With markets roaring ahead and economists muttering about strong growth in the Western economies, one feels a little churlish in pointing out the Panglossian nature of these pronouncements, but we do feel compelled to dwell on a few of the less positive economic issues that seem to have been temporarily forgotten by the newly emboldened investor. First and foremost, it’s Government. Yup, the institutions that belatedly saved the world economy by spending your children’s taxes have run out of cash and the ability to write credible IOUs , otherwise known as bonds. Ponder on California letting convicts out of prison because they cannot pay the wardens anymore if you think ongoing debt issuance will be painless – and that is while Central Banks are artificially depressing rates. The official prognostications for deficits are scary enough, yet we know they are predicated on a politician’s make-believe world where growth recovers and interest rates and hence debt service costs remain low. Stimulus programmes for housing and autos are already winding down, but companies are talking of ‘renewed momentum’ – at least in the prospectuses for their recently de-mothballed capital raisings. How many extra cars and houses through the cycle will be sold by these programmes? Give yourself a pat on the back if your answer was ‘none’. Demand has merely been borrowed from 2010 as consumers have done a back-of -the envelope DCF calculation and worked out that $4500 today is a good deal if your car needed replacing in the next year or two anyway.
Spending cuts will be massive – think double digit percentages, just to pay the increased unemployment benefit bill, let alone all the other stuff like public sector wage rises and pension bail-outs. Public sector strikes are coming. Tax rises will also be very painful as they will have to be levied on consumption and/or the average earner. Corporation tax in many jurisdictions is history. For example, Merrill Lynch apparently has 160 years of tax losses in their UK operation, and they will not be alone in not having to worry about tax for the foreseeable future. The few companies that are paying a lot of tax are heading rapidly to domiciles with a lower impost. High earners have already been targeted, but there aren’t enough of them to plug even a small fraction of the whole – and in many cases are amenable to relocation if they are not bowled over by our superior weather. These factors apply in the U.S and Europe equally and when combined with a monetary backdrop which can only get tighter (we do not believe electorates will wear negative nominal interest rates) presents a really massive impediment to fast growth. So consumers will have to save less and spend a lot more. That’s all right then. Good job no-one can remember the great crash of 2008 anymore.
