A HARD RAIN

WHEN WILL MARKETS RESPOND?

Everything is in the end politics; it just takes a long route on occasion and rather like a frog in water, markets take time to realize that the pleasant feeling of warmth is a prelude to being boiled alive. We are well into the boiling phase, but how long before it all registers and an escape is finally attempted?

The purpose of politics seems ultimately to take an individual’s wealth and the fruits of their labour and give it firstly to the friends and allies of the confiscatory state and then use the remainder to buy votes. That bit does not ever really change, whoever is in charge.

So how does that truism impact markets on each side of the pond? Well, traditionally the UK state has been far greedier and done far more harm to the economy, than the US state has, which is why both GDP per capita is far worse than the US, and the FTSE has failed to rise, even in nominal terms, in two decades. Add back inflation and investing in UK PLC has been a long-term wealth destroyer. It enjoys that characteristic with the rest of Europe. As we have long said, lift the lid on any sensible UK pension fund, and you will find a lot of Apples inside.

In general, and this too is a platitude, well run dictatorships, especially those with access to world markets, do far better still, hence the rise of China. Of course, “well run” and “dictatorship” seldom sit well together, but nor do “populist” and “well run”. In general markets are not greatly in favour of either populists or dictators, feeling the rule of law is not something either care that much about. But by implication neither are voters now too fussed about laws either.

LONDON OR WALL STREET FOR THE REST OF 21? – THE BIGGER PICTURE

So, the investing question is whether the US, despite being increasingly under the control of the populist wing of the Democratic Party, is a better bet than the UK? Or do we have the capacity to process a bigger picture?


Source : IMF – link to page

And of course, we need to ask whether China is better than both. So far, the US is finding Biden to be no worse than the populist wing of the Republican Party, and the UK is feeling rather baffled, given Boris constantly talks right but acts left.

Put like that our current sentiment, that Biden will cause more damage than Boris, is at the least contentious. So, we should look for the good in Boris and the bad in Biden, to help justify that call. Not an easy balance, but what makes it easier is the relative valuations. In particular of tech, where the US has moved ahead massively, so a lot of the question can almost be reduced to asking if Tesla is worth it? Or if it is, what is the motivating force to make it still more overpriced?

Boris seems to be trapped by the doctors and his inability to fathom numbers, into driving us into a permanent state of fear and welfare dependency, which will keep the UK steadily in long term decline. If he can break free of that populist vice, we might have a slim chance.

The omens are mixed, banning travel to Portugal (again) looks like the familiar science trap, but of course might be a reaction to the EU also banning wider travel from the UK to the EU just before that. Given our relations with the EU, that oddly seems more likely (if childish).

By contrast the US is now operating near normally, a stark contrast, as we remain in de facto lockdown, tied up in fiddly, unpredictable, illogical restrictions.

CULTURE WARS AS INDICATORS OF INVESTOR SENTIMENT

Both the Queen’s Speech setting out the legislative agenda for the year and the visit of Viktor Orban, the Hungarian premier, may have been light on substance (they were), but boy were they heavy with Tory symbolism, coming hard on the heels of the local election wins.

Much of that proposed legislation was to placate the grass roots, I seriously doubt laws on de-platforming (of both the living and the stone hewn) will make much difference, but the Conservative base feels it is high time the left got some mild resistance, in cultural matters. There has been very little of that for the last two decades.

I suppose the brutal bashing of Bashir is in the same category, although from my own experience a BBC journalist who did not lie and cheat their way to a non-existent story, would have been the truer rarity. Although in that they differ little from the rest of their breed, but defenestrations at the National Gallery and revolt at the National Trust, have been a long time coming and indicate a new degree of solidity and confidence. This is long overdue since Blair assiduously stuffed placemen into those organisations. Neither Cameron nor May did much about them, having their focus on higher things, it transpires.

Does it matter? Well not really, to markets, but it is a counter to the reckless spending, and the chilling clarity with which Boris famously expressed his view on business during Brexit, so is a straw in the wind. Maybe other things will change.

DEFUND THE DOLLAR?

What of Biden, well so far the US markets have taken slow comfort from the slender political majority, he holds, but the view is creeping in, that he really is going for broke, he is happy to unleash inflation, almost keen to do so, that letting Wall Street blow itself up, in the meme stock nonsense, and suppressing interest rates (which is vital if you are borrowing so much) and as a result trashing the dollar, is all fine, all part of the plan. Note the recent measures by China to prevent their currency appreciating too fast and by Putin (of all people) complaining at dollar fragility. Others may not attack it yet, but it increasingly looks like US policy.

Much of that perhaps matters little to Wall Street immediately; inflation makes you own real assets, bonds are now utter rubbish and so far, very little of US individual wealth is invested abroad. So, Wall Street almost inevitably drives itself up and that’s a hard tiger to dismount.

But it maybe matters more to us Europeans, who need to both believe that US overvaluations will persist and critically that the dollar will not weaken further.

Graph from this source.

So, in the end politics do matter, not now, not today, but how these contrasting styles evolve over the rest of the year, will be very important to how currencies and markets respond.

Getting it right for the second half involves a big call, this year, as it did last.

Flat markets are not always still markets.        

Charles Gillams

Monogram Capital Management Ltd     

06.06.21