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8th January 2019 - The Markets and Economy
would do well to heed the advice from World War II to ‘keep calm and carry on’,
as they remain excitable about relatively little. There have been a succession
of minor tribulations ranging from widespread uncertainty about the state of
international trade, to slowing growth in China and the Italian government’s
budget, but nothing to justify the wild movements witnessed.
times like this, it can be difficult to differentiate between the events that
matter and the temporary distractions. As investment markets have headed south
some investors are apparently worried that the Federal Reserve will tighten
monetary policy in the United States, sending it into recession as the
tit-for-tat exchanges between China and the United States drag the rest of the
world into a slump. Similar stories of doom, gloom and misery abound but they
all appear unnecessary.
knows what the future holds but it really does not matter very much
because the vast majority of these feared events can quickly and easily be put
right. For the avoidance of doubt, this is not a repeat of 2008 but simply a
phase of market irrationality.
in its widest sense thrives upon sensationalism and so there is almost no
coverage when everything is going smoothly and the content in times of
turbulence is neither balanced nor well informed. So let the facts be a
reliable starting point.
week the US published its monthly non-farms payroll data, showing that 312,000 extra jobs had been created in December. This was far ahead of market
expectations and is anything but a sign of the US economy slowing down: quite
the opposite. America is simply growing at its more usual 2% per year rather
than the over-stimulated 4% that The Donald achieved last year through
short-term tax-cuts and bribes to big business.
also seem to have forgotten, or simply discounted, the fact that Central Banks
can intervene to reverse any slowdown. Each one has a duty to engineer some
inflation into their domestic economy but not let it rise out of control. A
resumption of QE in America is but a distant possibility because the Fed can
cut interest rates by 2¼% before that might be considered, but it shows the
extent of influence that the Fed has at its disposal.
introduction of new money into developed economies is also at historically
benign levels: less than 2% a year in Britain according to the Bank of England,
in the Eurozone it is 3.7% according to the ECB and in the United States the
money supply is rising by less than 3.5% according to the Federal Reserve Bank
of St Louis. This means that the inflation pipeline is neutral.
trade tensions will be dealt with very shortly. Both the US and China have
moved on from the chest-puffing stage and deals can now be done. China must be
the ultimate winner because it has a President for life rather than just
another two or six years in Trump’s case. Xi can afford to make short-term
concessions to overcome “local” resistance to their ‘Belt and Road’ policy. The
very long-term financial ties that it creates for China are not universally
welcomed across Asia and the continent is experiencing a reduction in trade as
a result of the US tariff disputes. Conceding a little ground in the short-term
will generate considerable pan-Asian goodwill towards China.
15th August 2018- The Markets and Economy
It was entertaining when that intellectual colossus, David Davis, tossed his dollies from the crib in a fit of pique. A report by the Financial Times established that the former head of our team had spent four whole hours in meetings with Michel Barnier so far in 2018. Four out of four thousand, five hundred and thirty six does not seem like very much for our brave musketeer by anyone’s standards. Of course, most negotiations happen at lower levels, but it is hard to understand how so little contact might have produced any meaningful progress at all – perhaps that is one reason why there has been none.
time rushing headlong past the nation, Mrs May is to be congratulated for
having wrought a Brexit proposal that pleased almost none of her cabinet but
which did attract their support. Few would have thought it plausible given the
polar opposites adopted by the two wings of her Party. Thankfully, a starting
point has been settled upon for negotiations with the other 27 countries and the
nation ought to be thankful that Mrs May has taken charge of the negotiations
herself, because she clearly has the ability to negotiate the seemingly
matter who starts fighting our corner for what, there are only four possible financial
outcomes for Brexit as far as investment markets are concerned:
Trying to stay apolitical here, if St Theresa decides against “the will of the people” and also keeps her job a) talk of miracles will be commonplace and b) the markets will be jubilant. A decision to remain that subsequently led to her losing office and a general election that would probably see Gezza in charge is an anathema to markets, but the further down that list of bullet-points the outcome sits, then the more negative the reaction from investment markets in the short-term.
The astounding achievement of Mrs May at the start of the month stacks the odds in favour of a Soft Brexit. Our Brexiteers are not so stupid as to resign en-masse and make an assault on the PM’s job just yet. That would court disaster for the government because an uncompromising stance on Brexit is opposed by half of their own party and most of the Opposition, so a lost election would be imminent for their putsch.
Danger lurks at every turn for our courageous PM. Her latest agreement should embolden her to press for a Soft Brexit even though the negotiated settlement must go back to Parliament for ratification. Her Eurosceptic colleagues may yet vote against her deal, gifting Labour the opportunity to vote it down, despite their preference for that Soft outcome, to win a vote of no-confidence and the resultant general election. As the mighty fashion guru, Gareth Southgate, might say – it would be wrong to underestimate the lust for power.
Change and change management have been rich sources of income to “Management Consultants” for decades, because change is frequently feared. The Commie President, as Trump surely must become known, seems to be lusting for the days when America was great. Having extended loans to much of the world to wage the World Wars of the last century and predominantly watched from the bleachers as Europe and the Middle East was destroyed, the world immediately afterwards was their omelette Rodney. Yankee businesses bought up competitors or established businesses in new lands on subsidised terms, creating an unassailable financial strength for several generations.
Russia went down a different but similar path, aggregating countries into its empire for more effective central control.
Over the years though change has eroded those comfortable oligopolies, to the point where the leaders of neither country are content to let things carry on as they are.
When America provided the bulk of global manufacturing in the 1950s it was quite happy to allow other countries an equal voice and vote through NATO or the UN, but the current President does not like being the object of criticism by those organs. The US of A is also finding it harder to maintain the generosity it previously showered upon other nations in terms of their financial commitment to the planet; subsidising everyone else in the name of “the free world”.
From a Russian perspective, it is one thing to allow satellite countries or regions their independence but quite another when the result is them cosying-up to nations that Russia has long considered to be their foes.
The inescapable truth is that the world order is changing by virtue of the return of China to economic strength with many emerging nations flourishing in that Chinese wake. Both of the established super-powers are keen to divide and rule (hence The Donald’s nonsense about supporting Boris for PM and a Hard Brexit after suing the EU) because it would allow the current order to linger for longer, but it would only delay the inevitable.
More experienced diplomats across the planet are simply watching the US make a fool of itself, waiting to capitalise on their misadventures. New alliances will be forged with the next nations of influence – in the same way that the Commonwealth did when they were abandoned by Blighty in favour of the EU experiment – while the old guard struggle to come to terms with the new realities of economic life.
Thankfully, businesses have no interest in nationalism. They simply seek the best return for the capital of their owners from whatever circumstances they perceive, and that will continue to be good news for all investors. What seems most likely is an enduring alliance between Europe and Asia, leaving Americans to pay more for their duty-laden imports.
Not that Europe is Trump’s only target: he has the UN and NATO in his crossed-hairs too because they allow smaller countries to criticise American behaviour. Trump and his supporters don’t like that one little bit – no sirree.
On the other side of the frozen wasteland though, Comrade Vladimir is exercised too because the European experiment has stretched its tentacles as far as the Ukraine. It is not hard to understand why Putin might see this as a threat. The more that Trump broadsides the world with his disconnected tariffs then the greater the likelihood of the rest of the world looking to the east for a stable economic partner.
Future dominance in technology will be less likely to come from Silicon Valley than from Bangalore, Shenzhen or Bangkok. Few people drive Yankee metal nowadays but the Chinese seem certain to emulate and then trump the Japanese and Korean car manufacturers in the next twenty years. Neither Trump nor Putin will like it, but the global economy is changing in favour of something that is more exciting and dynamic; it may even be a jolly good thing too for those Nations seeking to cosy-up to others in a frantic search for replacement trading relationships……
Improved science and technology has been transformational in the mining sector, replacing inspired guesswork with near certainty in most cases. This is hardly surprising, because it simply confirms what has already happened and what is there but beyond the limits of our eyesight. Until Elon Musk or some acne-faced youth from the East cracks the space-time continuum and builds a Tardis though, the future is not ours to see and so financial markets remain beyond the immediate threat from automation.
3rd July 2018 - The Markets and Economy
Equity markets in general have a narrow mind-set that is
dominated by a herd mentality and an arrogance that can be staggering. It is
therefore important to understand this mind-set, to which the Brexit vote was
such a shock. Remaining in was in the interests of the City and so many there
believed that it was the only possible outcome of the referendum, which is why
the possibility of a vote to leave went into the ‘does not compute’ box.
Dissent is not welcome, which is why Neil Woodford and Jupiter Strategic Bond both get pilloried for daring to say that they think 180 degrees differently to everyone else at the moment: expecting a huge correction everywhere except in the UK domestic market. The City, Wall Street, Tokyo and Frankfurt all believe that Central Banks are doing a brilliant job today, with no-one saying that the Fed is leading us into oblivion again through unduly hasty Qualitative Tightening. This coterie is especially cosy: growth is all around, inflation is benign and everyone is as happy as can be. Markets were doing very nicely thank you, so don’t upset the apple cart.
It is this City mindset that must change if “sustainability” is ever to become a world-changing ethos rather than a soundbite. Something more complex, engaging and rewarding than money is needed to motivate the entire business leadership team and their stockbrokers. Plausible solutions on a postcard would be gratefully received and faithfully applied. Until then, there is no incentive to invest “for the world” when shareholders will approve a five-year earnings-based package to dole out wealth that even Croesus would have been embarrassed about. It could be a long wait.
The Fed continued its programme of Quantitative Tightening (by accepting the cash from maturing Treasury Bills to reduce national borrowings rather than buying replacement debt) and raised the cost of borrowing in America as expected in June. On the other side of the pond, the European Central Bank said that it will stop buying bonds at the end of this year. No surprises there, but liquidity is the essential requirement for the world economy and it is being removed. To use an engineering analogy, if there is no lubricant then the machinery is likely to seize-up, so this is a high-risk tightrope walk.
It began with $10bn per month in the last quarter of 2017 in America, then $20bn in Q1 of 2018, $30bn in Q2, $40bn in Q3 and from Q4 $50bn until all of the QE injected in the first place ($4,110bn) has been removed. That will take another ten years at this pace - a programme that simply cannot be sustained if there is any faltering in US growth.
By way of explanation it is worth noting that an abundance of liquidity in the US Dollar is associated with strong global growth, a weak US Dollar, higher prices for commodities and buoyant equity markets. The converse is equally commonplace.
Commentators hope that this gradual resumption of what passes for normal will not cause investment markets to go “cold turkey”: a view bolstered by the repatriation of more than $400bn through Trump’s amnesty for corporate overseas cash hoards and the financial strength of US banks. So things still look OK for America, but the growing strength of the US Dollar is making life very difficult for those countries who had to borrow in greenbacks because no-one trusts their domestic currency / economy. This increases the cost of natural resources and forces weaker economies into huge interest rate hikes to lure depositors into buying their currency rather than yet more US Dollars.
Whilst American banks can lend money if they want to, essentially stepping into the role that the Fed had been playing, this is not the case in mainland Europe, Japan or China. Banks in Italy and Spain have not made the progress with balance-sheet strengthening that the UK has seen and so their economies are very vulnerable, as witnessed in the rapid fall in the momentum of their investment markets.
Equity market volatility is picking up everywhere. Daily movements of 1% or more are becoming more common. Whether the latest explanation is based upon Trump’s trade wars, the MPC’s quest to raise interest rates or something else, the outcome is the same. Falls and rebounds are getting larger: this frequently means ‘something’ is about to happen.
Well; what a waste of a month. Everything was going swimmingly until The Donald decided that he could climb any mountain and ford any stream in pursuit of his dream. At the current rate of progress, his only friends might well appear to be his lawyers.
Corporate tax cuts and bribes / threats about repatriating overseas cash piles to the US can be claimed a BIG success, but not in the way that Captain Weetabix had hoped. Instead of stimulating corporate investment as a prelude to his plan for economic growth, the money fed straight back into the pockets of the senior managers of those businesses through share buy-backs that drove up the share price to qualify that same management for enormous “performance related pay” bonuses. Hopefully, a loose grasp of The Law of Unintended Consequences will come quickly to Mr Trump, because the Trade Wars he has embarked upon are likely to cause a more insular – and therefore less efficient – global economy. The targeted responses by the developed world are hitting those regions and local economies that voted DT in to the Oval Office and pushing up the cost of living in the US. With a Budget in a parlous state and mid-term elections on the horizon, Trump cannot afford to keep this nonsense up for very long.
6th February 2018 - The Markets and Economy
February has provided lots to
write about! The month began with US employment data confirming that jobs are
being created, the unemployment rate is very low and the resultant skills’
shortages are causing some wages to go up. Quelle surprise! It is fair
to say that this could not have been the trigger for the American slide.
3rd October 2017 - The Markets and Economy
The pound has been on a steady decline for several years and the decision to paddle our own economic canoe accelerated the process. Initially of the view that this was a temporary market over-reaction, the MPC decided to sit back and watch. Faced with the reality that international investors do not share their peachy view of the economic future for Britain he decided to go nuclear.
Reinstating the post-Brexit quarter point cut and raising bank rate to 0.5% really should be neither here nor there but it provided sufficient excitement for international investors to ignore the facts and gamble on the hope that his will be the first of many rises in quite quick succession. With the currency buoyed by that increased demand the FTSE naturally fell, for the identical reasons that investors had so recently profited through the weakness of Sterling.
Oscar Wilde famously wrote that ‘the only way to get rid of temptation is to yield to it' in what was supposed to be a waspish aside. The last ten years though has seen the world tying to cure its addiction to debt by yielding to the temptation of taking on even more, whether through QE or any other means. Rising interest rates must be worrying.
On the one hand, the BoE has to raise interest rates to give it some options other than QE to manage its affairs because there is virtually nowhere for them to go at the moment. Conversely, even a small rise in the interest rate cycle might tip this palpably fragile economy back into recession.
Closer study of the latest MPC Minutes revealed that they believe a lack of business confidence has led to underinvestment in capacity in the economy, with the result that even the low growth of late is rapidly taking up the available spare. This is a legitimate view but it is hard to see how raising interest rates will deal with both the expected inflation and perceived underinvestment. The economic brains on the MPC are amongst the best in the country but it does seem more likely that their voiced solution is only going to make everything worse. With any luck it will prove to be nothing but a bluff.
The Governor had hitherto been at pains to stress that the unwarranted weakness of Sterling was the sole cause of above target inflation. With the currency now at a post-Brexit high and approaching pre-referendum levels against the US dollar, that argument starts to run out of steam. A more probably bogeyman is less tangible and therefore much scarier: the output gap or, more accurately, the lack of one. Only political intervention from an astute Chancellor could address this and his Autumn Budget should have that topic as its focus. On a positive note, Hammond does not have the distraction suffered by the rest of the government: those all-consuming and angst-ridden but fruitless Brexit talks.
To the surprise of almost no-one Angela Merkel secured election for a fourth time and that political continuity is a very positive thing for our brave Brexiteers. Some common sense and deal making might now prevail, but it might prove a disaster from Germany's point of view that they did not find a replacement. Evidence from the UK suggests that the repetitive election of a Premier tends to be a bad thing for anyone, whether that was Thatcher, Blair or anyone else. The Founding Fathers deduced this more than 250 years ago and even the Russians adopted a constraining policy to prevent it - until Putin rewrote the rules.
Super Mario faces a diametrically opposite problem and it will come to a head this week at the meeting of the European Central Bank. In their case the temptation will be to hint that it is time to reduce the extent of QE and stop buying quite so many bonds. Last month's Eurozone Flash PMI data saw manufacturers' confidence hit a dizzying 56.7%, but the euro is floating ever-higher on the expectation of just that step. With the Euro currently buying just under $1.20 or £0.90, the most since early 2015, he will be damned either way.
The shabby behaviour of Ryanair and demise of Monarch Airlines in the budget flight world were nasty surprises but of little consequence for investors. Footage from Spain though brought another dimension entirely. What sort of democracy is it where you get a sound thrashing from the police for voting within the EU While stock markets have shrugged the episode off it is hard to see how the Catalan situation is going to end well.
October is the month when the Federal Reserve switches from Quantitative Easing to Quantitative Tightening. Despite this certainty, markets appear not to care one iota. The message seems to be that they do not believe that the Fed will see it through when the economy slows again and QE resumes. The recent years of easy, risk-free money is an unsustainable fantasy which essentially discourages risk-taking and so something has to change.
9th June 2017 - UK Election 2017
It has taken a mere twenty eight years for there to be a less predictable outcome than when Sutton United took on Coventry City FC on 7th January 1989 and they emerged victors 2:1. Nineteen months after winning the FA Cup, Coventry were still riding high in the Premiere League when the non-League amateurs beat them “at their own game”. Now that was embarrassing and in this context the Conservative victory is OK really.
Irrespective of the quality of the debate or campaigns the reality is that there is a hung Parliament in Britain and that shock brings more volatility to investment markets in the short term. Sterling always loses international value in such conditions and while that means your overseas holidays become more expensive, it is good for the FTSE 100 because more than three-quarters of FTSE 100 profits are made overseas. When those overseas profits get converted back into Sterling the dividend is higher and that pushes the share price up too.
Several positives have emerged from the result though:
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