It’s all so 1970s. The U.K. is once again the “sick man” of Europe, or rather would be if it was in Europe at all. Like the victim of an abusive relationship, the U.K. government and a goodly part of the country still loves Europe but there is no way Europe can play nice with the Eurosceptics like former Hungarian prime minister Viktor Orban grinding their EU gears.
Nothing more clearly demonstrates this apparent precipitous decline than the parlous state of the U.K. stock market. The CEO of the London Stock Exchange isn’t even the CEO of the London Stock Exchange Group and she doesn’t even report to him. It would not surprise me if the whole “group” didn’t rebrand into some Greek word starting with A so it could drop the whole idea of a London Stock Exchange entirely. After all the flat line FTSE says it all:
The U.K. FTSE is the one at the bottom that needs the defibrillator.
There seems to be only one person in the world that shares my allergy to rhubarb and that is Warren Buffett. So I feel that is another reason to respect him in addition to the fact he has made himself one of the richest men in the world by investing and running some of the dullest businesses you can imagine.
So it’s worth taking note of his maxim of being greedy when everyone else is fearful and fearful when everyone else is greedy because fear is certainly running high in the U.K. stock market.
As I read a headline that the U.K. was the cheapest stock market in the world right now, which is true enough to discount any other outliers you might excavate, It dawned on me over a “wake me up coffee” that one of the reasons is simple.
Take the U.S. economy. Post-Covid it is a mess like everywhere else but the market isn’t exactly in the dumps. The U.S. government via the Federal Reserve has kept the wheels on and they have done it, I believe, by being smart. They have navigated using two indices: the stock market, probably the S&P 500, and house prices.
A clever government would not allow either to crash but would pull the levers of interest rates and money supply in such a way as to zigzag to the best or perhaps least worse result without crushing their citizens. There will be pain but not systemic destruction. They would do it this way because it is roughly fair. Everyone can buy a little stock and most can attain property ownership so these two price outcomes are the bedrock of economic activity and wealth. If you do neither you are in the lap of the welfare portion of society and the government deals with that cohort via other programs. The stock and property owners are the spine of the economy and economic policies need to pivot around them.
(As a side bar, increases in money supply into stocks and property don’t create CPI inflation, they make the new money illiquid and not immediate demand drivers except for stocks and property of course. However, if you give cash out to the bottom of the wealth pyramid you start driving headlong towards hyperinflation.)
So the U.S. has been navigating its anti-inflation using stock markets and house prices as its navigation points.
But in the U.K. the story is different. For starters, the stock market is broken already because the government sees it as just a cash cow for transaction taxes and a reason to employ lots of bureaucracy to make people push paper about. Long since (around 2000) the government instructed pension funds to get out of shares and into government bonds, which means the major money flow into any stock market was cut down and ultimately off. Government even admits that this happened and would now like your pension funds to reverse course, but rather obviously they don’t mean that, because who else but U.K. pension funds are going to buy the flood of government bonds which the fiscally challenged U.K. government must print? House prices have long been off the dial high because government has once again seen property as a cash cow and encouraged to the max house prices so they can tax them, so they are a systemic accident waiting to happen.
The U.K. is further up the creek than almost all major economies for a whole set of reasons and the one foremost in people’s minds is “the cost-of-living crisis” of inflation that really should be renamed “the price of Covid crisis” where inflation has shot up into double figures.
The U.K. solution? Hurt the citizen by driving as much pain their way as necessary to freeze their spending and pull down prices as citizens’ wealth and well-being is crushed via mortgage payments and house price collapses. It’s the bitter medicine long since obsolete but being administered anyway.
It’s the direct opposite tactical pathway from the U.S. and what do you know, the outcome will be quite different. Firstly the U.S. will glide out of the post-Covid miasma, whereas the U.K. will shudder, jerk and U-turn out of this mess and probably plough through a few new ones on the way.
But the fear and depression in the city doesn’t stop there, most see a new Labour government packed with Crypto-Marxists getting elected in 2025 with the gates of economic hell being thrown wide open.
So there is only one call for the investor. Is the U.K. toast or is this nearing the nadir of fear?
If you think the U.K. is toast, then it’s hard to justify being in U.K. stocks even if they are global companies because the London Stock Exchange is on the way to the dumpster and frankly the signs are all there that it’s on its last legs. As such, cheap will get cheaper.
If you think the U.K. will turn around and it won’t get worse from here and we are near the bottom then now it is the time to load up. That is what I’ve done, perhaps too early.
If I am correct the market will grind up this autumn and others will suddenly start to think all is not lost.
The only reason I think the future is brighter is that people have underestimated the price of Covid and feel the problem is deeper than a recovery from the economic consequences of 2020-2022 and do not realize it will wash out in the coming year or so, and that in itself will sort many of the things that ail the U.K. The U.K.’s underlying weaknesses have been accentuated by the pandemic, like cracks in wood when you bend it, but those cracks are not yet catastrophic fault lines.
If I’m right the turn is not too far away and could well be fast.
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