Prepare to turn left

Prepare to turn left

14 Nov 2017

I have been on the town recently. Two weeks ago I went to see Reasons to be Cheerful, a brilliant play based around the music of Ian Dury. It is performed by the Graeae theatre company that featured in the 2012 Paralympics opening ceremony. I saw it when it was produced the first time in 2010 and eagerly returned for more.

Ian Dury was to say the least an anti-establishment figure and by today’s standards not politically correct. I’m not sure whether he would have appreciated the fact that a new song was tacked on to the end of the show. “If it can’t be right then it must be wrong” has rather puerile lyrics that I don’t think Ian himself would have written (“Keep the funding flowing from a loving cup”). As the song was played and sung, pictures of various politicians with devil horns sprouting from their heads were flashed onto a screen: Mrs Thatch, natch, David Cameron and, oh look, Tony Blair. But I will let someone else summarise:

“This new anti austerity song from Graeae and the Blockheads captures the current mood of the country. Its lyrics bring people together in a moment of shared experience to challenge the status quo.”

Jeremy Corbyn, Leader of the Labour Party.

There I was watching a play set in 1979 and suddenly the “mood of the country” in 2017 was sprung on me. How did that happen, I wondered.

Last week I revisited 1979 for the second time by paying a 2079 price to see Squeeze at the Royal Albert Hall. And it happened again. In between Cool for Cats, Up the Junction and Labelled with Love, the band naturally played songs from their new album. These included Rough Ride which laments the lack of affordable housing in London and A&E which really challenges the status quo by calling for more funding for the NHS.

Perhaps I should get out more but I was struck by the way in which the anti austerity message was offered on both occasions with such confidence, as if it were not a politically contentious message but almost a fact.

Perhaps I live in a London bubble but it feels as if it has almost become a fact. An opinion shared so widely that it is treated as if it is simply true. Despite the fact that opinions are never simply true and despite the fact that national debt was 76% of GDP when the coalition government introduced so-called austerity in 2010 and is now 89%.

Back in March 2016 (before the EU referendum, if you can remember back that far) I wrote a typically prescient blog titled “BREXIT special. Does politics affect asset prices?” This was partly inspired by the scare campaign that came to be known as Project Fear. In that piece I pointed out that totalitarians are bad for assert prices. Given the centenary of the Bolshevik revolution and the Labour party’s renewed appetite for nationalisation, this seems to have an unexpected relevance today. But here is something else that I wrote:

Democratically elected politicians who respect the law and remember that they can be turned out of office seem to offer the best chance for asset prices. Politicians who meddle and attempt social outcomes by tinkering with financial incentives are dangerous, even when they act from the noblest intentions.

There is no doubt that the present government is aware that it can be turned out of office. Half the ministers seem to be rotated every week. So that’s all good. But I am concerned that this emerging anti-austerity consensus, driven as it is by the desire for perceived “fair” outcomes, could get messy. Meddling is in the air. An outbreak of doing the wrong thing cannot be far off.

It is true that “post-truth, post-Trump”, describing politics is newly challenging and consequently confusing. There seems to be this phenomenon known as “populism” which defies the traditional labels of left and right. Enemies of populist outcomes define them according to what the disapprovers are predisposed to dislike.

Independence parties in Scotland and Catalonia are generally left wing and their opponents are conservatives who dislike change (or anarchy) but in the UK as a whole independence became a right wing cause (because the EU was seen as increasingly statist and illiberal). Consequently the referendum losers depict Brexiteers as racists. This is confusing because the highly valued EU “freedom of movement” overwhelming benefits people with pale skin. When I walk past the Home Office immigration reporting centre by London Bridge there are always queues of darker skinned non-EU citizens in the street.


                                                                                                         Source: Google Streetview

It is all too easy to characterise supporters of Jeremy Corbyn’s Labour party as neo-Marxist. It is true that some of them are, just as some of the 17 million people who voted to leave the EU are racist. But the rise of Corbynism should not be characterised by what we dislike about it. Most people who will vote Labour while he is the leader probably do not favour the confiscation of private property, exchange controls or the Venezuelan model as the alternative to capitalism.

On the other hand, it is highly probable that they have bought into the anti-austerity narrative. And I feel that all political parties are quietly buying into it too. Seven years of “austerity” headlines resulting in little but more rising debt and persistently rolling deficit reduction targets have understandably sapped the enthusiasm for budget discipline.

Were the Conservative government strong it could try some traditional Conservative policies such as income tax cuts. Unfortunately with the wind in today’s direction, tax cuts will always be denounced as being for “the rich” who wouldn’t be paying tax in the first place if they weren’t earning plenty. So I doubt if Chancellor Hammond will be returning money directly to the people, other than those employed by the government itself, in next week’s budget.

So what does a weak Conservative government do in these circumstances? The answer follows two left wing agendas. First, it interferes in private sector businesses to combat perceived unfairness, but with little regard for the unintended but arguably predictable consequences. This has already happened in the case of private landlords and energy companies. The curious strategy appears to consist of little more than trying to ensure that the provision of housing and energy are as unprofitable as possible.

Perhaps there are sound ethical reasons for this but one sure consequence is that investment is discouraged. Why commit capital to an area where the government has a record of applying penalties, apparently motivated by the wish to punish rather than the need to generate tax revenue? Discouraging investment is not a practice normally associated with Conservatives. So perhaps the second left wing policy can compensate – direct investment by the government itself.

Corbynites appear to hate Tony Blair and it was New Labour that pioneered the debasement of the word “invest” to include almost any kind of public spending. I think that the left would now like to reclaim the word and to promote the idea that the government would make a better job of running productive assets than the private sector. And the Conservatives, incredibly, now seem quite sympathetic.

It remains to be seen how hands-on the present government is prepared to become. Brexit hysteria has propagated the idea that international trade has to be sanctioned and monitored by governments. Proponents of free trade are routinely referred to as fanatics. Our entire trading future with Europe is said to depend on the goodwill of a few unelected EU officials who are widely described as reasonable men (naturally) whose patience is wearing thin.

My suspicion is that the current government’s new mantra is “borrow to interfere”. The policy implications are as left as you can imagine, short of the neo-Marxist stuff.

From an investor’s point of view, this will continue to play out on a daily basis in the foreign exchange markets. Though if sterling is to fall again, it will have to be seen as less attractive than the Trump dollar and the ECB euro, neither of which is a trivial challenge.

I dealt with the possible impending panic for the housing market in my last post. Attention may turn to the gilts market where UK government debt is bought and sold. As we know, this has been stupendously rigged by mass purchase of government bonds via the Bank of England’s QE programme. Unless it extends the scheme, the Bank has exhausted its buying capacity.

A government committed to “borrow to interfere”, determined to keep out Corbyn by embracing his anti-austerity message, would not, in normal times, be regarded as bond investor friendly. With 10 year gilt yields currently at 1.31% there is “nothing to see here”. But should gilt yields start looking up towards the rate of inflation (3%) (merely to yield zero in real terms), there would be something that would look like panic. As I said in my last post, asset class values are always relative to each other. Tumbling house prices and tumbling bonds would be tumbling dice.

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