Blain’s Morning Porridge – St David’s Day – March 1st 2019
“Dydd Gwyl Dewi Hapus”
In the headlines this morning: https://morningporridge.com/stuff-im-watching
A moment of frostiness in the Blain household this morning after I failed to provide my very Welsh “She-Who-Is-Now-Mrs-Blain” with Daffodils for St David’s Day. Cup of tea sorted it and she smiled. Limited Porridge next week I’m afraid – the clouds gathering over the Alps promise a big dump of fresh powder. Have skis.. will travel..
Yesterday was an eye opener. Trump and Kim Jong Un walked out their love-fest. A billion reasons why, but what happens next? Watch that space.
Back in the real world – and for once I actually mean the real world, a proper functioning part of the UK economy! Yesterday, I was asked to give an economic outlook to a gathering of some 50 CFOs and Treasurers from a major UK services sector. It was fascinating – their main issue is uncertainty, so I pitched in terms of why markets are likely to remain plagued by a lack of reason. Funnily enough, Brexit isn’t their main threat. They are more concerned about UK politics.
Regular porridge readers will know my simple thesis:
The Global Financial Crisis of 2007-2017 was a pretty standard correction – triggered by unwise lending and improvident borrowing – but the subsequent political, regulatory and central bank responses have magnified the damage, are still shaking market fundamentals to the core, and have driven political populism, creating today’s unstable uncertainty.
It goes like this:
Central banks slumbered as short-term financing markets dried up in 2007. We saw the vivid illustrations such as the Run on Northern Rock. It triggered a major crisis of confidence in the banking system. Something had to give – leading to the collapse of Lehman and the bailout of banks across the globe. Politicians were furious – and looking stupid. Regulators had dropped the ball. Central Banks struggled to catch up.
The response was reactive. Politicians demanded banks were disciplined and never again too big to fail, while declaring war on borrowing. Regulators went into overdrive to reform the behaviours they believed caused the crisis – regulating new capital measurers which effectively reduced bank risk-taking, killing market liquidity and putting risk avoidance rather than risk management at the centre of finance. Central banks sought to stimulate economic activity through QE – designed to flood markets with cash to encourage bank lending and keep interest rates low. It was sloppy stew of conflicting measures.
The results have been… unhelpful:
- Governments adopted austerity measures to rein back borrowing and cut services, inflicting pain on the lowest classes in society, the rise of the low paid gig economy, and massive unemployment across Europe.
- Zero interest rates did not create new jobs, infrastructure or build new factories. Corporates levered the equity into debt, rewarding shareholders thru buybacks, and increased executive bonuses.
- Financial assets – bonds and stocks – became massively price distorted by QE (financial asset inflation).
- Markets have become more risky and less liquid, while risk has simply been transferred from the banking sector to the investment sector.
- The rich got richer, the poor got poorer as income inequality has widened.
The result was inevitable. The GFC of 2007/17 spawned political populism. You can blame it all on the Crisis. BREXIT! TRUMP! CORBYN! Italy, Spain, what’s going to happen in May’s European elections… etc. Trump was elected by the same voters who elected Obama – he won the vote because by breaking the moulds, he offered the electorate some hope of something better… Ya get what ya pay for!
Politics is probably the biggest driver of market vol – witness the effects of Trump’s trade posturing and Brexit. Witness the see-saw of Italian bond yields. The wild ride of populism is now over yet. The experience of the 20th century illustrates two routes – a slide towards political extremism fuelled by issues such as racism (or anti-immigration as it’s called today), or towards social redistribution. Whatever my US chums, fulminating about the risks of socialism say, Social Redistribution worked in the US in the 1930s as New Deal fiscal spending re-invigorated the US economy in time for it to become the “Arsenal of Democracy” 10-years later.
When my clients asked me to explain uncertainty – I explained it as a consequence of market crisis, unstable and distorted sentiment, and the obvious unfairness of income inequality and life opportunities triggering extreme political reactions. The management of the service sector industry I was presenting to are faced by a whole series of uncertainties in terms of government policy – which in the UK is buried beneath Brexit b*ll*x for now – demographics and the potential destabilisation threats of global trade lockdown.
What positives could I offer?
Plenty. It’s not too late to scale back on trade wars. It’s perfectly positive to re-address social inequality – if politicians will play ball. (In the UK I think we need a full scale clear out of politics.) Remember, it’s never as bad as it looks – markets will always over-estimate the downside. Remember, Trump has demonstrated a willingness the threaten, but not to actually throw any punches. Be positive that technological revolutions – including AI – will be job positive rather than negative! The big challenge to constrain uncertainty will be to reform politics…
Next week I will be working from the slopes – but expect email replies to a little delayed!
Back to the day job and get my desk tidy…