To start on a personal note, I can still remember the day in 1979 my mother got herself into a flux over a meat pie. My father had told her that we were having an important guest for lunch and we needed to make a good impression. Since we never had guests for lunch and didn’t even have lunch, which was dinner in those days, this caused her some consternation. She rushed to bake a large steak and kidney pie in time for the meal. My dad was selling his small business so he could retire and was hopeful that the young, thrusting entrepreneur coming to our house would buy it. Well, the pie must have been OK because the sale went through. Some time later we found out that the business hadn’t flourished due to a lack of interest from its new owner, who had changed tack and become a travel agent. Forty years later the same John Hays bought Thomas Cook – it’s a small world isn’t it?
Around the world, during the first half of 2019 the US economy grew by 2.5%, while at the same time the labour market continued to create new jobs with unemployment remaining exceptionally low at 3.7%. However, while consumer spending rose at a strong pace, business investment and exports weakened. Consumers have been gaining at the expense of businesses, as usually happens in the later stages of an economic cycle. US companies appear to have passed peak profitability for this cycle. While profits have still been rising, margins have fallen and the strength of the dollar has reduced overseas earnings. US business is not in bad shape but has undoubtedly been derailed by the global slowdown and the trade war with China.
One of the problems we see in Europe and the UK is that much of the QE (quantitative easing, or money printing) that has taken place since 2008 has been a failure, largely because it was poorly designed. If it had been designed to acquire securities from non-banks rather than banks this would have raised the rate of growth of money much more quickly and led to faster economic growth. Instead, especially with the recent appointment of the hopeless Christine Lagarde as head of the European Central Bank, the eurozone is likely to remain in its self-induced weak state, with low inflation, low business investment and negative interest rates. We note that Mark Carney, the outgoing Governor of the Bank of England, has taken a new job as United Nations climate envoy on a salary of $1 per annum – good to see his real worth has finally been realised.
The next Big Thing in policymaking across the world will involve politicians making plans to reduce inequality. Policies like Medicare for All in America, even more quantitative easing, Modern Monetary Theory (almost unlimited government spending on the NHS, roads, schools, new hospitals, bridges, railways, Northern Powerhouse and so on), together with the eventual adoption of a Universal Basic Income (where all citizens receive a wage regardless of their employment status), all seek to address the democratic need for greater income and wealth equality. That the slowdown in growth is taking place at the same time as risks from climate change are emerging is also forcing politicians to confront the intergenerational inequity associated with a warming planet.
This will inevitably lead to higher levels of national debt. France’s private sector debt is more than twice the level of its economy (GDP). Add in the rest of its debt and this rises to three times GDP. The 2008 crisis was triggered through debt default and many safe countries’ debt levels now stand even higher. The Netherlands is now at 333% of GDP versus 232% then, Singapore 283% versus 115% then, Ireland 302% versus 250% then, Canada 302% versus 222% then and the US 250% versus 168% then.
In China mianzi, the concept of honour and morality, has been influencing how people behave for thousands of years. Now it seems to be controlling online shopping, as maintaining social image and status is of the utmost importance in China. The more someone spends the more money they appear to have and money is closely linked to social status. Rather than having goods delivered to their homes, consumers in China gain mianzi by having online purchases delivered to their offices so colleagues can see. This has led to household debt soaring over the past few years, which has implications for China’s economy as a whole as China is today in $35 trillion of public and private debt according to Bloomberg. If this trend continues there will be trouble ahead.
In the run up to the General Election there was an enormous amount of navel gazing about all the different tribes that make up the United Kingdom and how they are set against each other – north vs south, old vs young, black vs white, rich vs poor, Remainers vs Leavers, working class vs middle class, climate emergencers vs couldn’t care lessers– and how difficult it is to tell who belongs to which group these days. In reality it is quite simple to tell who voted Leave and who wanted to Remain; all you have to do is stand in any Marks and Spencer café and see how the customers order their lattes. If they pronounce it ‘latty’ the chances are they’re a Leaver and those asking: “Can I get two lahtays?” are undoubtedly Remainers. It’s all relative of course, but too great a divide between rich and poor is neither sustainable nor healthy in any civilised society.
The centre ground of politics is rapidly vanishing, politics everywhere is lurching rightwards and leftwards towards nationalism from both directions. The new breed of politicians has little interest in anchoring policies on the opinions of experts. In 2015 Jeremy Corbyn was elected leader of the Labour Party and we said in the next client bulletin that he could easily become a future Prime Minister. The response from clients was bigger than anything before or since, with the general feeling that we must have taken leave of our senses. As Bob Monkhouse once said: “When I told my parents that I wanted to be a comedian they laughed. Well, they’re not laughing now.” Whilst it is true that the prospect of Mr Corbyn occupying Number 10 has now vanished, we wish that politicians of all colours realised there is a difference between resolving income inequality and wealth inequality. It is the latter which is far more important.
In the year ahead, we see a continued thawing out in the trade tensions between the US and China. Certainly the first six months of 2020 look OK for markets, as interest rates are kept low by the US Federal Reserve and the Trump administration seeks to boost the US economy by any and all means possible. We see American growth being at least satisfactory – this is important as the US remains the economic engine of the world – with growth in the rest of the world slowing down slightly in a synchronised fashion as a normal part of the end of a long positive business cycle. The Democrats don’t seem to have learned anything from our recent demographic earthquake in Sedgefield and elsewhere and continue to plough ahead with impeachment proceedings that have no chance of going anywhere.
At home we expect inflation to fall short of predictions once again in 2020, leading to a year of even lower interest rates, periodic bouts of volatility and decent investment returns. Looking on the bright side, the outlook for equities has improved from our most recent forecast in October, partly due to more favourable current company valuations, as profits growth has outpaced share price returns since early 2018. We expect that central banks will continue printing money like it was going out of fashion, leading to more attractive valuations for financial assets.
Get invested and stay invested is our advice.
Apropos of nothing, we believe that the Americans probably never wanted to buy the NHS, but we think they could help to improve it. In recent years the NHS has spent £15 billion out of its total annual budget of £130 billion on goods and services provided by the private sector, things like computers, office equipment, vehicles, food and so on. If we could get these items cheaper surely that would be good news wherever it comes from? The NHS has accumulated a treasure trove of patient data which has almost been given away to private firms in order to develop data-driven technologies. Unfortunately, the public sector has not succeeded in recouping a fair share of the financial value of this data which could be worth several billions. Added to that about 45% of GPs now work part-time in highly paid jobs with little responsibility and no home visits. Surely it's time to reorganise the whole thing and not just pump more and more money into an obsolete system? Get some top consultants and GPs together and give them the authority they need to make some fundamental changes is our advice.
To solve the greatest problem of our times, climate change, the solution is not to have our bins emptied once every three or four weeks, nor is it for endless programmes on television drearily telling us we’re all doomed. As David Bellamy once said, instead of spending millions on global conferences, why not just use the money to buy some forests and preserve them? No, the solution is quite simple. The real problem is that there are too many human beings. All it would take is for the leaders of all the major world religions to get together and stand on the Pope’s balcony next week to issue a joint statement declaring that contraception is a good idea. No fuss, no cost and almost immediately beneficial.
Finally, we have taken the liberty of not sending cards this year and instead have made a donation to a local food bank. We hope you approve.
With very best wishes and season’s greetings from all at Scholes & Brown.