JUL 10, 2024
Brood XlX meets Brood Xlll
Cicadas spend most of their lives underground, emerging only periodically, with two particular brood types - labelled XlX and Xlll - emerging on 13 and 17 year cycles respectively. This is evolutionary genius, for it means that they only coincide one every 221 years and this is one such year. This May and June billions of them emerged in the US at the same time, which got us thinking about cycles, and Politics.
The, needlessly early, UK election has seen a return of New Labour with Kier Starmer and his mentor Tony Blair - last seen 17 years ago, while in France, the debacle of their early Election has left the country in search of a new, non aligned, Prime Minister, which is widely thought likely to be Francois Holland - last seen 13 years ago. Hmm.
The question is “has anything actually changed?” because, beneath the illusion of ‘historic’ Elections in France and the UK, the Globalist regime looks pretty intact, the menu is the same, it’s just that they have rotated front of house. In particular, despite clear populist concerns, they did nothing at all to address the issues of uncontrolled immigration, ruinously expensive wars and quixotic Climate change policies. Indeed, the first act of Prime Minster Starmer was to fly to the US to join the NATO 75th summit (lucky timing on the Election) and commit to yet more funding for ‘defence’, while the first act by his Chancellor Rachel Reeves has been to bring back former BoE Governor and Climate Zealot Mark Carney and announce the billions more will be borrowed by a (so called) Wealth Fund to ‘invest in the Green Economy’.
Meanwhile, in France, the left coalition concocted to thwart ‘extreme right’ (actually rather left wing) Marine le Pen in France, is even more pro-immigrant than Macron, and it looks like with a hung parliament the former President Francois Holland may return as Prime Minister. Interesting that when he first appeared, Holland was something of a Starmer like character, offering “Change’ and a ‘normal administration’, which all sounds rather familiar. Plus ça change, plus c'est la même chose as they say over there.
Thus for investors, many of the big issues remain seemingly unchanged; Europe appears to remain committed to the US led policies of ruinously expensive wars against both Russia and the Climate and seemingly offers no new policies to limit immigration - despite the popular protests against all three policies. The Military Industrial Complex and the Green equivalent will continue to attract vast amounts of capital that could be invested productively elsewhere. This is obviously not good for Bond Markets, as there is no sign of any commitment to reduce spending and the promised revenue from new taxes and ‘growth’ is likely as illusory as the promised ‘change’. The spread between French and German Bonds, already around 40bp before the Election has widened to 70bp
You can ignore economics, but it won’t ignore you
As we noted in earlier posts, targeting ‘Growth’ like it is some form of Managerial key Performance Indicator rather than the outcome of ensuring that markets can provide solutions to consumer needs, is a key flaw in current western systems of government. The parallels with management targeting EPS growth - often by playing fast and loose with the balance sheet - are obvious, albeit largely ignored, but just as economic gravity ultimately hits companies regardless of their creative accounting, so the GAAP are hitting the non GAAP illusions of a lot of western economies.
In particular, the illusion of public private initiatives, where the Government puts (borrowed) money in as a form of first loss and the private sector puts in money that is also borrowed and writes off the cost of debt against corporation tax. The UK based partners in the Private Equity firm obviously take any profits in the form of capital gain - whereupon they usually move to a more attractive tax jurisdiction to avoid paying any tax on that either. The US based ones of course were never eligible to pay tax in the first place and the non doms probably donated a little of the tax they didn’t pay to Arts and Charities and got themselves knighthoods. Along the way, we have seen most of the profits for many of the Private Equity Barons generated by ‘cost cutting’, i.e sacking staff and shifting them from being tax payers to benefit consumers. All round a win-win for the Private Equity barons and a lose-lose for the rest of the country. Nothing in this new government so far suggests any ‘Change’ here.
In his excellent book Vassal State, how America runs Britain, Angus Hanton makes the point about how many UK Brands are actually owned by US corporations. HMRC estimate that those US giants underpay corporation tax in the UK by around $6bn a year, but it is the Private Equity element that is the big issue in our view. As Hanton points out, in 2022/23 alone 181 UK businesses were sold to US PE firms. He also notes ironically that people said they wouldn’t buy his book from Amazon, but instead from Waterstones - only to be told that Waterstones is owned by US PE firm Elliot advisors.
The net result of the various Public Private Initiatives has been to increase benefit spending and reduce taxes while shifting large amounts of income offshore. The answer is apparently more of the same
For households, things are also not so good, for not only are taxes going to increase - a return of Holland’s wealth tax in France and the likely emergence of one (even de facto) in the UK - but taxes are going to increase on savings one way or the other as the expanded role of the state is going to need funding somehow. Wealth managers are understandably running round trying to read the runes as to which feathers are to be plucked.
The reality is that the real policy makers never go away - the Tories in the UK have merely kept the seat warm for the Blairites to return officially to power, while in France the centre left never really went away either and of course the EU remains in power however people vote. Davos man has seen off the threat, so far, but is, rightly, anxious about Trump. In the meantime, the Change voters have been promised does not appear to include, borders, wars, net zero or the high cost no revenue outcomes of public private initiatives. The new governments will offer to govern competently - but on whose behalf?
Cicadas are noisy and very irritating, but ultimately harmless. The same might be said of politicians, but perhaps not of those ultimately running things. But just as the economic reality of chasing illusory debt fueled growth will emerge, so too will the populist push back against the Globalists. They might have won this round, but there is a lot more to come.
