I passed through London last Wednesday and after lunch had the good luck to pop into Chatham House to see Prime Minister Theresa May’s last public speech. Truth be told, the invite I received specified only that a senior politician would be speaking, and as I trundled down the motorway towards Bordeaux airport early that morning, I was expecting be treated to a last hustings hurrah from Jeremy Hunt. Instead, Theresa May turned up to deliver a speech on ‘The State of Politics’ (though not under Chatham House Rules).
I had not seen her speak before and after I did many things fell into place. As she is at the end of her tenure as PM she deserves at least a ceasefire from the criticism that has been directed at her. However, the general lack of emotional investment in her comments and her willingness to avoid engagement on questions led me to think that she naturally won few passionate political friends in Westminster and Brussels.
To be fair, some comments did strike a chord and her thoughts on the antagonistic, negative and now habitually hostile approach to politics in the UK and US were worth listening to. In particular she lamented the lack of compromise in politics today, the deepening of divisions (the ‘Squad’ debate in the US is a very good case in point) and the rise of absolutism. What she meant here is much less the enforcement of the primacy of principles, but the conviction of those with extreme views that their perspective is right to the point that other competing views are excluded. That at least is my too wordy definition of what she said.
Absolutism can have many political effects – some voters are drawn by strong views while others are put off. In general, what we can call absolutist views get more media and social media attention than more moderate views. Bad ideas fly faster than good ones. In the longer-run, absolutism may end up breaking apart very well-established political parties, further destroying bi-partisanship and generally producing bad policies.
We might well argue that absolutism is everywhere, even in financial markets. A pronounced trend in recent months has been the strong rise of bond and equity prices in tandem, to the point that the correlation between them has reached historical extremes. The price action in each, major asset class suggests a strong degree of conviction, almost to the point of absolutism.
Surely, neither equities nor bonds can both be right? Indeed, both could be wrong. Bond prices reflect weaker economic growth, potentially lower trend growth and the apparent willingness of central bankers (Korea cut rates last week for instance) to force rates lower.
Equities exuberantly reflect this ‘surrender’ of central bankers, but in my view do not reflect lower growth. In that respect an ongoing macroeconomic shock (a longer, deeper, sillier trade dispute is the likely cause in the near term), in the context of very low unemployment may well be the signal that equities have peaked.
One remarkable offshoot of the absolutism in equities and bonds (in the sense that both have risen together) is that wealth – at least financial wealth has risen sharply. Indeed, I would hazard that with house prices generally now more choppy, the mass of household wealth (financial plus housing wealth less debt) is close to a peak. There are other signs that this may be the case, such as generous IPO (initial public offering) pipelines that suggest that business men and women want to sell businesses,
Ironically, whether we are at a peak in wealth will depend very much on the major central banks, whose overly generous approach to quantitative easing has spurred the creation of financial wealth, and at least in the case of the USA has pushed wealth inequality to historic highs. The Fed in particular is now wrapping itself in policy knots, because any change in policy could produce a large wealth effect, at least for the middle classes.
Central banks are however likely to treat any recession as an excuse to cut rates and open up the policy toolbox. This means that household balance sheets in developed countries should be relatively solid, and that financial risks will be focused mostly on corporate balance sheets (in the US and China) and on government balance sheets (in China and select EU and EM countries).
The exceptions are perhaps Hong Kong and Australia – where property prices and leverage are high. I would also put the UK in this bracket. As I left the May speech on Wednesday, I picked up a copy of the Evening Standard, whose headline read ‘property slump accelerates with biggest drop in prices in a decade’. If this continues, the ‘state of politics’ will become even more complicated. May is leaving at the right time!
Have a good week ahead,
Mike
The Levelling 