It would be fatuous not to agree that there is something very troubling going on.
There was once something called the “peace dividend” which, based on the end of the Cold War, drove markets higher on expectations of better times ahead with less money going into armaments and more into consumption.
The peace dividend thing worked but bearing that in mind, with international security now under pressure from all manner of challenges, how can it be that markets continue to drive higher? President Trump’s authority seems to be disintegrating in front of our eyes. China, already burdened with critical amounts of debt, is trying to expand further on nothing other than even more borrowed money; Russia has, for all intents and purposes, again become a military dictatorship even though its leader doesn’t wear a uniform; Europe is smoking a joint rolled in Macroptimism and dreaming that all is well again in the garden; both Latin America and Africa risk sinking back into the swamp; and Japan, well, it’s Japan. Oh, and if we close our eyes tightly enough, we can’t see the nuclear puppetry in North Korea.
Yet markets behave as though nothing was wrong and that all the promises of a bright and prosperous future for all were founded on fact and that a recovery in household earnings and hence consumption were just around the corner.
MAY POLL
But perhaps the strangest of all phenomena - other maybe than the recent performance of the VIX index - is the manner in which the UK stock market has been behaving. The Tory victory is, let’s face it, a foregone conclusion. The size of that victory, however, is not. Britain has a strange first-past-the-post system which, to proponents of proportional representation, looks deeply undemocratic. When dealing with a method of simple majority, some very strange outcomes can ensue as it is the way in which the vote splits, constituency by constituency, which will determine the final result.
If France did not have its second round run-off and had it used the first round results for the final tally, then Emmanuel Macron would have become president with only 24% of the vote. In the UK that would be absolutely possible.The system is devised to resolve a two party punch-up and although there has for the best part of a century been a third, smaller party in the mix, the current shift in loyalties away from the old us/them of left and right risks making the simple majority count look very strange.
The rise of the SNP in Scotland is undeniable but what the party is doing with 54 out of a possible 59 Scottish seats in Westminster when it only attracted 50% of the popular vote boggles even the most open of minds, not least as the formerly dominant Labour Party won only one seat on 24.3% of the vote, the same outcome as that achieved by the Conservatives with 14.9% and the Liberals with 7.5%. For the coming elections on June 8, the Tories are slated to wipe the floor with Labour but that does not necessarily mean that the final seat distribution will be all that different. The big question, alas, will be whether Nicola Sturgeon, leader of the SNP but not an MP in London, will still be able to claim a mandate for a second Scottish independence referendum if the party drops below 50% or whether she will be have been comprehensively out-braked by Mrs May.
UKIP, all but wiped out in recent local council elections, faces the same fate on June 8. Although, under the same arcane rules which gave the SNP almost all the seats with 1.4m votes, UKIP won just one seat with 3.9m citizens choosing to back one of their candidates. Conventional wisdom has it that, irrespective of whether UKIP voters came from the left or the right, they will be backing Theresa May’s Conservatives and not the rudderless rabble that the once mighty Labour Party has become.
May could end up with a majority of anything between 40 and 100 MPs, the final tally of which will most likely depend on how the centre-left splits between Labour and the staunchly pro-EU but otherwise rather bland and unimaginative Liberal Democrats.
And yet, with all this uncertainty, the FTSE has now powered past 7,500 points to close at a new all-time high of 7,522.03 after a gain of 67.66 or 0.91% on the day. Eleven months on and pretty much all of the losses taken on equities immediately after the referendum have been recouped and even the pound, the main victim of the Brexit vote, has regained a modicum of composure
But can this be right?
If it is, then it is telling us that the key investment firms that set the scene for all the small guys to follow don’t believe the hard-core rhetoric that some of the EU officials are pouring out; they believe that an accommodative settlement not only needs to be found but that it will. I wonder whether Jean-Claude Juncker, the muppet-in-chief, before his recent pronouncement that the English language is losing relevance within the EU, had checked with the Scandinavians, the Central Europeans and the Greeks and whether he asked just how good their French might be.
COURT RULES
Meanwhile I also read that a ruling has been handed down by the European Court which, though in a different context, strengthens the use of a qualified majority over unanimity in EU matters. This, applied to the Brexit negotiations, would hugely simplify the process and improve the chances of a settlement within the stipulated two-year period of which 7% has already elapsed.
The UK aside, Europe in general and the EU in particular are basking in the afterglow of the Macron election. In France the parliamentary elections are also ahead and although the presidential election pitches first against second, at Assembleé Nationale level, the second round is contested by any candidate who garners more than 20% in the first running. That could in this edition quite possible see three or even four candidates run in the second round and that, as in the case of the UK, could lead to some freak results.
It seems that investors either know something I don’t or that they are happily oblivious to some of the risks that are still embedded in the political process
We are, if you pardon me, at war. We are not at war with guns and bombs but what we are experiencing at the moment might well prove to be the beginning of World War III and it is happening in the ether. World War III, or what will one day might be known as the First Global Virtual War. Did the malware attack last weekend mark the equivalent of the shelling of Fort Sumpter, the violation of Belgian neutrality or the unprovoked invasion of Poland? And all the while risk assets are going from strength to strength.
Many of my peers are perplexed. So am I. But at the end of the day, with dividends in the 3.5% area, with cash paying nothing other than negative real returns and with bonds offering about the same, how should income hungry investors act?
You tell me!