Income inequality – how will a consumption crash and recession impact markets?

Blain’s Morning Porridge – Nov 28th: Income inequality – how will a consumption crash and recession impact markets?

“Eat the rich might not just be a statement on a placard in the near future….”

This morning: How will free-market economies resolve crashing discretionary spending, wage inflation and looming recession when income inequality is so blindingly obvious to electorates? Something has to change.

Before I go off on a rather depressing rant on the UK and income inequality this morning, I thought I’d start with renewable energy. My colleagues and I are looking for investors on new solar energy projects across Europe – where we’ve got a new approach to monitoring secured private lending. If we aren’t already speaking to you, and you’re a potential buyer of senior private debt backed by solar farms, then drop me an email to billblain@morningporridge.com.

Back in the markets it all feels a little too comfortable. I can’t decide if markets are Risk on or Risk off? Stocks ended last week up, while bond yields are down – all on the basis the pace of interest rate rises are likely to ease as inflation moderates early next year. An increasing number of analysts are writing inflation is no longer the main the threat – it’s global recession which will hit Europe hard, but the US less so.  More than a few firms are calling for a bond rally in 2023 on the back of central banks easing rates to ease recessionary pressures.

This week’s big news will be the US Jobs report on Friday – which is likely to confirm the ongoing strength of the US economy and its apparent resilience to the looming threat of recession. Job creation is apparently still strong in areas like building, manufacturing and health care – but the latest round of layoffs in Big Tech are scary. That’s about the only area of the global economy where wage growth has matched market rises over the past decade.

Hold that thought for a moment. Global wages lagged markets through the 20-teens by a significant margin. If we are going to create hi-wage, hi-growth economies – as politicians blithely inform us – then what’s the motivation when the highly skilled professionals in tech and data processing now find themselves on the scrap pile?

I’ve got to admit, my outlook for 2023 is not rosy. I’m tending towards a view where inflation will remain entrenched across society driven by ineffective politics and spiralling wage demands – with angry electorates demanding change. These calls will get increasingly strident as we see a deep recession impact harder than expected. It won’t all be bad – I’m expecting a bid of creative destruction across economies to free up new bursts of entrepreneurial magic – especially in climate change mitigation and renewables!

I’m an optimistic pessimist.

As I read through screeds of economic commentary over the weekend on the macro outlook growth, inflation, central bank action, interest rates, stocks, bonds, company earnings, or the fallout from Disney, and future pathways for renewable power, I was struck by our apparent inability to see the wood for the trees.

We seem unable to focus on the real issue at the core of economics – what is the point if things are getting worse instead of better?

The fundamentals of the Occidental, free-market, capitalist economic miracle shouldn’t be how strongly we expect companies to perform, or which stocks will do best, or where the next trillion dollar market comes from, but how well are people doing…

The big issues should not be how much money Elon Musk and the other trillionaires have, or which one will buy Manchester United with their chump change, but why is society so unequal and unfair? It hurts to read headlines about hospital waiting times, child poverty, empty foodbanks, rising crime, and pensioners left helpless by failing care services – how has it gone wrong so quickly?

Anyone who dares to write about failing governments, or how income inequality is a significant driver of economic performance and outcomes – in the same way as entrepreneurship, invention and innovation – is immediately dismissed as a closet communist. And that even thinking about the merits of socialism relative to capitalism is a sign of insanity. I’m thinking it – our economic prosperity depends on getting it right.

We all know the reality is societies that are fundamentally unfair don’t work. Corrupt kleptocracies fail and fall. The libertarians among the readership will be screaming how its capitalism that’s enabled workers standard of living to steadily rise over the decades. Agreed – but it’s a far from perfect system – and maybe we should be thinking about how to fix it – before it fixes us!

I was reading a comment this morning on the China riots about how workers on 18 hour shifts building tech toys for the decadent west are unlikely to accept ongoing Covid Repression, or return to their work camps unless there are major changes to their terms and conditions and the ending of the surveillance state. They are hailed as freedom fighters, courageous and brave for taking on the might of the Evil Empire.

Yet, on Sunday morning I listened to a UK politician describe windfall taxes on energy firms as an assault on free-markets – and the reason why firms are pulling out the UK. He then effectively called striking rail workers and nurses traitors for daring to demand higher wages in the face of rising energy prices and economic misery facing the economy.

One of the other guests jumped in to remind the obnoxious little sh*te of just how much the energy and rail companies have been paying in dividends, and how the Tories have been in power for the last 12 years and should be held accountable for the current economic crisis. This should not be a repeat of the 1970s where militant unions took down weak government – but that is how it will be spun. Here in the UK angry and broke workers are demanding restitution for the past 12 years of political and economic incompetence, and a fair share of the economic pie.

The problem is – now the crisis is upon us, the workers, (as usual) find the pie has already been consumed.

On Friday morning I was on the radio and found myself furious as the boss of a UK electrical goods consumer told the audience how their black Friday sales were in response to customer demand, and they expected to be busy providing credit to customers buying the latest white goods (particularly air-fryers.. the latest must-have that will set you back £400 to save a couple of pennies on electric bills). The exchange sums up the broken economy – addicted to debt from top to bottom.

There is no easy answer for the UK. An economy doesn’t function unless there is discretionary income driving consumption. Vast swathes of services and manufacturing – we’re already seeing it in the second hand car market – are going to grind to a halt unless incomes rise. To do so would mean embedded wage-inflation and higher interest rates crushing our debt-riddled society..

Time for something radical?

Some folk think its Brexit that’s crushed the UK – I am tending to that perspective myself as a lost and wasted opportunity. More likely our decline is yet another consequence of QE distortion. As soon as company bosses worked out that zero interest rates meant they could pay themselves squintillions by levering up their firms to buy-back equity, thus boosting their stock and bonuses, and that it wasn’t worth investing in new plant or improving productivity, then the basis of capitalism shifted. The effect was to widen income inequality and diminish the role of labour in setting the agenda.

A key issue is what kind of employment is being created? The hi-wage, hi-growth, hi-skills economy ministers blather on about does not exist in an economy of zero investment in productivity growth, where low wages, zero-hours, and gig-economy wage slavery has become the norm. That’s not the fault of workers, but management.

The bottom line is the UK has seen chronic underinvestment and flatline incomes for the last decade, while income inequality gapped wider. Bosses pay themselves massive bonuses and award themselves double digit pay rises year on year. And now we are shocked workers want their payslips to match inflation, or that they can’t afford homes in an economy where average household earnings are £36k, yet the average 4 bed home now costs £350,000.

Can someone please explain to me how this is supposed to work?

Five Things To Read This Morning

BBerg               The Treasury Market’s Big Recession Trade is Gathering Momentum

FT                     Seven days that could unravel the global oil market

FT                     Chinese stocks drop after zero-Covid protests add to uncertainty

WSJ                  Stocks are on the Rise, but Earnings Could Drag them Down Again

Guardian          UK to allow new onshore wind

Out of time, and back to the day job…

Bill Blain

Strategist, and Head of Alternative Assets, Shard Capital