Mid Monthly Update – January 2019

January Sales

The sales that occur in January and with reasonable frequency throughout the year. This is a familiar story as figures from the British Retail Consortium (see below) would indicate unless you’re Aldi or LIDL. Any coincidence that they are both private companies and can run their business without having to assuage shareholders every quarter?

Source: The Wall Street Journal
In 2018, it feels like the sales also occurred in February, October and not least, December at least as far as financial markets were concerned. The end of QE (quantitative easing) and the imposition of QT (quantitative tightening) places the emphasis of economic medicine on fiscal policy as already evidenced in the US, possibly happening in the UK but yet to do in Europe although President Macron’s white flag response to the ‘Gilets Jaunes’ protests in France highlights the impact of populism on fiscal policy. The Italians are no doubt delighted by that.
Markets’ addiction to quantitative easing ended poorly in 2018. Now financial markets are enduring some cold turkey but those markets hit badly in December have bounced back to some extent in January to date.
Risk assets bouncing as history suggested it might could be short-covering at work, investors seeking a cheaper entry point, cognisant of how financial markets have fared well after a weak year and December in the past.
Credit Spreads
Credit spreads have widened during the second half of 2018 and while they too have narrowed somewhat since the start of the year, it is worth both noting and watching how developments unfold in credit markets. As we mentioned in our blog Credit Where Credit is Due posted on 6 December 2018 and We Are Indebted to You posted on 20 December 2018 and both available via these links:
the amount of corporate debt accumulated because US corporates chose to use low interest rates prevailing because of QE, to buy back their own stock and leverage their balance sheets, means that the amount of BBB (the lowest rating within investment grade) as a percentage of outstanding debt or as a percentage of US GDP, is at record highs. Sensitivity to minor changes in interest rates is key to these companies. Meanwhile household debt levels in the US are reasonably healthy.
Money Supply
A figure we monitor constantly as it is a leading indicator as opposed to unemployment data, so earnestly followed by market participants, which is a lagging economic indicator. Money supply data across developed markets has indicated economic slowdown for some time and the data is supporting that thesis. We don’t expect a rebound until the second half but don’t see the recession that spooked markets in two thirds of the final quarter of 2018
Germany – The Italian Job
For years prior to the start of the Euro, German manufacturing companies used to get extremely annoyed by Northern Italian engineering companies periodically benefitting from a devalued lira to restore Italian competitiveness. In recent years the strength of the German economy has partly been the result of the Euro being cheap for Germany to operate under in relation to the rest of the world. Consequently, Germany built up a massive current account surplus and via the rules of the
Euro, enforced fiscal discipline on previously profligate member states. Donald Trump says and tweets many things but he is right in saying that Germany’s current account surplus is too high.
Even as economic data in Europe also slows and the European Central Bank brings QE to an end, short term interest rates are still negative. Time for a more expansive fiscal policy in Europe, sanctioned by Germany and helping to appease those for QE didn’t really help. Not expecting that in the immediate future though.
We delayed the publication of the mid-monthly update to take account of the Brexit vote that took place in the House of Commons last night. While the outcome was not unexpected, the margin of defeat for the Prime Minister was. There is a no-confidence vote in the Government today which is expected to fail. Theresa May has until Monday to come up with plan B but as sterling has reflected since the vote, the prospects of a no deal Brexit, cliff-edge departure from the EU on March 29 2019 look unlikely as:

  • Parliament may have taken sufficient steps to prevent that occurrence post the Grieve amendment
  • Article 50 could be delayed
  • A second referendum is likely to be resisted but is more probable than a no deal exit, although it would be foolhardy to predict the outcome of that!

Perhaps of greater concern for the future is a likely apathy from current and future generations having witnessed the ineffectiveness of their elected officials. A general election in the immediate future is unlikely but whenever the next one is, it will be interesting to measure the voting participation of the younger generations who, understandably, could well be disillusioned by both major parties. Room for a new party one suspects.

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