YELLOW BRICK ROAD
The recent elections in the UK probably result in a mildly stronger position for Boris in his Merkel persona, his Christian Democrat (CDU) disguise, so the fiscally left wing, culturally right-wing hybrid, that seems popular; but other than disasters averted, the poll achieves little more. For all the noise about the Hartlepool by-election, we are talking very small numbers, with a 40% turnout in a seat already slightly subscale due to depopulation and industrial decline. It has no resulting impact on the governing majority. Indeed, but for the Brexit Party, it would have been Tory already, so it really says nothing about the right-wing vote. The Tory Party is still miles from representing a majority view, but as long as the left is divided and the right united, that will persist.
Nor do I see much of interest in the council elections: a good result for the Tories in building on an already strong performance last time, which shifts the middle third of councils around in the quagmires of NOC or No Overall Control. This morass, like the bilges on a boat, washes left or right depending on the political tide. But with staff (and councillors) aware that only a few seats can shift them in or out of the NOC swamp, its impact is not great, particularly where they have elections three years out of four. These permanently transient councils tend to be run more for themselves than anything tedious like ideology or providing decent local services.
Neither Mayors nor Police Commissioners have any major power. Sadiq Khan, freshly back in office, faces a central government happy to call in his local plan (on housing) and impose central government representatives on his transport authority, thereby strapping one hand behind his back, in both his areas of real influence. Meanwhile London policing remains ultimately under Home Office control, so like the other areas is just for political grandstanding, not real service delivery. Policing in London also seems an enduring disaster: where it is needed, it is not wanted, where it is wanted, it is not needed.
Reading the Party Runes
So, what of Kier Starmer? Well, it also tells us little about his Cameron-lite policy of avoiding controversy, avoiding spending on fights he can neither win nor cares about, and ensuring he controls everything in the party. That policy is seemingly intact. The Corbyn wing will continue to spout for the microphones on demand, but matter little. The key issue is whether the big funders will want to have a go at winning the 2024 election. I think they will, but should they decide it too is lost, Starmer has a problem. If the partyâs money bags decide he canât win, he wonât.
For Boris it is at the least an endorsement of his recent COVID strategy, and that higher taxation to pay for the incredible spending splurge, has yet to impinge on votersâ minds. So, it permits him to carry on, but perhaps recover more of a strategic view, after the recent wallpaper storms? Does it make exiting COVID lockdowns any easier? Well, it should, but hard to tell if it will. Does it validate the extreme turn green? Not really, the Greens still did better in terms of new seats won, than either the Labour or Lib Dems, and are still advancing (from a very low base).
I am not sure if the Lib Dems expected much, they have Keirâs problem of irrelevance tied to being pro-European, when the EU is behaving more oddly than ever. So roughly holding their ground was fine. Indeed, they polled way ahead (17%) of national election ratings (which are more like 7%), but not over the magic 20% required to hit much power. Â Â Â
Those Strange US Job Numbers
Which brings us to the real shock from last week, the weird US jobs numbers on Friday. We have long said that how and if labour markets clear after the great lockdown experiment, is the vital economic issue. The problem never was the banks (so last crisis) nor the ability to borrow to sling money down the giant hole dug by the virus. Both are easy. But once you have smashed the economic system, does it regrow, like a lizardâs tail or simply start to rot and decay?
Many of us would have avoided the deep wound in the first place, but now the experiment has been started it must conclude. So, what did happen to slash monthly US job creation from expectations of a million to just a quarter of that? The instant reaction that it meant inflation has gone and so bonds were fine, was as instant reactions often are, garbage.
The bull or âBidenâ case is that as they have the right medicine, it just needs a bigger dose, or to take it for longer. Seems credible; labour force stats are notoriously volatile, some of the job losses came from manufacturing, where supply shortages are biting, but thatâs transient. Some seem to indicate a mismatch of jobs to vacancies, hopefully also transitory.
Encouragingly, a spike in wage inflation and hourly rates indicated plenty of demand for workers.
Yet, slamming the brakes on, shutting the economy down and paying millions of people not to work, might have brutally destroyed the delicate economic system. Thousands of small firms, where the bulk of employment is created, have just gone. The complex prior system of sales, working capital, scheduling, delivering, inventory, payment has been eliminated. Sure, the people still exist, so do the premises, but the invisible mass, the self-directing hive, is lost: no map, no honey, no queen.
Bigger firms are also planning to work differently, perhaps needing less labour.
Once you stop working and get paid to be idle, and indeed have limited ways to spend your money, it feels easier to stay in bed, study Python, redecorate the house, or whatever, but not get back on the treadmill. Indeed, in a lot of cases, once you step off, stepping back on is hard and also downright counter intuitive. Sure, your old boss wants you back, but do you want the old boss back? Worth a look round at least? As the title song puts it, âthereâs plenty like me to be foundâ.
Well, we still go with the bull case.
However, the bear one is not trivial. If you canât get labour markets to clear, welfare will be embedded, as will high unemployment, deficits and unrest. It remains the most critical feature, worldwide of the recovery, and several questions about it remain as well, including the need to keep new bank lending elevated, cheap, available. Expanding needs cash, contracting creates it.
The oddity to us then remains, that if the liquidity barrage really does work, why should it work better in the US than elsewhere?
And if it works the same for all, donât US markets then look rather expensive?
Charles Gillams
Monogram Capital Management Ltd
Rising Tides
First posted 21st March 2021
Interesting times.
Bond markets are out of the cage, off the deck, ready to rumble.
This week feels like another one of those big calls that investors have faced over the last year, and in many ways much less obvious. Forget the chatter, it is the bond markets that are now back in charge. While upsetting Californian law makers and the SEC is now small fry for Musk and Tesla, the bond markets will just roll over him. They are the gorilla in the room, for all those frothy tech valuations.
Bond holders are just dumping their holdings as fast as they can; like tectonic plates they move slow, but like any earthquake, you get the sudden shift, then the aftershocks, and then it will all settle down. But the landscape will have changed.
What has woken them up? Well inflation and the conviction that the colossal election bribes handed out by Joe Biden will cause inflation to go over 3% and perhaps, as important, possibly stay there. It is the stay there or persistency risk, we are looking at. We can all see a short-term inflation spike, from commodities and logistics snarl ups.
Now, everyone (including us) have been focused on excess capacity and deflationary forces. Indeed, as we keep being reminded, over 10 million Americans are out of work; but for some reason the nasty bond markets have decided giving those citizens jobs is not the priority.
So, the naĂŻve equation Powell (at the Fed, who I keep reminding readers, is not an economist by training) is working on, is if you stuff circa 20% of US GDP in one end, all of course borrowed, out pops nationwide low paid jobs, focused on the low skilled workforce, by the ten million or so. Now thatâs the bit which is no longer credible.
It seems more likely all that stuffing is instead creeping into asset price inflation, with virtual currencies attracting a lot of speculative flows and likewise hot stocks, be it SPACS or GameStop. None of these areas provide much of the required nationwide low skilled employment.
A Detailed Look at the UK Employment Statistics
So, what is happening? Well, a more detailed look at the labour market in the UK (not the US), provides some clues. My source is the Office for National Statistics, February Labour Market report. Not a bad date, as the year-on-year figures are clean; from the March one onwards, we will have the COVID shocks in the annual comparator.
The employment crisis is hitting the young hardest, under 25 employment is dire, of the job losses year on year, 58% were in those below 25. While we have both lower employment (so people exiting the labour market) and also higher unemployment (so not working, but available). Noting that furlough for these purposes remains classified as employed, which is a little moot.
But here is the paradox, wage inflation is also very apparent, hitting 4.7%, which is recorded as 3.8% above actual inflation, so a pretty high real rate. Now thatâs not causing deflation at all.
While the furlough impact, doubled to December (from 5% to 10%) of the workforce, and no doubt has now gone up again, with the arts, entertainment and recreation industries (sic) and food service industries, each having over half their workforces on furlough.
So, while the claimant level has been stabilized quite well, we see relatively lower levels of actual employment, but with the secure workforce getting good pay rises, well over inflation, and those in less secure positions, or who are younger or in the wrong sector, hit hard.
Should Preserving Capacity be the Real Concern?
The assumption then is that the labour market is clearing, indeed faces inflation, for those in work, but for those who are not, there is a big presumption that the leisure sectors will bounce back hard and take up the slack. You wonder if just more money across the board, is the right way to tackle this specific problem. Oddly if this was in banking or steel, a targeted approach aimed at preserving capacity would now follow. Time to rethink that? Although if everyone gets a âgiftâ, then fewer people will complain they missed out, given how politically charged both steel and banks became, you can see why; but it is poor economic policy.
This two-speed position is also apparent in other Government statistics, tax gathering is going well, the annual self-assessment returns were higher than a year ago, and total tax returns only marginally lower due to reduced VAT income from the leisure sector. The strain on Government finances is on the other side, excessive spending, not reduced tax. On tax receipts, inflation via fiscal drag, is already working its magic.
What the Bond Market is Afraid of?
So, the bond market fear is that more of the stimulus will go to the âwrongâ places, than the ârightâ places, creating inflation in areas that are already running hot. While Central Banks have apparently decided they no longer think about money, just the jobs market. Which is also odd, because they have so little control over it.
Indeed, the heavy political pressure in the US to sharply raise the minimum wage, must work in the opposite way, as must the surge in automation and home working. It is noticeable that when Trump tried to turbocharge labour markets with a tax cut, we had a pre-emptive rate rise from the Federal Reserve. Clearly this time round Janet Yellen has told Powell that if he tries that stunt again, he is out.
So, What do Investors do?
We did not expect this rise in rates so soon, but nor do we see it automatically stopping at this level, as Powell has clearly said he wonât intervene more to hold rates down, nor will he acquiesce by raising overnight rates.
Broadly rising rates, with rising inflation is good for equities, but the end of free money is less good for the out and out speculators, who can gamble on trivial things, without a great deal of care.
It is these periods of cross currents, short sharp movements, that are toughest to navigate. While the first order effects will be in falling bond prices and the badly overvalued tech markets globally deflating; so, all of that stuff with inflated multiples or no real sales. But the second order impact will be on equity markets overall and on currencies.
At some point if you can get a nice return in bonds, even better a real return for holding them, there will be a lot of money heading that way. It is a finely judged switchback, taken at speed, if they raise rates and then find inflation (and employment) actually starts to fall, the Fed can again wreak havoc by going too fast.
While elsewhere boring may in the end be best, especially in well run financials. There is an old market saying that a rising tide lifts all boats, but perhaps not the electric ones this time?
Our own Performance
Our own VT Global Total Return Fund has now had three distinct patches of outperformance, in the last year, as against behemoths in the Absolute Return space. All, as it happens, since Monogram joined the team, as investment advisors, although that really is co-incidence.
One such good patch would be fine for us. It is of course partly good timing (for whatever reason), but it may also be that small, focused funds like ours, can simply turn that much faster and make the needed adjustments more quickly.
Which then generates patches of outperformance, three in a row is starting to make a real difference compared to just âbuying IBMâ.
While we are now running unusually high cash levels, we know markets donât stay this kind for long.
Charles Gillams
Monogram Capital Management Ltd