This morning provided a nice juxtaposition of news stories that deftly explains why we are where we are.
First up we have the fish-finger-loving, partial-to-a-glass-of-vino-or-ten, EU Commission President Juncker. He was giving his State of the EU address, and unsurprisingly called for an end to individual country vetoes, along with introducing a single European President, and every member state to be in the Euro and Schengen. ‘Ever Closer Union’ writ large indeed.
At the same time, the ONS released UK employment data. Yet again, unemployment fell, but yet again, wages remained stagnant. Real wages are now 3.2% below their peak in 2008 (h/t @Rupert_Seggins):
Oh, and what’s happened to asset prices since then? Up, a lot.
So those who own assets have become a lot richer. Those who own more assets, have become richer than those with less. Inequality between all segments is rising, even before we take into account that salaries are falling in real terms.
To put it bluntly, if you wanted to trade up from a one bed flat to a 3 bed starter home, even with two incomes and super-low interest rates, and banks falling over themselves to lend, it can’t be done. Stagnant wages alongside exponential asset growth have stymied people’s progress. Or at least, their perceived progress. Meanwhile “the rich”, “the elite”, “the 1%” appear unscathed. And worse, uninterested. Jean-Claude Juncker believes the answer to people’s concerns about the establishment, is to create a more powerful and isolated establishment. Or at least, that’s how his speech today could be conceived. If you were, say, a powerfully disenfranchised electorate looking for someone to blame.
Amongst Remainers, there has been and continues to be astonishment that people would vote for something that could be so economically crippling. After all, those real wages aren’t doing very well following the currency-depreciation-induced bout of inflation in the UK, induced by that whole Brexit vote. However, sometimes Turkeys do vote for Christmas, if they’re sick and tired of their current situation. As YouGov report, a majority of Leave voters consider economic damage to themselves or the country to be a “price worth paying” to leave the EU:
I know, you’re tired of this aren’t you? You roll your eyes at the loonies who voted to Leave, or who voted for Trump, or maybe even who voted for Macron, now that he’s spent 26,000 Euros on makeup as he smashes up the Unions. In any case, as a humble market investor, you think this is all a depressing sideshow. Your conundrum is how to get yield in such low volatile times. Here’s how compressed spreads are these days (h/t @BarbarianCap):
But it’s those pesky politics that make these spreads look so unsustainable. The People Have Spoken but goddammit they just Keep On Speaking. Juncker’s speech is a reminder that the anti-establishment mood will persist until The Establishment make some changes. And eventually they’ll be forced to. And in such ways that will make the future path of the economy look quite different from those of the past. Market-based spreads will need to reflect this risk premium at some stage.
Just a small reminder, though, as for now it’s carry on carrying mixed with a dash of stop-hunting (GBP being the current such target). Keep an eye on the AUD above 0.8000 – if that starts moving higher then we are in return to euphoria form, with stocks even higher, spreads even tighter, and the rest.