I think I was supposed to spend the weekend mulling over the volatility which beset markets last week while trying to frame a view on how, tactically, to approach the new week. In the event, sport and politics kept me busy. England’s rugby team wrestled the Australians to the ground to take a historic series win Down Under and Porsche carried off the honours at Le Mans as the leading Toyota so sadly broke down just four minutes short of the full race time. Talk of snatching defeat from the jaws of victory!
At home it looks as though the Vote Leave camp is about to suffer the same fate as Toyota.
Rome, meanwhile, has seen the election of Virginia Raggi to the post of mayor. The press generally seems to be obsessed that Raggi is an attractive 37-year-old female lawyer and their headlines are “Rome gets first woman mayor”. What they seem to focus on less is that she represents the “5 Star” movement of comedian Bepo Grillo, an anti-establishment party that was only founded seven years ago which is neither of the right nor of the left.
The binary political set-up which has dominated European politics for the past 70 years is falling to bits but the establishment, to the right as well as to the left, is, to coin a phrase, fiddling while Rome is burning. The Brexit debate in the UK has also transcended party lines although the Jeremysaurus has steadfastly refused to share a platform with Dave “You may now call me David again” Cameron. While across Europe, Eurosceptic parties such as AfD, the Front Nationale and so on are gaining in support, the mainstream is trying to behave as though nothing has changed.
The key observation has to be that, although the general populus appears fearful and uncertain about the pace of integration, between members of the euro integration has to be accelerated. The requirements of the EU as a whole and the eurozone as a part are in many cases not at all the same. The fact that the majority of EU members are also members of the eurozone somewhat clouds that issue and it becomes hard for outsiders, of which the UK population is a major part, to distinguish between the rhetoric affecting the one as opposed to the other, and often, even for round-the-clock observers such as myself, it is difficult to work out who is saying what about which.
Somewhat perchance, I had staying with me this weekend my oldest friend. We sat next to each other on our first day at school at the tender age of four-and-a-half and have been friends for the best part of 58 years. Bill is a London-based, freelance architect and is a prime example of the Britain’s educated urban left-wing middle-class and a fervent supporter of the Remain camp.
The juxtaposition of watching and listening to Bill at dinner with an equally textbook example of an upper middle-class, rural, conservative Brexiteer was interesting. But the depth of the philosophical chasm between the two was sobering. The two species rarely meet, but after three hours of very grown up and civilized political lobbing and smashing it became clear that, whatever the outcome of the poll on Thursday, the issue will not have been resolved and the debate will continue for a generation.
So we head off into week 25 with the UK referendum on Thursday and the Spanish general elections on Sunday, the latter of which is also turning into a match-up between the establishment and the anti-establishment.
After 70 years of post-war politics dominated by debt-funded fiscal giveaways, the political establishment finds itself with a people that believes itself to be entitled to what it has been receiving and the acknowledgement by the old parties that this cannot continue willy-nilly – it’s what we now know as “austerity” – is beginning to bring them down.
Our economies might not be in bad shape – 3% global growth really isn’t to be sneezed at – but we are watching the political consensus breaking down and that brings huge risks with it. The key to the Brexit campaign is that the two can be separated; the central tenet of the Remain camp is that they can’t.
That said, the US economy is still causing confusion. It might well be entering a cyclical slowdown and it is now that it becomes clear that the Fed’s failure to tighten monetary policy earlier leaves the arsenal severely depleted. Both monetary and fiscal stimulus were cast out but never reeled back in again. In many respects the fear of making any kind of a mistake put policymakers into a self-imposed straitjacket and now the lack of past action might be coming home to roost. That, my friends, is the price of total transparency.
So this is a good week to stay out of the markets and to do a spot of thinking. I suspect most of the action going into Thursday will be on the Remain side so it will be lifting some of the sterling hedges, selling bonds and gold and buying equities. It is very much the risk trade although I am sceptical that the pay-off, should it come good, will justify the risk taken. Best stick to watching the sport where the outcome is clearer.