Thursday, 19 July 2018

Time for scaling back

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SwissInvest strategist Anthony Peters says new black holes in Spain should not be a surprise

Anthony Peters, SwissInvest Strategist

I HAVE BEEN away from my desk now for the best part of 10 days, although I remain, thanks to the miracles of modern technology, more or less in touch with the goings-on in the markets. Whoever I communicate with seems to come back with the same line, namely that I couldn’t have chosen a better time not to be in the office.

Alas, they seem to say the same thing every time I absent myself from the front line of market action.

True, whenever I log onto my systems, be that by iPad or Blackberry, there is not a lot I see that fills me with thrill and confidence. The continued decline in sentiment with respect to the prospects for Spain weigh heavily but, as John Authers of the FT noted, this is not a “black swan” event in the making.

Black swans are, to once again grab that inimitable quote of Donald Rumsfeld, all about unknown unknowns. Spain is a known unknown and has been for some considerable time.

The simple issue is the question of where the bottom might be and when we can assume we’ve got there. The appearance of new black holes in its fiscal structure should not really come as a surprise and the continued decline of an economy built on the busted flush of residential property construction can only be a surprise to those with a significant collection of rose-tinted spectacles.

THIS DOES NOT forgive us, however, from buying into the political correctness which eurozone enthusiasm has demanded of us.

I have occasionally referred to the “bunker mentality” of the euro-enthusiasts when faced with critics. Personally, I believe the single currency to be a brilliant idea but sadly beset with congenital flaws.

We saw those flaws as far back as Maastricht when the principles of the euro were established. At the time, in 1992, I was working for a French bank and woe betide those who would not acknowledge uncritically that the best thing to effect the modern world was about to be implemented.

Spain is a known unknown and has been for some considerable time

Yes, a full 20 years ago we began asking how they planned to create a single currency without establishing fiscal union first and then, like now, the answer was always: “you English don’t understand the political will”.

Biting the bullet

BANKERS – SOME OF them at least – certainly made out like bandits in the past decade or so but the issues facing the West have roots going far further back than the explosion of derivative markets in the 1990s.

The Parisian response to the problems facing PSA Peugeot Citroen is a case in point. You have a maker of cars which is turning out more than the market is able to absorb. A Keynesian approach is to use public money to bridge temporary oscillations in demand. But in the same way that economists now acknowledge that Keynes offers no working response to the current resizing of the economy, so it must also be taken on board that if more Peugeots are coming off the production line than there is demand for, output simply needs to be scaled back.

IN THE AFTERMATH of this week’s rather dismal UK Q2 GDP numbers, I once again heard all the same nonsense about stimulus this and stimulus that which we have been listening to quarter by quarter for nearly five years now. Chancellor of the Exchequer George Osborne is no more King Canute than was King Canute himself. Quantitative easing might have put much of the government’s debt on the Bank of England’s balance sheet but it is still debt which will need to be repaid at some point in the future, whether QE has worked or not.

John Fitzgerald Kennedy will go down in history for his presidential inauguration speech in January 1961 in which he uttered the most significant of words: “ask not what your country can do for you but what you can do for your country”. Fifty-odd years on, we have clearly gone backward rather than forward and forms of political correctness do not permit us to admit this.

I have been banging a drum which has been trying to convey the message that we are not in an age of austerity but one of recalibration. It will not be painless and sadly the pain will be harder for some than for others – most of us are rather privileged in this context – but the more we postpone biting the bullet, the longer it will take future generations to pay off our debts and begin the rebuild. Greece or Spain are the canaries in the coal mine, not the coal mines themselves. And there, but for the grace of God, go we.

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