2016 – All things must pass

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Writing a year-end review of 2016 could focus entirely on the story of Brexit, or the unbelievable Trump victory; seek to understand the epic collapse of oil or consider the cultural influence of the many icons who have passed. Or most confounding of all, how the heck did Leicester City win the Premiership and did Gary Lineker’s football shorts constitute underwear on MOTD.

It has been a transformative period, like hearing for the first time The Beatles Blue album and knowing immediately the world would never be quite the same again.

As much as the loss of Mohamed Ali, Prince and Bowie brought an end to the journeys of true cultural legends, in truth their influence in shaping events had passed some time before.

By comparison and not to get too hyperbolic over the course of the second half of last year, it can be argued several events pretty fundamental to future direction occurred. Two of the worlds’ five wealthiest countries (and the last two world leading powers) experienced through the ballot box historic, seismic shifts in their governance and direction.

In both cases the conventional wisdoms and wishes (of wealthy elites) were blown away by a groundswell of general public dissatisfaction demanding change.

In a real sense these were bloodless coups or put another way, civil wars won without weapons.

The often-silent majority used the democratic process (not violence) to reject the status quo, recast the agenda and thereby radically redefine future priorities.

The cause of revolutions from English to Russian, French to American have always been rooted to the simple dynamic that all does not end well when the majority see the minority using influence and privilege, to take more and do better whilst not noticing or perhaps not caring that they, the many, are suffering.

It takes time for their general anger to coalesce into concerted action and when it happens the elites are always shocked. In past times, they were also often executed, this time happily they just wore dumbfounded expressions and shook their collective heads (still attached!). The financial crisis of 2008 had many immediate effects, but longer term the antidotes then administered have in large part helped cause this backlash.

The subsequent implementation of savage cost cutting by governments and businesses; lower fiscal (public) spending meaning lower wage increases (what a Dickensian public school word austerity is, simply meant harder for many) technology being used to replace jobs, zero hours’ contracts, part time employees with no security, outsourcing and migrant workers prepared to take lower pay.

Zero interest rates were put in place to encourage people out of hoarding cash but many didn’t have spare cash in the first place.

Those that could borrow/invest did so to great effect as the yields on assets rose far faster than interest costs but that hasn’t helped retired savers brought up on the long-held orthodoxy of having no borrowings and keeping their nest egg in a building society to live off the interest.

By comparison those with money invested in property, bonds and equities since 2008 have enjoyed stellar returns.

The realisation of these factors and the consequential implications going forward are perhaps therefore the place to focus our thoughts.

All things must pass, in 2016 a lot did.

But what comes next?

UK (The Jump)

We in the UK post Referendum have a new direction to travel, it will be self-determined and self-regulated but equally uncertain and unsupported.

On the day after the Brexit vote the pound collapsed as did many UK share prices.

The pound hasn’t recovered, share prices have and this is interesting and instructive, but more of that in a minute.

The reality of the Referendum to leave the EU was akin to a person being told to stand on the highest ledge of a tall building. The public would then (once they’d heard from experts) vote on whether or not they wanted them to jump off.

The message from the “yes they should jump” camp would be:

“don’t worry it’s all pillows and feathers, people that speak like you, better job and more money at the bottom, it will be everything you want”

The “don’t jump” side would loudly proclaim the exact opposite.

“don’t be ridiculous, it’s just jaggedy rocks and certain death, nothing good can come of it”

Unfortunately for the jumper it became clear after the public voted yes that both sides (the yes camp in particular) were in fact making most of it up and didn’t actually have much of a clue what would happen.

Going back now to why it’s interesting that the pound has stayed low against other currencies but shares have recovered their previous values. This appears to be sending two conflicting messages.

Either, it’s going to be a bloody mess (currency) or, it’s ok and pillows and feathers (shares).

This is understandable however from the perspective that the stock market is now saying:

“hey, ok, so we panicked a bit when we learned about the jump but nothing bad has happened since”

And basically, as of now, that’s true.

The currency guys have a different perspective.

They respond.

” it’s like being asked to provide health insurance to someone undertaking highly dangerous activities. We don’t know exactly how bad their injuries will be but we’re pretty certain they will suffer damage ”

The point here is that the jump hasn’t happened yet.

The jumper is still in good health, bit anxious, bit trepidatious but basically fine (stocks). People continue to talk endlessly about jump strategies, of soft landings, hard landings, who will help and who will hinder but nobody really knows how it plays out (currencies).

There is however a scenario which could be transformational.

If Europe holds together and the UK is the only one leaving, then it’s likely they will do their damnedest to make it deeply unpleasant. A country leaving is the Unions nightmare scenario, how their carefully constructed non-elected super-government starts to unravel, especially if a leaver is seen then to be prospering. They are therefore going to exact full vengeance on any refuseniks as a salutary lesson to others thinking along similar lines.

But what if in 2017 Italy’s new government calls a referendum and also votes to leave or Germany votes in an anti-immigration party or possibly France says Oui to Madame Le ‘Stylo’?

None of these can be viewed as odds on but if 2016 has taught us anything. We should not expect the expected.

So what comes next for the UK is probably quite nasty, maybe really nasty and just possibly not quite so nasty but under no scenario will it be pillows and feathers.

THE DONALD (US against them)

Up until now I’ve worked pretty hard attempting some thoughtful, unbiased analysis.

But then we get to “The Donald” and what can you say!?

Misogynist, homophobe, racist, hate speaking, lie telling, red neck pandering………..

I could go on (and on) but words alone don’t do justice to his election campaign awfulness.

A horror show of epic proportion with no offence spared.

NIC CALLS

It’s post US election morning, about 5.30 am in the UK and I’m woken by a phone call, never a good thing at that time, always bad news.

It’s Nic.

What’s wrong I ask, thinking accident or illness.

She’s properly sobbing.

“They’ve elected him”

I get up, go downstairs, make myself a double strength coffee and turn on the TV.

After a few minutes, they start to show his acceptance speech.

Here we go I think, ok so let’s hear the gloating and the threats.

But, it’s measured, respectful, inclusive, hopeful and sets out an economic path for lower personal and business taxes, infrastructure spending and less business regulation.

This isn’t Tea Party rhetoric, this is Roosevelt mixed with Eisenhower with a dash of good old Ronnie charm.

This isn’t the same person at all, this sounds like a proper human!

I start thinking of the Lincoln quote, the one about only being able to fool some of the people all of the time. But that’s all you need do to win an election isn’t it?

Is this one of the great flim flams in history, did we just mistake as real a reality star playing a part to win the role of President?

I phone Nic back.

“Hey, you know what, I have a feeling it may turn out better than you think. And by the way, if what he just said in the acceptance is kosher, keep an eye on US industrial and financial stocks, they’re going higher, way higher”

SINCE THEN

Before I commit this theory to, well iPad, I need to first issue the disclaimer that I’ve not entirely discounted the possibility that he’s a grade A Buttmunch.

However, my sneaky hunch (hunch what hunch, I don’t have a hunch) which from election morning onwards has not yet been disproven is that:

Whilst he will undoubtedly continue to “mad tweet” nonsense and say stuff that’s pretty inflammatory, keep focused on what he actually does rather than what he says.

If we examine his cabinet appointments as an example.

He said “I’m going to drain the swamp” (not hard to see why he chose that analogy). What he’s actually done is appointed half of Goldman Sachs, the CEO of Exxon plus Wilbur Ross and Carl Icahn who are legendary hedge fund managers.

The only really jarring appointment is head of communications, Steven Bannon, who used to edit the very right wing Breitbart News but through the prism of ‘tell those who elected you what they want to hear and then do the opposite’ this can be excused.

WHAT WILL HE DO?

My guess is that his playbook going forward will look something like.

  1. Cut taxes hard and fast (immediate feel good factor and boost to consumer spending)
  2. Cut regulation (business and markets will love it)
  3. Ramp up fiscal spending, awarding all contracts to US businesses (benefits middle America)
  4. Make China the US bogeyman
  5. Russian relations come under the banner of “the enemy of mine enemy is my friend” (neither like China)
  6. Have as little to do with the Middle East as possible (it’s a no win)
  7. Promote US energy independence (why number 6 is now possible)
  8. Use business language to appear to be negotiating better deals (that will look good)
  9. Appoint a cabinet of highly skilled people
  10. Be the figurehead but don’t get much involved in the details

In essence he will do what he’s done for decades, he brands it with his name, turns up for the opening, does some publicity then lets other people manage it.

CONCLUSIONS

It’s reasonably likely that economically the US is going to feel good about itself over the next few years and markets will enjoy the ride.

Less tax, less regulation, higher government spending, higher wages, more jobs … it’s all gravy.

As my brother who’s now a US citizen said to me recently.

“Haven’t we seen this all before, it booms then it busts?”

I agreed “yep, I think that’s how it may well go but a party shouldn’t start with being worrying about the hangover after, where’s the fun in that?”

He’s a bright guy so he ignored my facile comment.

“But does anyone know when the party ends and we start feeling like crap?”

“Fair point” I reply and no, no they don’t but it won’t be for years probably and it could be a really fun ride while it lasts.

Note: This is written in a personal capacity and reflects the view of the author. It does not necessarily reflect the view of LWM Consultants. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.

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