The UK elections are just two days away and, irrespective of the outcome, the six-week campaigning period has been like none before.
Beginning as the Brexit election, it swung to becoming a debate on social welfare and now and rather inevitably in its final days it has been taken over by the thorny issue of security. Yet behind all this are fundamental matters that markets should be focusing on but which, for being too complicated, tend to get pushed onto the back burner.
Shortly after the Brexit referendum last June – who else can remember Merrill Lynch banning its analysts and strategists from referring to it as Brexit? – when markets were all over the place and Bank of England governor Mark Carney was wandering up and down Cheapside wearing a sandwich board on which was written “The End is Nigh”, his predecessor Mervyn King was interviewed on the radio.
OVERBOARD
He was asked what he made of all the panic over the fall in the pound, the prospect of higher inflation and the developing fall in the value of residential property. His answer was disarmingly simple and surely not what the interviewer had expected. He replied, and I paraphrase: “I don’t know what all the fuss is about; this is what we, somewhat unsuccessfully, spent years at the Bank of England trying to engineer.”
The same sentiment might have occurred to observers of yesterday’s release of new car registrations for May which, having fallen by 19.8% year-on-year in April, continued to look soft at -8.5%. This has now been followed up by the British Retail Consortium’s overnight release of year-on-year store sales for May, which fell by 0.4% as opposed to analysts’ forecasts for a drop of 0.2%. Is this good new or bad? When held up against household indebtedness figures, a fall in the British obsession of buying stuff they don’t need with money they don’t have should be celebrated and not bemoaned.
A few weeks ago I hosted an exhibition by a number of artists at my house in the context of Oxfordshire ArtWeeks. For most of them, the ArtWeeks show is their biggest opportunity to sell their work outside of the pre-Christmas period. ArtWeeks is important to them but this year trade was markedly down and although they all sold bits here and there, it was far from the usual bonanza. We talked a lot about the lack of buyers and concluded that whereas in the past people bought something for the feel-good effect, that sense of happiness is now generated by getting home and proudly being able to declare that today they have spent no money.
When Carney warned there may be trouble ahead British consumers dug into the Irving Berlin songbook and continued “…but while there’s music and moonlight and music and love and romance, Let’s face the music and dance.”
STAND BY ME
UK household debt now stands at 142% of disposable income. This compares with 103% in the US, often thought of as the credit card capital of the world. At the height of the global financial crisis this figure, for the UK, stood at 160% but is 142% better than 160%? Probably not; at the time the figure peaked, the base rate was at 5% so the measurable disposable proportion of after-tax and debt servicing cost income to debt itself should have been falling and not rising. The objective of loose monetary policy had surely been to cut the cost of debt to help households spend less on interest and more on capital repayment. In the event the whole low interest rate malarkey has led to nothing other than an even greater spending spree and a re-inflated debt bubble but one that is even more sensitive to tighter monetary policy than it had ever been in the past.
I had the pleasure yesterday of lunching at the Great Hall of the Middle Temple with a barrister who kept on asking me when I thought the Bank of England might begin to tighten and when I thought the stock market – bubble or no bubble – was about to turn. I replied that if I knew the answer to the second one, I’d be long up to the ying-yangs in long-dated puts and that, with respect to the former, it might be quite some time away.
I did add, however, that I sensed that the BoE had missed earlier opportunities to tighten and that now it might be too late. Just like Goethe’s (and Disney’s) Sorcerer’s Apprentice, central banks around the globe have called up the spirits of ZIRP and NIRP – think real and not nominal interest rates – and QE, and although they talk the talk of future normalisation of monetary policy, it’s hard to imagine that they know the magic spell to allow them to walk the walk.
GREMLINS
The consumption-led, debt-fuelled economy will present whoever wins the election with an adult-sized conundrum with or without the 21 remaining months until the UK membership of the EU expires. In the event, without is not an option unless the remaining members conjure up a membership-lite package to offer the UK, which would force the government’s hand to actually re-run the referendum. The chances of that happening are close to zero so best not discuss them.
European players return today after the long Pentecost weekend to face the ECB meeting on Thursday and the ongoing negotiations on how to bail out Greece again. The IMF, the prime proponent of debt relief, is now also working hard to find a compromise. If debt relief is finally given, Hans and François SixPack should be asking themselves where the hundreds of billions of euros of their tax money has gone after it was pumped into the Hellenic Republic’s coffers to avoid just such a writedown in obligations.
ONE CRAZY SUMMER
Four weeks today is July 4 which marks the proper beginning of the summer season. There’s a lot of work to do in this period and issuance activity in both government and credit bond markets will remain brisk. The bid remains good, especially in anything with a bit of yield. I’d love to be able to say that I can see the end of the blind buying coming on but, as I told my barrister friend, I can’t….yet. The central banks remain trussed and stuffed and locked up in a cell built of the unintended consequences of excessively loose monetary policy.