Racing conditions: unchanged from last week, ie still parched, with little sign of value. Risk of US interest rates rising too-fast, too-soon, trumps Greece and China slowdown as key worry.
This week an unusually angry note: Greece – the oldest joke in the world, housing wealth- UK gvt lies about babies are made, and just when is that market correction going to come?
Greece – the oldest joke in the world.
- Early reports are that a majority have voted ‘No’ in the referendum, presumably believing that this will help them stay in the euro on better terms than if they had voted ‘Yes’. We will see.
- My heart is sinking as I write this. How did these decent people got themselves here? Perhaps a too-quick readiness to see conspiracy theories and what they call the ‘foreign finger’, in what are otherwise perfectly good proposals by its creditors. Let me explain by way of a joke…
- A man walks into a barber’s shop. The barber says, ‘how would you like your hair cut?’ The man replies, ‘in silence!’ That, according a man on BBC Radio 4 on Thursday, is the oldest joke in the world and it goes back to Athens at around 450BC. And that’s why I pay my licence fee. But what if the barber had some fresh tips on way of keeping hair free of lice? Or had news of a planned attack from Sparta? The joke would be on the client.
- Greece, 2465 years later, is demanding a debt haircut, claiming it will never be able to repay the EUR 320bn that it owes. But it is equally deaf to advice that would help address the root cause of its misfortune, which is poor governance. It is poor governance that led to the build-up of debt.
- True, Greece’s euro zone creditors are making some daft demands, such as insisting –against IMF advice- on full debt repayment, which at 185% of GDP will never happen. By way of comparison, the UK debt to GDP ratio is around 85%. Demanding a 4% budget surplus when the economy is re-entering recession is also poor judgement.
- But what seems to get Syriza’s goat just as much are structural reforms that can only be good for Greece, in that they will improve governance. Better governance will deliver an economy that can escape the burden of debt through stronger economic growth. These reforms include recommendations on how tax collecting could be improved, making political decision more transparent, ensuring labour markets work better to reduce unemployment, and breaking up cartels in product markets and professional services which keep prices high.
- Syriza mouths acceptance of these reforms but baulks at their implementation –eg, the privatisation of the port of Piraeus- and tells the vested interests who protest that they are victims of malign foreign interference. Sadly, the joke is on Greece.
- Grexit may not matter so much anyway, to investors. Thanks to measures taken by the ECB and the Eurogroup of finance ministers, contagion into other European capital markets has been limited so far. For instance, Spanish 10yr gvt paper traded at 140bps higher than the equivalent German bund at the end of last week, by comparison the spread was more than 600bps during the last Greek debt crisis in 2012.
Housing wealth – the UK gvt lies about how babies are made
- On Wednesday the UK government will announce a new budget. One would imagine that this will accelerate the process of achieving a balanced budget, now that Chancellor George Osborne doesn’t have to compromise with coalition partners. Indeed £12m cuts to welfare have been mooted. But he is a very political Chancellor -echoes of Gordon Brown here- and he can’t himself. So an unjustified exemption from inheritance tax of primary residences worth under £1m also looks likely.
- This it to court favour with home owners. But this ‘give away’ (to quote the Daily Mail on Saturday) will be paid for with borrowed money. This undermines Osborne’s supposed goal of shrinking the £90bn a year deficit and begs the question as to his commitment to that goal.
- The justification for making £1m of housing wealth free of inheritance tax is cant. According to Prime Minister David Cameron, the value of our homes represent years of hard-earned saving as we pay off the mortgage. Balderdash! This is like being lied to about how babies are made.
- Mortgage repayments will represent a fraction of the worth of any home being disposed of in South East England, and most of the rest of Britain. Government policy has done the rest. Quantitative easing and ultra-low interest rates from the Bank of England over the last seven years, together with long standing restrictive planning laws, population growth and welfare policies such as housing benefit, are what have increased the value of British homes. These reflect government policies, not our own prudence. Why should this unearned wealth be considered sacrosanct?
- If the government wants to go easy on austerity, a less-bad option would be to limit the proposed welfare spending cuts. That money has a higher propensity to be spent and re-spent in the economy, and so boosting growth and future tax revenues, than the windfalls arising from inheritance bequests. These are likely to be used to pay off mortgage debt (ie, money is retired) or saved (ie, money is horded).
Just when is that market correction going to come?
- I’ve no crystal ball, but…developed stock markets have enjoyed a six year bull market on the back of loose monetary policy from central banks, the US Fed being the most significant. Ultra low interest rates and quantitative easing have also benefited government bonds. But wobbles in bonds, in anticipation of higher US rates, have recently fed through to nervousness on stock markets with Grexit another (but overrated) factor.
- Brace yourself for more volatility as and when the Fed raise rates, possibly starting in September. We should get a signal of its intentions in late August, at the Jackson Hole summit of central bankers.
Preferred asset allocation
- Unchanged from last week: neutral equities/ fixed income, preference for Japan and euro zone in equity portfolios and for short duration and high yield in fixed income. Overweight cash.