice guys, but the senior management… These are guys who were millionaires in their early 30s and decided to never ever see their families so they could make more money.”

He was also becoming concerned with the real world implications of his epiphany about the stagnant state of the national economy: “I was just sitting there making the same trade and making the same bet: that rates would stay low for a long time, which is basically that the economy will stay bad for a long time. Eventually you start thinking, I should try and do something, tell someone, because – and I still believe this – I don’t think we are going to recover.”

He decided to quit. His professional divorce from Citibank was messy, involving a nasty legal tangle and some thinly veiled threats from senior management over a ramen lunch. After eventually managing to leave the bank in early 2015, he moved into the charity sector, worked in research for the New Economic Foundation, and is now studying for a master’s degree in economics at Oxford University. He hopes to develop his economic theory of inequality in academia. Most leading economists, however, haven’t even thought to frame the economy in such a way.

Bad weather ahead.

Gary has asked his Oxford tutors – world leading experts in monetary policy – why they think the Bank of England’s predictions have been so wrong. They have responded with bemusement: if it wasn’t for aggressive monetary policy, they say, the crisis would have been considerably worse. But it’s not the Bank of England’s monetary policy itself that Gary thinks is wrong: it’s the inability of the entire economic sector to see the wood for the trees, to work out why it has ostensibly become impossible for normality to resume itself. Rather than ask existential questions about the British economy, the Bank of England ploughs on into an increasingly menacing snowstorm and, from time to time, tells everyone it’s going to be sunny soon.  

Today, Mark Carney blamed “Brexit uncertainties” and “adverse weather” for their latest delay in raising rates – despite his indications that things were back on track earlier this year. The excuses continue, but Gary is categorically clear that it is not these political factors that are the main stalling point for the economy.  “There can’t have been a series of unfortunate events for every country in the world for ten years. They always blame it on the last crisis, but the fact is, this is endemic – it’s not just the UK.” He continues: “it’s like if you watched a penalty shootout and all ten guys hit it out for a throw in. These guys are either lying or they don’t know what they’re doing.”

That stagnation in the economy may be caused by widening inequality, as Gary suspects. But even if it isn’t, something is fundamentally wrong with modern day capitalism, even on its own terms. The fear is that only a second and considerably more traumatic crash will force the system to rebuild itself entirely. Materially, that will mean increased poverty for the people who have suffered the most from the last financial crisis – a crisis which, Gary is keen to emphasise, has never ended.  

Back in the City of London, the Bank of England is now suggesting they expect to raise rates to 1.4% by next year. This is being interpreted as a “dovish” forecast by most commentators, who seem to exist in merry denial of recent history. Let’s be clear: rates have been 0.5% or lower for an unprecedented nine years. To raise them above 1% and keep them there would not only be bold: it would be extraordinary. But don’t hold your breath. We have heard all this before. Whether they are incompetent or lying or just flat out of ideas, it is clear that central bankers don’t know the way out of the wilderness.

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