“It’s the economy, stupid!”. So exclaimed an exasperated James Carville in 1992 when advising aspirational Bill Clinton to bring crystal clarity to a presidential manifesto whose aims seemed otherwise all at sea. Thirty years later, that sentiment resonates strongly as the International Monetary Fund at the World Economic Forum in Davos pronounces the global economy to be in big trouble. It merely confirms what we said in these musings only a few weeks ago when we observed it looked as though the wheels were dropping off. 

“Oh my ears and whiskers!” The Bank of England in a flap

As the global economy slows, the persistent, enduring effects of a pandemic and the geopolitical fallout from a major war in Europe are stoking the fires of inflation to levels not seen since the 1980s. The emerging paradigm of ‘stagflation’ is one largely untried in at least two generations.

 

Policymakers find themselves all at sea. Take last week in the UK as a good example, when the hapless Governor of the Bank of England put up a literally hopeless performance in front of the Treasury Select Committee, figuratively wringing his hands in desperation and effectively capitulating: 80% of the inflation problem is a global phenomenon and not his fault and as for the other 20%, well, it’s all just so, so difficult. The food crisis? ‘Apocalyptic’, said Andrew Bailey. The White Rabbit in Alice in Wonderland would have inspired more confidence before diving down the nearest burrow. Not making the Bank’s position any easier, and adding to the general discomfiture, Bailey’s new Chief Economist, Huw Pill, a pugnacious, forthright ex-Goldman Sachs banker not known for pulling his punches, then started lobbing well-aimed brickbats at the Treasury, suggesting it was fiscally incontinent.

 

None of which is wrong, but nor is it helpful. Nobody is pretending the prevailing predicament is easy (it is immensely complex): leaving aside the exogenous shocks of pandemic and war, the fact of major global supply-side dislocation to the economy and simultaneous pressure on the consumer is , if not completely unprecedented, then at least so unusual that we are very much out of practice dealing with it. Yet the governor of the UK’s central bank implying we’re up the proverbial creek without a paddle, and his subordinate opening trench warfare with the government, is an unhappy position in which to be, especially when what is needed is steady nerves in the face of hostile fire and a firm plan to navigate us away from the treacherous rocks, shoals and reefs back in to deeper, calmer, safer water. Confidence and leadership go hand in hand. 

Rishi Sunak: fiscal policy on the hoof and in a political vacuum

Speaking of leadership and confidence, as we have said before, this is not just an economic problem, it is a political one. If a central bank has only two main levers to pull (interest rates and market liquidity, both blunt instruments, neither of which is in any way useful as an antidote to supply-side constipation), Prime Ministers and Chancellors have choices. Those choices are predicated on ideology, vision, the need for political courage while maintaining fiscal probity, and all the while keeping a pragmatic eye on the prevailing conditions. There will always be surprises which need managing, but governments are vulnerable when they are shown to be constantly at the mercy of events rather than even moderately in control of them. The current administration now finds itself in an almost perpetual state of firefighting.

 

We have observed in these musings on many occasions that, across the western democracies, the prevailing economic dogma is almost universally that of John Maynard Keynes, tending to the left of the political centre: high levels of state intervention and participation in both the allocation of capital and labour; burgeoning regulation; higher levels of taxation than would be required were the state not spending so much. The essential pretext is that the state is the more effective allocator of capital than the private sector. It is a point of view, and in itself is no more right or wrong than the opposite perspective espoused in the works of Milton Friedman, the arch-monetarist who believed in the supremacy of the private sector and the social duty of companies to increase profits. But where both become problematic is when one or other becomes the only show in town; a lazy, unchallenged consensus across the spectrum is the recipe for bad policy. Inefficiencies or malpractices rapidly take root and multiply, the economic effect can be debilitating, so too the potential social consequences. Dogma needs regular and effective challenge and testing through rigorous, informed debate to prove it is still fit for purpose, something almost entirely lacking in 2022 UK politics. 

Low tax Chancellor? Only in his own mind 

Not unfamiliar with Labour manifestos of the 1970s, pre-pandemic Tory policy was already at home with Keynesian principles. Regulated returns and regulated dividends for utility companies; Teresa May’s energy price cap (pinched straight from Ed Miliband); her proposed and politically near-fatal ‘death tax’ at the 2017 election to name the most obvious.

 

Post-pandemic, it’s a race for the Chancellor to out-Labour Labour: the hike in National Insurance rates for both employers and employees; Corporation Tax to rise next April from 19% to 25%; frozen allowances pushing many more into higher rate tax bands for both Income and Inheritance Tax; and now, this week, pandering to populism (again stolen from Labour and then multiplied) the energy relief package for all UK households and for the 8m households on universal credit, a £650 cheque. It is all to be funded by the extra 25% windfall tax on oil and gas producers (our article from 11 February 2022 analysed the pros and cons of this subject in detail). Subsumed in a web of commercial and technical complexity, Sunak still has the electricity generators in his sights for a super-tax once he has worked out how to do it. 

Energy policy convoluted to the point of incoherence 

We disagree with the windfall tax in principle, even with the discounts for good behaviour if oil and gas companies up their game in the North Sea. As far as the electricity generators are concerned, it would be a tangled bowl of policy spaghetti to maintain the renewables levy (charged as a financial bung to renewable energy suppliers to invest in more capacity) on household bills in order to maintain the façade of the government’s green credentials, while on the other hand confiscating all of the proceeds and more in a super-tax for alleged profiteering, only then to rebate the consumer to help contain the annual household bill. It simply does not make sense. Why not just cut out the middleman and chop the levy?

 

Just to add to the contradictions in the government’s energy strategy, while now intending to penalise electricity generators, albeit temporarily, nevertheless the new Development Consent Order (DCO) scheme for solar developments, akin to compulsory purchase orders against landowners, ensures that projects deemed in the national interest will go ahead regardless of any objections.

 

Question: with all the other pressures arising from building 300,000 new houses each year, most on greenfield land, and requiring an area equivalent to Bedfordshire for re-wilding, does it really make sense – in the face of a national food security crisis – to be compulsorily setting aside and locking up for 30 years an area the size of Exmoor, mainly productive agricultural land, and plastering it in plastic panels? As a good example, the proposed Mallard Solar Farm, the biggest in Europe and covering 2,100 acres of top-class arable land in South Lincolnshire will go ahead under just that new DCO. 

Where are The Lady and Alan Walters when you need them? 

But the fundamental problem here is the apparent race to the bottom in terms of policy. Where is the over-arching, ideological strategic vision for a match-fit, vibrant, vital, innovative, competitive economy to take us through the next quarter century, an economy designed to attract not only domestic but international capital, particularly in a post-Brexit world? Where is the commitment to root and branch reform of the bloated public sector, especially the NHS, with its inordinate levels of waste (in our 4 February 2022 article about Rishi Sunak’s own-goals, we identified £120bn of taxpayers’ money incinerated to zero effect since 2010 alone) and inbuilt inefficiencies? Where is the ideological belief in wealth creation, rapidly in danger of becoming a dirty concept, spreading from the left where the whole idea of economic progress being measured by GDP is regularly treated with contempt, now moving uncomfortably towards the political middle ground thinking) across the private sector?

 

There is little exaggeration to say that the public sector basically recycles taxpayers’ money; it fulfils an important societal role in maintaining state services (defence, police, judiciary, education, health) and providing a safety-net for the neediest but it does not directly generate national wealth. That is the preserve of the private sector. Today, faced with rapidly escalating input costs, rising debt financing charges, the possible slow-down in demand and being overloaded with higher taxes and employment charges, ‘business’ is feeling justifiably unloved, not at all what one would either expect or hope for under a Tory administration.

 

Granted, Thatcherite ideology is not everyone’s cup of tea and it may not be yours, but whatever your beliefs it is the sign of a confident society, and essential to the health of democracy, that alternative policies are presented to avoid the risk of lazy groupthink which eventually and inevitably leads to economic and social stagnation and relative decline. For the evidence, just look across the Channel to the eurozone members who in aggregate have lost ten percentage points of their share of global GDP in little more than 25 years. 

Shareholders overtaken by Stakeholders

If that is a somewhat blunt diagnosis of the thin gruel being served from a cheerless political menu, the outlook for investors in the UK is further complicated. Already much in evidence before thanks to the mounting momentum behind ESG, and particularly the one-way, unstoppable train that is climate change, where to challenge the IPCC orthodoxy is tantamount to heresy, the ‘we’re all in this together’ measures to deal with the pandemic have merely accelerated the trend towards companies becoming more by way of social utility constructs than primarily the homes of efficient capital and the creators of national wealth. Crudely, it is the rising supremacy of the ‘stakeholder’ of which the shareholder is only one and rapidly falling down the list of priorities. Indeed, the latest edition of the Companies Act (S.172) enshrines this shift in emphasis into law.

 

“Sustainable” is an over-used, hackneyed word these days, frequently in the context of spurious claims about environmental credentials. But as noted not only by us but others including Terry Smith, for any company to be literally sustainable, to be able to survive as a going concern for the foreseeable future, looking after its ‘stakeholders’ was always essential, long before ESG came along as a label or the term ‘stakeholder’ itself was invented, or the Companies Act legislated for it. Customers, suppliers, community neighbours, regulators, local and national government, all those and others listed in S.172: no company enjoys long duration without paying attention to these groups, working with them constructively. But it enjoys no prospect at all without equity capital as its permanent financial bedrock.

 

As an aside, compared with even a decade ago, you’d be amazed at the acres of print these days in any listed company’s annual report which reveals just how much of a board’s busy-ness is devoted to activities other than making the widgets or providing the services without which it has no business at all.

 

However, as the paradigm shifts in a world in which Mammon and the principles of capitalism are at least frowned upon, if not actively undermined amid rising perceptions that capital markets are little more than casinos, perhaps as we move into the new post-quantitative easing era and a curtailment to the access to ultra-low-cost, easy debt financing, the longer-term interests of the shareholder might be understood and served better if companies use equity financing as a source of new capital. The IPO market has thrived over the past two decades, but mostly that is a convenient exit route for founder shareholders. Apart from a brief spurt during the pandemic to alleviate balance sheet pressures, rights issues as a concept of new capital raising had almost been confined to the museum of financial curiosity since the mid-1990s. On that score at least, there is hope!

 

The Jupiter Merlin Portfolios are long-term investments; they are certainly not immune from market volatility, but they are expected to be less volatile over time, commensurate with the risk tolerance of each. With liquidity uppermost in our mind, we seek to invest in funds run by experienced managers with a blend of styles but who share our core philosophy of trying to capture good performance in buoyant markets while minimising as far as possible the risk of losses in more challenging conditions.

The value of active minds – independent thinking

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