Living with new realities

13 January 2017

Stock markets have hit new all-time highs already this year, while government bond markets have calmed down markedly after their violent correction in the last quarter of 2016. So, all well and almost back to the Goldilocks feeling of the summer of 2016, when everything just went up?

All very confusing to discerning followers of Global current affairs, who read every day about the monumental risks to global trade that the highly emotional personality of the new populist US president will bring to us all from 20 January.

Well, the flow of economic data from the tail end of last year, indicates that businesses and the majority of consumers do not appear to share the concerns of their intellectual elites about political style having lost all manners and are more and more upbeat.

I wrote last week how perceived political risks currently appear to be almost entirely discounted by capital markets as well, when they are usually much more sensitive to any potential obstacles somewhere in the future. The UK’s currency may be a slight exception, because it weakens every time when there is any suggestion that the UK may indeed no longer be a member of the European Unions in a few years’ time.

But even that doesn’t deter the UK economy, as so far non-Sterling based supplies have mostly absorbed the fall in revenue which the pound’s devaluation has bestowed on them. Retailers and especially online retailers delivering abroad have enjoyed a much better Christmas season than expected, with most firms reporting improvements on the previous year.

I have decided to decrease the political focus of my market observations for the time being, even if that feels somewhat odd. Fact is that the global economy and the US economy in particular is experiencing a strong uptrend. This makes markets - for a while - less prone to be upset by political surprises. Although, should D Trump be outrageous and impose lots of import tariffs straight after his inauguration then that may be a different matter.

However, I believe the risk of that is relatively low. The very measured or even contrary statements of some of his future cabinet members to his strong (and sometime outrageous) words during his first press conference in 6 months suggests that we still must not take him literally, even if only fouls at this point will still refuse to take him seriously.

As an easily hurt individual and inexperienced politician, his style is entirely different to most of what we have seen in the western world. Objective of his answers to pesky journalists’ questions are by no means to provide policy statements, but first and foremost to establish and/or defend his public persona.

Over the course of the year I believe we will have to learn to differentiate between political news that have the capacity to really matter to the economy and those that merely insult the intellect.

For the time being, I am glad to be positively surprised about the various upbeat economic data reports around the world and the fact that government bond values have stabilised. This tells me that capital markets have not gone ‘bonkers’ but recognise that a few promising green shoots do not yet make a full bloom. As a consequence, I believe that our central scenario assumption, of another politically unnerving but economically stable and improving year is more realistic than to continue to expect the next economic and financial Armageddon as so many in the hedge fund industry have done for the past years.

In the main body of this edition we cover this week whether the economics profession is indeed in crisis or merely apologising for not delivering on forecasting accuracy it never was designed for in the first place.

Following very upbeat results guidance from major UK housebuilders, we also once again turn to UK property as it is such a key element of what makes the UK’s economy go around.

We then discuss the market concentration dynamics most of us will have observed over Christmas with the ever increasing volume of deliveries from online retailers. Will our competition authorities be able to contain the potential market abuse that is inherent to every monopolistic dynamic.

Last but not least we look at currency developments, which carry so much weight in economic terms. Except this time we discuss the latest swing in the value of the cyber currency Bitcoin and what it tells us about Chinese monetary policy.