Talk to enough fund managers over a long enough period of time, and you get used to a high level of general optimism. Crashes are corrections; credit crunches are short-term problems that can be magicked away if you nag the banks hard enough; house prices never fall for long (there’s a shortage of supply you see); equities return, on average, 5.8% a year; Chinese growth will help the West avoid recession… you know the kind of thing.
So most MoneyWeek staff – I’m thinking of Bill Bonner, John Stepek, and myself in particular – are used to being the most pessimistic people in most rooms. That’s why I felt a tad discombobulated when I met this week’s fund manager interviewee.
Aberdeen’s Bruce Stout doesn’t just think things are as bad as we do – he almost trumps our grim forecasts at every turn.
Cut public spending to reduce our budget deficit? Won’t work. Head off deflation? Can’t happen, we’ve no other choice. Maintaining our living standards? Nope. Most people in Britain haven’t got a clue about how much they will suffer financially over the next decade. Investing in the UK? Doesn’t make sense – dividends and earnings are going to “contract for the next five years”. The four big currencies (the yen, euro, pound and US dollar)? “You can’t make a positive case for any of them… the macroeconomic fundamentals are just rotten.”
See what I mean? And that was all before Fitch’s warning on UK debt hit the pound again this week. And before Wednesday’s trade data made it clear that hopes for an export-based UK recovery are looking pretty forlorn. And before the new government began fleshing out its plans for spending cuts.
I can’t imagine any of these things have made Bruce feel any better disposed towards the UK, the last in particular. One thing he stressed in our talk was that cutting deficits isn’t as simple as cutting spending: when you cut spending you cut revenues too (fewer people work and you collect less tax) – at least in the short term.
Martin Wolf took up the point in the FT this week. Cut spending too soon, he says, and economies could weaken again, creating larger cyclical deficits that instantly “offset attempts at structural fiscal tightening”.
So in some circumstances (now may be an example), cutting spending can only have a “painful result”. Wolf is probably right. But sadly that doesn’t mean we can delay sorting out our finances.
As Bruce says, with no savings and huge debts, Britain doesn’t get to do what it wants: it gets “dictated to by the markets”. If you’d like to read more about the financial end of the West, see the interview here. If you’re after anything more jolly, we look at how the robotics industry may hold some hope of improving – or at least protecting – our standard of living in the long run: Cash in on the robot revolution.