EU Phew

If we take our attention away from all of the hullabaloo surrounding Brexit and the political boxing taking place with our European friends we are to divorce, there is a good news story beneath the surface. Don’t expect too much publicity regarding it though……it’s a good news story after all!

 

After many false dawns, there appears some sunlight on Europe's strongest economies with economic growth across the European Union at levels not seen since 2007. And the continent's powerhouse countries - Germany and France - are seeing growth at levels not experienced since 2010.

 

And that’s not all……the Eurozone Economic Surprise Index (what a name by the way) which is a measure of whether economic data is better or worse than forecast, is comfortably above 60 (where above 50 is considered positive). Figures like these have not been seen since the beginning of 2014.

 

That’s great, but what’s in it for ‘us’?

 

Well, better EU growth is good news as nearly half of all we export goes to the EU. If the EU is growing, they will want more of it. As we are still in the single market and the customs union, this gives us tariff free access to the EU (for now).

 

Although that relationship will change (with this thing called Brexit) the UK is still the major beneficiary as the EU marches forward economically speaking.

 

So……good news. You would be forgiven for thinking it was fake news though as it is a positive story after all.

Vaporous Volatility

You will have been hard pressed to have avoided stories of an apparent ‘imploding’ of stock markets over the last 10 days. It’s a negative story so our media jump all over it.

 

Yes there have been some volatile days that have seen some stock markets fall by over 4% in a day’s trading……including the largest economies across the world. But what our ‘doom addicted’ media have failed to explain, is the positive long term reason that sparked the sell off.

 

The first Friday of each month is a big deal for investment analysts and investment markets as it is when the US announce their latest job data. Positive data that shows unemployment reducing and wage growth increasing is seen as a positive indicator that the world’s largest economy has the right ingredients to grow (and vice versa). The most recent job data announcement was good……but investment analysts and investment markets thought it was too good!

 

The concerns are that the Fed / Bank of England et al will need to raise interest rates quickly and significantly to stop a potential inflation issue. Increasing interest rates then hinders business growth as the cost of servicing debt is more……stunting growth as a consequence.

 

The long and short of it is this……Trump’s tax cuts for businesses seem to have had the desired impact he wanted. More people are employed and wage growth is increasing.

 

Surely, our media can see the long term benefits of this rather than scaremongering on the back of very short term investment market volatility?

 

When did it become so unfashionable to report something good?

Property Timebomb

As a tribe, the UK really is emotionally attached to property ownership to the point of irrational behaviour. Which makes the results of recent research by the city regulator all the more intriguing (for once!) for the property obsessed UK.

 

In summary, hundreds of thousands of homeowners could be at risk of losing their homes by ignoring how they will pay off their mortgage. Nearly one in five mortgage holders has an interest-only home loan, meaning they would need savings or other funds to pay a final lump sum.

 

The Financial Conduct Authority (FCA) said the end of these mortgage terms would peak in the next 10 to 14 years. The FCA said that 1.67 million full interest-only and part-capital repayment mortgages were still outstanding, representing 17.6% of all mortgages in the UK.

 

Frightening stuff. Which leaves me to consider the impact of this in 10 to 14 years.

 

Firstly, there is little prospect of banks allowing mortgages to continue as ‘interest only’ by extending terms. The way in which lenders are scrutinised post banking collapse ensures that the regulator will not permit lenders to continue with interest only mortgages after the end dates of the original terms.

 

Secondly, a high proportion of the interest only mortgage holders have no plan or insufficient savings in place to repay the debt. This will leave the only option being to sell the property to raise the necessary money required to repay the debt. The result will be a property market flooded with properties for sale, bringing house price valuations down as a consequence. Elasticity, demand, supply and all that.  

 

The alternative to all of this is for banks to work with interest only homeowners now to construct plans to repay the debt and avoid the timebomb in 10 to 14 years. But that takes accountability, ownership and humanity in addressing the issue. And that’s not something we associate with the banking sector.

 

My prediction......the issue will be ignored, the can kicked down the road and the issue only addressed when it reaches alarming levels in 10 to 14 years.

 

All very predictable. All very avoidable.    

Blackmock

The fallout from the banking collapse highlighted one overwhelming message……the power that investment banks held over the Government. Investment banks simply make too much money for them to be ignored and they create vast wealth for the UK coffers. This wealth creates power……this then leads to the Government conforming with their political policies and regulation that is very ‘friendly’ to investment banks.

 

Fast forward a decade across various political promises of reform against this power……exactly where are we?

 

 

Exhibit A Your honour……BlackRock.

 

BlackRrock are an investment company responsible for the investment of $5.7 trillion ($5,700,000,000,000)

 

A recent freedom of information (FOI) request has uncovered that Blackrock held 14 meetings with the Treasury in 2017. While there is no suggestion that rules governing how much access a company can have with current policymakers has been broken, exactly why does an investment company need access to the Government every 4 weeks?

 

And that is just one company…… there are many, many more.

 

 

Exhibit B Your honour……Ex-Government Officials.

 

BlackRock has been the next calling point for a number of high-profile Treasury officials in recent years.

 

George Osborne last year started in a contractor role at the company in a four day a month ‘research position’ earning him £650,000 a year.

 

Rupert Harrison, the former chief of staff to George Osborne, joined BlackRock in 2016.

 

Another ex-Treasury official, Antony Manchester joined BlackRock in 2017 to lead the firm’s ‘Brexit position’.

 

 

Given we live in a capitalist society (well, for now anyway), I’m all for a successful Government on an economic level which creates an environment for corporate success. But why does there seem to be an underground secret that big city institutions have open door access to Government. Why is there seamless career progression from Number 11 to city institutions?  

 

The lack of transparency creates concern……and we know where that all led a decade ago.

Driverless Supermarkets

It’s been in planning, production and testing for the past 12 months…..and this week sees the first driverless supermarket go live.

Amazon Go has launched in Seattle with no checkouts at all and no human interaction needed to shop or pay for the groceries. It uses an array of ceiling-mounted cameras to identify each customer and track what items they select, eliminating the need for billing. Sensors on the shelves add items to the bill as customers pick them up and deletes any they put back. Purchases are then billed to a customer credit card when they leave the store.

Which all begs the question……is the driverless supermarket going to be a new reality in the years to come or is it simply Amazon serving up a shiny brand marketing campaign / gimmick?

 

Well, it has some legs that’s for sure. I guess it will all come down to profitability and how long the upfront investment in technology will take to ‘pay back’. When you consider that Tesco alone employs over 300,000 people, it is clear that a significant labour saving will be attractive to supermarkets that work on such low profit margins.

Which brings me to ponder a few points:

Technology in supermarkets. As we are seeing with electric cars, the rate of development and market penetration is far from quick. Let’s be frank, supermarkets seems far from quick to adopt technology and manage it successfully. Just get yourself along to any self-service checkout and watch as customers take it in turn to lose the plot with the “unexpected item in the bagging area”. It’s like a Monty Python sketch.  

 

What about customer identification? On a busy Saturday morning, I am pretty sure I am not the only dark haired (with subtle grey ‘areas’) tall man sighing his way around the isles ramming any screaming kid with his trolley. Just how reliable is the identification? I’d hate to think someone else was paying for my shopping.

 

Then there is the customer experience. If I am not being greeted with a miserable sigh / grunt at the deli counter, treated like I am the thickest man alive when my knowledge of where the piccalilli is located is inferior to staff members with 15 years experience under their belts, endure a 15 minute queue whilst Brenda at the checkout provides a running commentary on the items being purchased by the irritating lady in front, playing adult Tetris on the conveyor belt with my trolley load and having to repeatedly confirm that I do not need any bags or help with the packing, then it will lack the ‘supermarket experience’. A certain irritating and frustrating ‘je ne sais pas’ will be missing in all our lives.

 

Despite these ponderings, money talks. And if the technology is consistent and offers supermarkets significant long term labour savings, it could all become reality.

 

In a consumer driven economy, it will be interesting to see how this will all impact the UK economy.

 

Intriguing times.

Bankrupt State Pension

The latest report by the Government Actuary's Department (GAD) paints a pretty grim picture for the future of the State Pension. It projects the National Insurance fund used to pay out the State Pension will be exhausted within 15 years. The result? The harsh reality is that, as the aging population bites the cost of the state pension will inevitably boom.

 

There will have to be a reduction in public services to cover the cost or taxpayers will have to pick up the slack to the tune of hundreds of billions of pounds. There really are no winners on this.

 

Should we be surprised though?

 

The issue has been known for the past few decades (or more) but no political party in power wants to address the issue. The State Pension, Income Tax and National Insurance are all political decisions. Politicians aren’t exactly famed for their long term thinking and planning given longevity in their position is all too rare. Let me put this into perspective, Esther McVey become the fifth Secretary of State For Work & Pensions since 2012. How can we expect long term joined up thinking with such a high turnover in the key position? (such a key position that only 1 in 1000 people new who she was in a recent survey!!!)

 

Then add to the fact that any Government that does take positive action to address the State Pension blackhole will receive a huge negative snowball from those people or areas that will have to pay for it……hardly any encouragement to show courage and leadership is it. Hardly a vote or popularity winner.

 

We have a very ‘safe’ Government currently that will simply kick the can down the road for someone else to pick up……and there is a readymade excuse of Brexit negotiations that the Government can use to duck taking ownership. Convenient. Very convenient.

 

But make no mistake, at some point extremely tough decisions will need to be taken as demographic reality hits the UK finances.

Trumpeting

In amongst all the magic of Christmas, you would be forgiven for missing President Trump well, errrrrr, trumpeting his latest achievement.

 

In short, Trump managed to persuade the US Senate to pass a Republican proposal for a $1.3 trillion tax cut that is likely to further boost the American economy. Basically, he cut Corporation Tax on business profits from 35% to 21%. It smacks of copying a Ronald Regan move in the 1980’s which is all based on a lower tax intake for the US Government in the short term but then getting a bigger total tax intake in the future from companies making more profits. Time will tell.

 

I guess Trump will just be pleased he’s managed to pass anything looking at all meaningful in his first year of office.

 

Anyway, enough of Trump……what’s the impact for the UK? Tax cuts tend to be an economic incentive for businesses to invest……and for employees to work and spend. An already strong US economy is strengthening and this is likely to boost it further. When the largest economy in the world is strong, those on the coattails receive an economic shot in the arm also.

 

With all the negative impacts that Brexit is having, a shot of economic steroids from Trump can only help.

 

No surprise that economic stimulus comes from afar and not from our own doing. Take note Mrs May.