Heroes: Fools Gold 

 

‘Gold’s just around the corner 

Breakdown’s coming up round the bend’ 

 

This weeks second feature, considers the disconnect between the economy and stock-market in the context of Brexit. 

 
Under investment has been a common theme in the UK for some time, and a report by Jonathan Haskel, an external member of the BoE’s monetary policy committee, said we lost £29bn,or £1,000 a household, since the 2016 Brexit referendum. This was greater than most other major industrialised economies, opening up a productivity gap.  

Most studies looking at the UK’s loss of gross national product (GDP), have focused on trade, E.G., the BoE in its most recent outlook for the economy that if Brexit had not happened in 2019, GDP would have been 3.2% greater by 2026. 

The government’s independent economic forecaster, the Office for Budget Responsibility, said GDP would be 4% lower in the long run than it would be had the UK remained inside the EU. 

Haskel, in his report, used business investment as the measure instead of trade, but still reached a very similar conclusion about the long-run loss of GDP. Using this he forecasts that by the end of 2026 the gap between current levels of business investment and the trajectory before 2016 would be 2.8% of GDP. 

The fact that this is yet more academic data that confirms the damage that Brexit has caused the UK economy, published at a time when senior figures appear to be questioning Brexit I find interesting. 

Staying with Brexit, it appears that the PM is close to unravelling the Gordian Knot⁽¹⁾ that is the NI Protocol. Whether he can carry the party is another matter. There is always Johnson hovering around like the sword of Damocles. 

Politically the situation is clearer; polls on voter priorities shows that the UK’s relationship with the EU shows that only 17% prioritise this compared with 72% in 2019. The most pressing issues being the economy and the health service  
 

‘The PM is close to unravelling the Gordian Knot that is the NI Protocol’

 
He may also be able to avoid a parliamentary vote as it is suggested that the agreement on customs and judicial oversight may not involve a reopening of the protocol or the treaty. Sunak may choose to hold a vote safe in the knowledge that Labour has made it clear it will support a sensible compromise. 

The risk here is that there are still Tory MPs who are incensed by the potential role for the European court of justice in any deal to cause damage to Sunak. The chief whip, Simon Hart, has been making significant efforts to keep in close touch with potential rebels on the protocol and to keep No 10 well informed on the numbers and what solutions would be acceptable. 

It is clear that Sunak wants to only have the fights when they are deemed to be really worth having. Government sources have suggested that comes down to the protocol, immigration and strikes laws. 

In recent weeks we have heard immigration proposals that might appease rebellious right-wing MPs, and ‘redwallers’ who, despite living miles away, are full of anger over boats crossing the Channel,. I suspect this is also aimed at spiking guns of ReformUK party and the potential return of Nigel Farage. 

If there is to be dissent it will be from NI itself and the DUP, who have warned Sunak that they will not return to power-sharing if he leaves Northern Ireland ‘abandoned to the EU’ under any new deal with Brussels. 

Sammy Wilson, the MP for East Antrim, said, ‘What we want to hear from him most importantly, is where the negotiations have reached in removing the automatic application of EU law to Northern Ireland without any democratic input from the representatives in Northern Ireland and without any ability to change those laws if they’re detrimental to Northern Ireland.’  

From the wastelands of NI politics we finish by considering the decidedly London and SE UK economy. Whilst escaped a technical recession, as in Q4 2022 economic growth was zero, the economy is still a mess. 

Whilst stagnation is not a good, there are different ways to view it; the economist and founding member of the Bank of England’s monetary policy committee, Dame DeAnne Julius, said that once the strikes were over and inflation was falling, the situation would improve. 

Samuel Tombs, the chief UK economist at the consultancy Pantheon Macroeconomics, said his measure of economic activity in fact showed the opposite was the case, with private sector activity contracting in the final quarter. 

Business groups tend to agree with Tombs diagnosis, with the belief that the government needs to announce tax breaks on investment as part of a broader strategic industrial policy. 

Unions respond that most big companies made bumper profits last year on the back of low pay awards for staff.  

What appears to be certain is  that GDP figures in 2023 will show only small differences from month to month, as we continue to stagnate. The real question is, how do change this? 
 

‘most big companies made bumper profits last year on the back of low pay awards for staff’

 
Official figures confirm that Brexit and the energy crisis were damaging the UK’s ability to generate cash from exports. The gap between what the UK exports and imports widened by £2.4bn to £26.8bn, according to the ONS . 

Excluding movements of gold, the trade deficit was a significant drag – hitting 4.2% of GDP in the fourth quarter. 

The latest labour market trends show that we are experiencing textbook stagflation; the number of people looking for work rose while the number of job vacancies fell. Hours worked in the economy were down while days lost through strikes in 2022 were the highest annually since 1989. You can add tot this the fact that there was zero growth in the final three months of 2022 while the annual inflation stood at above 10%.  

The pandemic has impacted the supply of labour, largely because workers in the older age groups have given up work, either through choice or due to long-term sickness.  
 

‘we are experiencing textbook stagflation’

 
Firms are hedging their bets, concerned as to whether they will be able to replace workers in the future if they make them redundant now. As a result, they are hoarding staff, taking on part-time rather than full-time employees, and paying their workers more;  growth in regular pay (excluding bonuses) was 6.7% in Q4, in the private sector it was 7.3%. 

The fact remains that pay in neither the private or public sector is keeping pace with inflation, and is a big factor behind the sluggish state of the economy.  

The government has several options. It could try to ease the pressure for higher wages by increasing the supply of labour, by changing pension rules to encourage early retirees back to work, or by making childcare less expensive, or by making it easier for firms to fill job vacancies with workers from overseas when they cannot recruit locally. Or, in true Tory fashion, consider tougher benefit rules to force people from welfare into work. 
 

‘The fact that unemployment has started to rise suggests one thing: this is going to hurt’

 
The alternative is for the BoE to continue raising interest rates until they reach a point where higher unemployment leads to less upward pressure on wages. There are already signs from the latest data for inactivity and pay that the labour market is on the turn. The fact that unemployment has started to rise suggests one thing: this is going to hurt. 

Whilst rising energy costs have hit ‘us’, the them, power suppliers and shareholders continue to benefit for doing nothing. 

Centrica, the company that owns British gas, has posted record profits of £3.3bn for 2022, 3x its results in 2021. The company also announced it will pay a dividend to shareholders > £200m, and spend a further £300m on share buybacks.  

Other than the size of the profits and dividends this is no different to either Shell or BP. This is how the energy crisis, climate emergency and inequality intersect and intensify. As household bills soar, the energy companies are using surging profits to increase shareholder pay-outs and double down on fossil fuel production. 

Aside from profiting from Putin’s invasion of Ukraine, Centrica accounts reveals three areas where exorbitant profits are being made:

 
 

• its commodity trading segment, where profits grew 20-fold to £1.4bn;  
• the UK’s under-supplied gas storage sector, where profits more than quadrupled to £339m; 
• energy generation, where Centrica made a phenomenal 60% margin, thanks in large part to its stake in EDF UK’s nuclear fleet. 

 
One commentator made an interesting observation about the energy sector; people keep saying its ‘broken’ and needs to be reformed? He believes that it isn’t broken., and that by transferring and concentrating wealth upwards it is operating exactly as designed. 
 

‘Power suppliers and shareholders continue to benefit for doing nothing’

 
The modus operandi of a modern corporation, and the financial markets that discipline them, isn’t focussed on the delivery of secure, affordable, clean energy, but on maximising shareholder wealth by delivering rising share prices and generous pay-outs. Basically, by privatising essential utilities you have a mismatch between what they are meant to be and what the market wants them to be, meaning that ‘us’ suffers at the expense of ‘them’. 

To reset the situation the only effective answer is public ownership. But the cost is prohibitive, shareholders have to be made whole, or, do we just say you have ‘made sufficient’ and take it off them? 

Investors in the FTSE 100 (‘FTSE’) have had a good start to 2023, with the index breaking the 8,000 barrier, and outperforming other global markets since the start of 2022. Facts that are somewhat bizarre given the mess UK plc is in, or is it? 

The make-up of the index kept it resilient through recent global market turmoil and bumper profits reported by energy, financial and commodities firms have underpinned its performance. 

Alongside energy firms, commodity stocks has also lifted the index higher, boosted by a rise in prices, supply constraints and, recently, the prospect of China’s Covid-19 reopening. 

‘The U.K. FTSE 100 is not about the U.K. domestic economy,’ said Janet Mui, head of market analysis at RBC Brewin Dolphin, noting over 80% of firms’ corporate revenue exposure is derived from overseas. 

Many of the index’s largest members are multinationals whose sales and profits come from around the world. FTSE earnings are influenced by changes in the foreign exchange market, where the pound has depreciated against the euro and US dollar over the last year. 

Another driver of the index’s growth is the fact that the BoE now expects a less severe downturn this year, with inflation expected to fall sharply in 2023. In turn, the City now anticipating Bank rate could peak below 4.5% in August, whereas when Truss was PM, rates were expected to hit 6%. 
 

‘the index contains a lot of companies that pay decent dividends, so is attractive to investors seeking to generate income’

 
A shallower recession would support consumer spending, which might explain why stock such as JD Sports, and British Airways parent company IAG have fared well since the turn of the year. 

As we have seen with Centrica, the index contains a lot of companies that pay decent dividends, so is attractive to investors seeking to generate income. Last year dividend pay-out totalled £79.1bn, this year analysts predict £85.8bn. 

Alongside dividend payments, companies have used spare cash to acquire and cancel their own shares, which has also helped boost the FTSE 100. Some of the big shareholder handouts have come in for criticism, with the argument being that the cash could instead be used to increase investment in renewables and reduce prices. 

Ironically, the index’s lack of tech stocks has been of benefit. Whilst the major technology companies boomed in the pandemic, they have fallen out of favour in recent months, with Amazon, Alphabet, Apple, Meta and Tesla all down compared with 6-months ago 

Whilst the FTSE might have an ‘old-economy’,  feel to it, London’s largest companies look more attractive in the current environment, where investors are favouring defensive stocks, and those which benefit from higher commodity prices and interest rates. 
 

‘middle-income households will face up to a £4,000 drop in disposable income’

 
John Moore, senior investment manager at RBC Brewin Dolphin explained; ‘Now, with inflation persistently high, elevated oil prices, and interest rates rising the consumer staples giants, oil and gas explorers, mining groups, and financials that make up the FTSE 100 are looking at a much more supportive near-term environment.’  

Despite the success of the FTSE, the IMF, in its growth forecasts for 2023, predicted that the UK would be the only advanced economy to shrink this year, with GDP falling by 0.6%, BY comparison they are forecasting global growth of 2.9% this year. 

A report published Wednesday by the National Institute of Economic and Social Research argued the U.K. was likely to avoid a technical recession this year, 25% of households will be unable to fully pay their energy and food bills, and middle-income households will face up to a £4,000 drop in disposable income. 

This disconnect between the stock market and the real economy sums up the ‘them’ and ‘us’ that proliferates in the UK. 

‘It is a cruel paradox that on the day that the FTSE 100 index hit a record high, campaigners on behalf of up to 7 million people on lower incomes in the UK were calling for the government to extend the support provided to them with regard to their energy bills,’ Richard Murphy, professor of accounting practice at Sheffield University Management School, told CNBC. 
 
Enough said.. 

‘Cash rules everything around me 

C.R.E.A.M., get the money 

Dollar dollar bill, y’all’ 

 
Notes: 

1. https://en.wikipedia.org/wiki/Gordian_Knot 

 
Double bubble from Philip, and a hard hitting piece that very neatly summarises the state of the union; and it feels in quite a state.

With the next round of NHS workers strikes set to raise the bar in terms of their harmful effect on patients, it feels as though we are in a complete power vacuum; without in any way wishing to diminish the importance of the NI protocol, who is actually running this place? The sight of Steve Barclay and Grant Shapps/Fox/Stockheath/Green fanboying Bill Gates was just nauseating.

The juxtaposition of the FTSE 100 topping 8,000 whilst it is predicted that the UK economy will be the only one in the G7 that will contract is stark; the fact that so much of that hike is based on fossil fuels and companies that benefit from commodities and higher interest rates will come as a body blow to those hoping to put all things environment ahead of corporate greed. They are raking it in, whilst the quality of life for an increasing number of people, is in a tail spin.

So what was Philip thinking? 

We start with more empirical data showing the cost of Brexit. Somewhat samo, samo, but it needs to be highlighted.

Then we have the NI Protocol. “Wishy-washy” Rishi may have nailed this, and with Labour saying they will support anything sensible it should pass the Commons. But then, this is NI, and there are the DUP, once again threatening to be the tail that wags the dog. This could be a story that runs for a while yet.

I decided not to cover Truss’s attempt at a come-back, with her crowd-pleasing, hawkish position against a  “totalitarian” China, which, she says, poses a global threat to the “free world”. Britain should help rally regional countries against Beijing by building a “Pacific defence alliance” and an “economic Nato”.

Is she looking for workable ways to mitigate the aggressive posture of China’s president, Xi Jinping, or is she just posturing for hard-right, anti-China audiences in Westminster and Washington? Who knows.

This is really another example of her deluded behaviour. Does she truly believe that Britain is still a global power with the political will, financial wherewithal and military firepower to intervene effectively in dangerous geopolitical crises thousands of miles from its shores?

The strikes continue to pass the government by, despite fresh calls for the PM to step-in to avert fresh strike action by nurses that is likely to have a “significant impact” on NHS services in England.

Thousands of nurses will walk out of 120 hospitals for 48 hours next month as soaring inflation continues to impose real-terms pay cuts. For the first time, the strikers will include those working in cancer wards, emergency departments and intensive care units, a significant escalation in the dispute.

Still, who cares the FTSE is galloping away.

Lyrically, we start with the Stones Roses and “Fools Gold”, we play out with “C.R.E.A.M.” by the Wu-Tang Clan. Enjoy!

@coldwarsteve
 

 

Philip Gilbert is a city-based corporate financier, and former investment banker.

Philip is a great believer in meritocracy, and in the belief that if you want something enough you can make it happen. These beliefs were formed in his formative years, of the late 1970s and 80s

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