Hard Landings?

A plane landing on a german autobahn - with the words 'hard landings?' in hand writing

Local elections tell us remarkably little about national ones. We reflect on those. Meanwhile US equity markets are in turmoil, and some big numbers are changing very fast – some further musings.

Do English local elections count ?

We start with the UK, or rather English local elections, the devolved governments (oddly) have a rather greater read through from local to national. But overall, nothing in the results changed our view that Boris will probably survive, unless the Tory party unites around an alternative, which is pretty near impossible: it has too many splits.

Nor has our long-standing opinion that all Keir needs to do is keep his head down and he will be the next Prime Minister changed. Although if Labour starts to believe it is a shoo in, and can pick who it likes as leader, it will also self-destruct. Which is just about the only chance the Liberal Democrats have of being relevant.

Just how politically marginal local elections are, is shown by the surge of support for the Greens, apparently the very voters the weird Tory infatuation with hard left environmental policies were meant to entice.

Indeed, a whole set of Tory policies designed to raise energy prices, have gone down like a lead balloon.

What voters want and politicians need to deliver

You do wonder if they will ever get round to realising voters really want just three things, a roof over their heads, bread on the table and a job. Deliver those and do so competently, and politics is easy.

The roof bit is a shambles; it turns out policies designed to enrich cabinet members and senior civil servants with buy to let portfolios, are not so good for anyone else. I suspect the job bit will soon turn turtle, and the bread bit is going off the rails too. See graph below:

Here is a link to the relevant page on Statista

We notice that the big Western democracies still seem hell bent on raising energy prices, which is universally unpopular.

UK local elections – a brief look at opposition policies

So, the other thing markets in the UK (and sterling) will be doing is wonder about Starmer policies, more critically does he have the “bottom” to either appoint radical reformers, or have them lined up in key seats? Let’s say he does. He will still continue the headlong wealth destruction of punitive taxation and the assault on business investment. He will over-regulate (that’s his background). The sole variable therefore feels like any plausible capacity to reform.

He is not afraid of hard choices, or of thinking long, both good points and incidentally he is not Blairite enough to be America’s poodle and get involved in picking pointless foreign wars. Although he will likely dismember the United Kingdom, either of political necessity or by accident. We really can’t see much support for sterling in that package.

Central Banks – are they signalling a hard landing?

Inflation is spiking into double figures, and Central Banks are explaining

1) it is really not their fault

2) they are only responsible for “core inflation” (so without the important stuff)

3) but anyway they must still raise rates to offset the malign effects of other state policies.

It is looking truly absurd.

Not that interest rates are off the floor yet, although the US bond market seems convinced rates over 3% are now nailed on, while oddly the UK Gilt-edged market seems unconvinced of exactly the same thing. This of course is helping an on-going collapse in Sterling.

Meanwhile the possibility of ending negative rates in Europe has caused great excitement and the Euro to strengthen, at least against sterling.  The divergence is related to a belief that the Fed which raised three months after the Bank of England is now more hawkish, a belief which seems more about wishful thinking than anything the Fed has actually done so far.

We are less sure on how high interest rates go. All three Central Banks seem to be hoping something will turn up, and inflation will ease. This is a view we share, but we really doubt the trivial rate rises so far, are the “something”.

Market turmoil – how far will they fall?

This leads on to the current market turmoil: With the US feeling very exposed, partly because it went up so high (relative to other markets), it has further to fall. Nor do we see the valuations on quoted US growth stocks as offering good value at these levels. They had become so detached from reality the gap is just too big, and the repeated attempts to buy the dips, just disguises a long-term trend down. The FTSE100 over five years is down, and the NASDAQ climbed over 100% in the same time. A 25% further US fall is at the least plausible.

Other markets will then get sucked down, and in Europe and Japan they are hard hit by their reliance on imported energy (the US is an energy exporter). While for now, their rates are not moving either, the resulting devaluation makes the value gap to US growth stocks, feel even greater. Buying overvalued stock in an overvalued currency, is not always great.

What do our models say about the markets?

Our MonograM momentum models suggest a turning point for both Europe (including within that bundle the UK) and Japan is close. It is only a model, we remind ourselves, and is quite able to give a false signal. It also sees this as true in dollar terms, not sterling. So, there is plenty of noise and last week had all the elements we dislike, a month end, plus a shortened market week, plus Central Bank meetings, created a baffling miasma of signals.

However, on current policies we anticipate a crash; the only issue now is how hard the landing is.