The side effects of ‘heroin’….

Tuesday 5th September 2017

The side effects of ‘heroin’….

Like a winded boxer, the British economy has been lying flat on the canvas and gasping for air throughout 2017.

It does not seem able to get back to its feet and put its gloves up….

A barely-flickering first-quarter GDP growth rate of 0.2% was followed by an equally disappointing second-quarter figure of 0.3%….

In layman’s terms, the British economy is a lame dog with no bark and no bite – the slowest growing economy in the G7….

The immediate prognosis is underwhelming. A poll of economists conducted by Reuters in August forecast that Britain’s economy will expand just 0.3% per quarter through to mid-2018.

If that were not a painful enough news, last week the Greeks delivered another kick to the unmentionables when they announced their beleaguered economy had enjoyed second-quarter growth of 0.5%….

The Greek economy has been in the doldrums for a decade and in recession 4 times during the last 9 years….

But, for now at least, its economy is growing quicker than Britain’s….

  • The gloomy message gets through….

It is fair to say that the state of the economy (British or Greek) doesn’t weigh heavily on the mind of the average individual….

This morning the people fretting about the state of Wayne and Coleen Rooney’s marriage will vastly out-number those thinking about how to boost British productivity….

Nevertheless, the economic narrative of gloom, stagnation and despondency gets through….

Most people don’t know what a recession is (negative economic growth for two consecutive quarters) but they are familiar enough with the word to know that it has negative connotations and is not supposed to feel good….

So, it’s interesting that a large swathe of the British people is under the impression Britain is in a recession right now….

According to Nielsen the pollsters, 45% of Britons feel that output is in decline to that degree….

They are wrong, of course. We’re not in recession. That Reuters survey of economists I mentioned earlier puts the chance of Britain going into recession before mid-2018 at one in five….

But the survey got us to wondering anyhow. How can anybody ‘feel’ anything about economic output, anyway?

Are these people drawing from some deep well of ancient instinct?  Do they stick their heads out of the window, sniff the air and make an assessment based on some fine correlation between scent and wind direction?

How does this thing work?

  • The next best thing to useless….

My best guess is that it doesn’t. The Nielsen survey is the next best thing to useless for the purposes of determining whether Britain is in recession or not.

But it does reveal something. It reveals that respondents to the survey are feeling negative right now….

Not about some wooly concept like economic output that is abstract to them at best and a complete mystery at worst….

But about tangible and concrete elements of their daily lives and experience….

Issues like rising prices, stagnant wages, debt, making ends meet, job insecurity and other ‘real life’ factors that do make an immediate and direct difference to how they ‘feel’….

Individuals don’t respond to big concepts like ‘the economy’. Instead they respond to the effect it has on the detail of their lives.

They don’t experience a ‘fall in economic output’. Things just get more difficult day-to-day on a financial level. As Barclays economist Fabrice Montagne put it last week….

‘With real income barely growing and the savings ratio at historically low levels, households are now significantly stretched financially.’

Most householders don’t know what the economy is doing. Plenty don’t care. But right now, a fair chunk of them feel like they’re experiencing a personal recession. I think that’s what the Nielsen survey reveals.

  • British business confidence is low….

And it is worth recording that business confidence is not exactly booming in Britain right now either….

Only a few weeks ago, IHS Markit said that the ‘net balance’ of British firms expecting a rise in business activity over the next year stood at +35% in June 2017, markedly down from +52% in February 2017 and the lowest reading since October 2011….

Chief economist at IHS Markit, Chris Williamson, has this to say:

‘Business optimism about future prospects has sunk to its lowest for nearly six years…. The drop in confidence pushed the level of UK optimism below that seen in the eurozone for the first time in seven years, and contrasts with multi-year high levels of optimism in the United States and Japan.’

Last month, all five European Commission’s economic confidence indicators – covering British industry, services, construction, retail and consumers – declined.

  • You’d expect this stuff to be priced into the market….

Flatline economic growth…. Struggling consumers with increasingly less money to spend…. Businesses feeling anything but confident about the future….

Would it be churlish of me to expect the market to have priced-in at least some of this darkening mood that has spread throughout the economy and into homes and businesses up and down the country?

Instead the markets continue to ride high. Stocks are not quite at the heights they were back in May but the FTSE 100 and the FTSE 250 continue to sit not-too-far below all-time high-water marks.

You wonder how this is possible in a normally-functioning market.

When the economy – consisting of producers, distributors and consumers – is barely-growing, how can the market that reflects economic activity fly so high for so long?

And how can a market continue to ignore and shrug-off the black clouds currently gathering on the horizon – as if they are not there?

It makes no sense in a normally-functioning market….

  • But this is the effect of ‘heroin’….

But that’s my point. We don’t have a normally-functioning market driven by corporate performance.

Instead, we have a bubble – a market driven by a decade-long speculation fueled by central bank money-printing and all-time low interest rates.

Last week, Nicholas Macpherson, a former senior official at the UK Treasury, referred to central bank money-printing (quantitative easing) as ‘heroin’ for the economy. On Twitter, he said:

‘QE like heroin: need ever increasing fixes to create a high. Meanwhile, negative side effects increase.’

One side effect of this ‘heroin’ is to create a market where stock values bear no relation to the performance of businesses that lie behind them….

When credit is cheap, investors are encouraged to buy stocks – whatever the price, whatever the performance. And that relentless activity inflates prices.

That’s okay while credit remains cheap and plentiful. But, when it isn’t, the end is nigh. The bubble will pop. That time is drawing closer.

  • The end is drawing near….

Last week, the Bank of England’s Michael Saunders said an interest rate rise would be ‘helpful’.

He was thinking of helping consumers and using a rate hike to help take heat out of rising prices….

But an interest rate rise would also have the effect of taking hot air out of the stock market bubble. And you want to be out of the market before that happens….

UK stocks are over-priced – based on a decade of cheap credit rather than actual business performance.

I’ve said it before. My view has only hardened and I say it again. UK stocks are due a significant correction. Maybe even a big crash.

It’s coming. The longer we go, the more likely it is that time will come sooner rather than later….

My suggestion: Be in cash ahead-of-time – poised for opportunities. Or head to gold– the ultimate safe-haven in times of trouble. Maybe a foot in both camps is the ideal scenario for your money right now….

That’s how it looks from here….

All the best,

Dave Gibson

Money Truths