Budget: Open Thread

What has Hunt achieved?  A bit of stealing Labour's thunder?  A bit of tinkering?  The last budget by a Tory chancellor for a decade?

Well I never pretended to understand macroeconomics.  Over to you.

ND

Bank of England - What inflation?

 So as we see record rises in inflation and to continue Nick Drew's theme some key elements are being ignored...

There is a much wider theme at work, there is a huge shortage of computer chips due to raw materials shortages. The big issue is the change in demand with cars now needing more chips as well as phones and most things electrical - the supply chain for the near doubling of demand is going to take a couple of years to fix. Plus China, as ever, interferes where it can with raw materials and supplies to Taiwan which is the home of much of the world's chip production (recent military manoeuvres too on the China side of the Taiwan strait are fund too....).

So used cars, used computers etc are all seeing huge bump in price, as are say new cars which are limited in number. 

Against this background, the Bank of England issue another £1.5 billion of quantitative easing this week to try to get the UK economy booming again.  Err....excuse me? Wage inflation is at over 5% this year, supply of goods is restricted. There are only two outcomes.

Stagflation - inflation but little economic growth or just plain old inflation with higher wages and prices in a spiral. 

The genie is out of the bottle, last time this happened, it was 20 years to get it back in. Plenty of time over the summer for us to reflect on how this will impact the Economy, markets and Government. 

UK shrinks 2.6% in November - apparently great news

Many economists, like Andrew Sentance for example, are declaring it a relative success that the UK economy did not shrink more during the 2nd Lockdown. 

Determined to see a silver lining to every cloud, they were expecting far worse and think this sets the UK up for a big re-bound in the near future. 

For me, some of the logic is poor, the second lockdown was not like the first, shops and schools were open and people were fed up with the restrictions when virus infections 'felt' low. If you fast forward to today, it is a lot more like the first lockdown. 

Also, with the lockdown here set to last until vaccine escape (if achievable) we have a whole Q1 of negative growth to deal with. 

The UK economy is going to be a lot smaller by the time the pandemic is over / under control. Yes there will be a big period of catch up with 10% growth for a couple of quarters, but lots of the damage is permanent along with a much higher debt to GDP ratio.

A few positives though, the share market and Sterling are already trading very low as compared to historical norms - there maybe upside in both for a while yet.

To me the big unknown for the year remains inflation - can QE keep inflation in its box forever? Maybe 2021 is when we find out. 

The 'new normal' economy and the unknowable future

After a lifetime of being interested in and studying macroeconomics and also participating in the coal-face end of Capitalism, I have been unprepared for the loss of insight that I have suffered through the covid pandemic. 

Long time readers will know, I could see the credit crunch coming, before that I knew 9/11 would wreck parts of the economy, I could see QE becoming the chosen too to manage the economy in the West in to 2010's. Whilst seeing the austerity recovery spilling over into more recessions and perhaps underestimating the euro's hardiness, overall I feel I have had good feel for macro conditions for a long time (just don't get me to stock pick, if only I were talented at that...).

Covid world is just mental though:

- Stock prices down less in percentage terms and GDP (utterly insane and unpredictable)

- Government spending slightly higher than during 2008, but no impact on the currency

- Huge increase in unemployment but a huge boost to house prices (in my area, where I am dealing with agents currently who are true sons and daughters of satan, at least 5% in the last 3 months)

- Also huge unemployment but the highest ever savings rate since records began 

- Tourism and trade hugely down, but deflation setting into retail purchase

- Some parts of the economy smashed by the Virus; travel and leisure, retail, but then others like digital and logistics hugely boosted. 

None of the above makes any sense in general economic terms. Asset prices maybe I can see rising as savings increase and need deploying, however the huge unemployment should undermine house prices and rents - but the opposite is happening. 

The Government is busy shellacking the public finance with a second 100-year black swan event in the space of 12 years. Yet relatively the Government remains popular and the pound stable as the same rate as the past years post-Brexit. 

So, with all the above, I have lost all sense of where this is going economically. The world is changing at hyper-speed and 2021 will see a big denouement - but I honestly can't say whether this will be a bounce back to a new level of stability or a 2009 style crisis. The issue with the markets is they are driven by people and investors too and I sense nobody knows what to do or where things are going. This would suggest a huge shakeout when people and markets figure it out eventually - I just can't make out how it will be resolved yet. 

Is reduced labour supply a bad thing?

I have read a lot of late, some hidden, some more obvious like this, about the sharp drop of immigrants applying for job in the last year or so.


Up to 100,000 people fewer have come to the UK over the past year. This is undoubtedly having an effect at the very bottom of the work pyramid, but also higher up. At the bottom, it means agricultural workers, shop assitants and amazon packers are all able to see a small upturn in the wages they can demand.


Meanwhile, even as the BBC said, applications are a mere 20 per position rather than 25. To me this does not show much of a crisis. I have also been more aware of late of the situation in the USA. There, unemployment is at 3% and there is a starting to be a real war for talent rather than the high falutin' discussions about such a thing that are present in the Harvard Business Review.


Higher wages, means higher costs of production which could lead to higher prices overall and inflation. How a little bit of inflation is bad when the entire private and public economy is in a huge debt position escapes me a little - but you do have to be careful with the inflation genie.


For me the main issue will be how time plays out on the situation. Take the housing market, a big constraint is lack of supply, but the construction industry is at full tilt and is hurting the most from lack of supply and higher labour costs. So a labour shortage here will also reduce the supply of houses in the short and medium term. But reducing 100,000 people a year coming to the UK also lowers demand for housing in the long-term. It could balance out over time, but it could also mean a price squeeze on housing and rents in the short-term and balance in the longer term. Impossible really to predict.


Still, whoever voted Brexit for higher wages already has their reward.

Beware the Ides of October?

It is an easy post to write every year, that stock market crashes happen in September and October. The major ones nearly always do, but the evidence is more mixed in years when there is not a major crash. The 3 largest declines in  recent times though are 1987, 2001 and 2008 - all those happened in September or October as did the Wall Street crash.

Since the beginning of September 2014, the FTSE and other markets have been hit pretty hard, as can be seen on the chart above. After a peak at very nearly 7000 in early September the FTSE is off to no only a year low, but touching the low for last year too. In fact you have to go back to the tail end of the Euro Crisis to find the FTSE performing so badly.

There are, as ever, many causes for this, one of the main ones is the FTSE still being resource stock heavy so the fall in Oil and Mineral prices - generally good news for the world in terms of inflation and prices, turns into bad news for the FTSE.

However, it also shows that finally the geopolitical effects of ISIS, Ebola and Russia are having an effect on the global sentiment. The latter is more or less forgotten, but in reality the sanctions are causing major dislocations in the oil markets - which is what the West aimed for, but still, the world is not harmonious.

Worse for the pension investors and others is that none of the above 3 issues is going to go away. Nor are the falls in resources prices, although they may level off - albeit another 10% down or so from here.

We'll just have to hope the Santa rally kicks in from next month as per usual!
 

FTSE nears 1999 highs, but for how long?

Of all the times to do this, at the beginning of September, on anniversary of the Wall Street Crash no less.

As most people know, September is traditionally when we have big stock market corrections, macro conditions in the world at the moment are the most perilous politically in my lifetime. Economically, China is slowing, the Eurozone really feeling the effect of sanctions whilst UK and USA run along on QE funded property fantasies.

Whilst it seems unlikely there should be a huge crash now, a correction is certain in September and October - will the FTSE finish the year at all time highs - it should on any kind of historically analysis (on an inflation basis we are 30% off real highs anyway).

Somehow I doubt it though, I can see the year ending for the market at around 6700-6800 after an Xmas recovery from a very rocky patch later this year.

Next year I foresee being very bearish.

*And this is without a Yes vote in the Scottish referendum which would be around 5% off the FTSE in the short term I would imagine.