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If you’re living in the UK right now, it’s hard to tear yourself away from the joys of the election campaign.
And given how dispiriting it all is – a great deal of finger pointing and confected outrage designed to camouflage some genuinely worrying trends – it’s easy to feel as though we’re in some sort of crisis.
But as investors, you need to take a step back and have a look at what’s going on without the emotional overlay (if you can).
And the reality is that this has been a remarkably good week for markets overall.
Markets have had a remarkably decent week
This week the S&P 500 in the US has hit new all-time highs. And it’s not just the US market. Most global equity markets have had a decent time – European markets are up for the fifth week in a row, for example, according to Michael Hewson at CMC.
Meanwhile, bond yields have started to rise from the depths – the world now has a few trillion fewer of negative-yielding debt than it did a few short months ago.
Gold has had its worst week in quite some time. One US dollar will now buy you fewer than seven Chinese renminbi, which is a very healthy sign that fear of deflation is decreasing (I’ll explain why in tomorrow’s Money Morning, where we go through the charts of the week).
In short, it’s “risk-on-tastic” as we go into the weekend.
What’s going on?
The obvious thing to point to is the wee boost the market got from the apparent thawing in relations between China and the US. Yesterday, one of Chinese negotiators suggested that both sides are looking at removing some additional tariffs “in phases”.
But we’ve heard all this before – it’s hard to imagine that many people are radically shifting their views on the trade war simply on the basis of the latest statements from either side.
So while the thawing has definitely helped – particularly in those markets (like Germany’s) that have been hit hardest by the global manufacturing slowdown – today’s good cheer can’t just be down to China and the US trying to be pals again.
I think the real story has somewhat deeper roots. And once again it mostly comes down to the amount of money that’s being printed or promised around the globe.
All governments are big spenders today
Let’s return to the electioneering in the UK for a minute, much as you might prefer not to.
Immediately after the financial crisis, the election campaign of 2010 was all about debt. The feeling was that we had to get our house in order and pay down our debts, because a financial hurricane had just blown through.
(Obviously, it would have been better to get our finances in order before the hurricane blew through – but that’s how these things work.)
Whatever you think of “austerity” – there are plenty of arguments you could get into there, and that’s even before you involve the economists and all their theorising about it – the point is that the amount of debt the country had was a very big issue in the election. It might even have been the decisive issue.
Now, in the current election, it’s pretty clear that one thing is not on the table – fiscal rectitude.
As Bloomberg points out, both Labour and the Conservatives are promising to increase public spending as a proportion of GDP from its already historically high level of just under 40%, to 41.3% (the Tories) or 43.3% (Labour).
Ignore the spurious accuracy of those figures – we all know that politicians generally spend more than they promise. The point is that whoever you vote for at the next election, you’re going to get a big-spending government (well, at least, unless it’s a hung parliament again, at which point the process will start over).
The same is happening over in the US – indeed it’s even more radical over there.
US president Donald Trump is already a massive spender. That’s hardly a surprise, given his background. But I’m led to believe that the Republicans (or a sub-faction of them at least) once pretended to have half an eye on America’s balance sheet. It’s clear that this idea has gone out of the window.
And of course, the Democrats are largely campaigning on tax and spend policies too.
Indeed, the main difference (seen from the outside at least, and I do appreciate that politics is local) is that the Republicans like to spend money on cutting taxes and pretend to offset that by cutting public services, whereas the Democrats like to spend money on public services and pretend to offset that by raising taxes.
Oh, and Japan is already embarking on its latest stimulus package apparently. As the FT reports, Prime Minister Shinzo Abe has told government officials to produce an “agile” and “comprehensive” stimulus, to “take advantage of ultra-low interest rates and borrow in order to finance public investment.”
Even the Germans are starting to inch towards the idea of loosening the purse strings, under intense pressure from the rest of the eurozone.
In short, as Dylan Grice pointed out in my interview with him last week (read it here), MMT, or something like it, is headed our way.
MMT causes lots of arguments on Twitter among economic theorists who seem to shift the goalposts every time you try to pin down what it means.
But the theory is irrelevant. In practice, MMT refers to the government deciding that it can spend what it wants until inflation causes enough havoc to stop it from doing so. And in practice, that’s what we’re going to get.
So if you’re wondering why markets are going up, that’s basically what it’s down to. Markets have been terrified of deflation. Now every politician around the world – and their central bankers – has committed to “reflation or bust”.
I suspect they’ll succeed, and then we’ll have a whole different set of problems to deal with, and everyone will blame the actions that were taken right now, for whichever financial crash awaits us in the future.
But for now, markets are in party mode. In terms of what it means for your portfolio, I do suspect that all of the stuff that has been hated in the last few years (simple “value”, commodities, etc) will probably have their time in the sun before the bad times hit again.
We’ll be discussing all this at the MoneyWeek Wealth Summit on November 22nd – make sure you’re there!