Of Our Elaborate Plans, The End

“Goodbye, Great Britain. It was nice knowing you.” – Wall Street Journal editorial, 1975. “[Gordon] Brown‟s Britain is like an episode of Life on Mars.” – George Osborne, UK Shadow Chancellor, at the time of the Northern Rock Crisis.

Does every Labour administration end in economic chaos ? Like Andy Beckett, who has just published „When the lights went out: Britain in the Seventies‟ (Faber & Faber), this writer was also born in 1969, and it certainly feels like Labour administrations have a greater propensity to disappoint public expectations than even the England football team. Writer and broadcaster Francis Wheen has a nice line in acerbic irony whilst reviewing Beckett‟s book for „Literary Review‟. Politics in the 1970s, claims Beckett, was “rawer, and more honest.”

“Thus speaks a man who spent the decade at primary school.”

Writing as someone who also spent the decade at primary school, 1970s politics made little impression on me by comparison with the music (by turns pungently offensive – Terry Jacks‟ “Seasons in the Sun” – or crunchily energizing – much of the oeuvre of Black Sabbath, Led Zeppelin or latterly The Sex Pistols), or by comparison with the cars, the decor and the fashions, which were just pungently offensive. Happily – to the aspirant middle classes at least – the great unravelling of the Callaghan government (applications for IMF loans; the dead going unburied) was followed by the capitalist shock troops of Margaret Thatcher. And recovery.

We are back with the economic chaos of the 1970s, but whoever replaces the tired, friendless Gordon Brown at the helm of state will have their work cut out. This is not a job that a sane person would relish. It‟s a little like The Onion‟s headline about the Obama victory:

“Black Man Given Nation‟s Worst Job.”

The underlying data are certainly disastrous, and no rally by more speculative stocks is going to disguise them. The 1.9% contraction in the UK economy in the first quarter of 2009 was the worst showing since the last dark days of Labour in 1979. Manufacturing shrank by 6.2% – perhaps just as well, then, that we barely make things any more. The Labour government has generously committed £1.2 trillion of other people‟s money (a.k.a. taxpayers) to the banking system – just a shade less than the entire UK GDP of £1.4 trillion. Inasmuch as ratings agencies are capable of saying anything, unconflicted, that the market doesn‟t already know, Standard & Poor‟s has downgraded the UK‟s credit outlook from “stable” to “negative” for the first time since it began assessing our finances in 1978. Public debt, at 53% of GDP, could reach 100% by 2013, it said, which would be “incompatible” with a „AAA‟ rating. Tax receipts are inevitably lower, while social benefits are inevitably higher. The unemployment rate reported in May amounted to 7.1%, a rise of nearly 2% on last year. One in six 18-24 year olds is already unemployed and they will soon be joined by a class of 2009 school and university leavers with employment prospects as shattered as Labour‟s fiscal credibility. The only good news in this is relative; the unemployment rate in the Euro zone is now at 9.2%, its highest for ten years. Spain‟s jobless rate, at some 18.1%, is particularly shocking – a visceral reminder of the real world impact of a housing bust. Unemployment is increasing in 25 of the 27 EU member states – only the economic powerhouses of Romania and Greece are bucking the trend. And of course property prices are continuing to fall – at a 16.2% annual rate in the UK according to Land Registry figures, or at a 17.7% rate if you prefer to use the Halifax House Price Index. And there are further signs that evidence of economic health and prospects for growth are heading inexorably eastwards. The US, Canada and Europe will generate less than half of global economic output this year, according to the Centre for Economics and Business Research, with wealth shifting towards China and other parts of Asia and the emerging economic world. The CEBR had previously forecast that the West would fall below 50% of the world economy by 2015. It now expects the output of western economies to be 45% of global output by as soon as 2012.

And yet. And yet.. Equity indices, even those of the West, are showing a robust return to apparent health. The FTSE 100 Index has rallied by 25% from its March lows, and the FTSE has been the laggard in Europe. The compressed spring of US equities has uncoiled even more strongly: the S&P 500 is now up by around 40% from its recent trough. And emerging markets, with admittedly stronger fundamentals, have exploded higher.

The stock markets, of course, are one thing, and the underlying economy is another. Equities and economies can stay uncorrelated for some time. And some of the recovery by risk assets is justified – whether by a lack of competition from deposit rates, or by the extraordinary valuations that second tier equities displayed as recently as the last few months. It is probably the popular perception that the banking system has retreated from the abyss that has triggered the bulk of the equity rally.

The problem with this perception is that while it may be technically correct, it overlooks the fact that in order to save the banking system, governments have imperilled their own debt markets. OECD figures indicate that gross issuance by member governments will reach almost $12 trillion this year. It amounted to $9 trillion two years ago. The US alone will account for almost $8 trillion on its own. Having enjoyed riding the government bond wave last year, we have liquidated all of our longer dated client holdings of government paper. The risk must surely now be that with a horde of national Treasuries clamouring to sell paper, revolted buyers will go on strike. Another throwback to the national malaise of the 1970s. Perhaps stagflation will also make an unwelcome return.

Financial life in 2009, as Ferris Bueller might have remarked, moves pretty fast. If you don‟t stop and look around once in a while, you could miss it. It may already be too late to warrant complete adoption of the equity recovery thesis – the best gains have gone to the brave, and the next exogenous shock, whatever its provenance, could easily derail the rally. But it is not all bad news. From a technical (that is, chartist) perspective, the equity bear market looks to be over. The chatter amongst market geeks has lately been around the apparent reversal of the Coppock indicator – a longstanding barometer for trend change in the equity markets. Regardless of near term market direction, the pendulum has swung decisively in favour of stocks and away from government bonds (at least, in anything other than the soundest, most creditworthy variety – and that universe is a good deal smaller than it once was). The pendulum also seems to be swinging away from the US dollar – so exposure to gold, oil and commodities in general as currency hedges makes a lot of sense.

So having survived a brutal assault across the landscape of traditional assets, the markets (or at least equity markets) are showing signs of an uneasy truce. But the crude message delivered by recuperating stock markets is being widely misinterpreted as economic recovery. It is not. Stock markets have merely been loudly exhaling relief. The hard tasks lie ahead. Property markets need to stabilize at lower levels. Unemployment rates will continue to rise. Personal consumption will continue to fall. And for the exhausted and frustrated citizenry of the UK, a tired and confused socialist administration needs to leave office so that the hard work of rebuilding the economy and the national finances can finally begin. The 1970s were bad enough the first time around. Having them repeated is becoming intolerable.


Originally published at The Price of Everything and reproduced here with the author’s permission.