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posted on 03 May 2015

Epoch of Belief, Epoch of Incredulity (17): Hope and Glory

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N.M. Rothschild notably said that it matters little who makes the rules as long as one controls the currency. With only two weeks to go before the General Election, the awkward question about what to do with Sterling presents itself to the trader. Applying N.M.'s logic, it ultimately doesn't matter who wins the election; because the currency market is the real policy maker.

Since Tony Bliar made it fashionable to rebrand political parties, in order to encourage the pretence that things have really changed, we have had to endure "New Labour" and then the "The Big Society". "The Big Society" pushed the old Disraelian theme of "One Nation". Disraeli noted that Britons do not like coalitions; so it is very amusing to see that those who are peddling the "One Nation" story are in coalition and face years of coalition to come. One should not laugh however, because they have prepared for this; and will therefore have the last laugh. "One Nation" seems to be a transitory phase, on the road to "One Party"; as all the contestants try their best to coalesce, on the re-electable middle ground, where policies differ by degrees rather than by political ideologies.

We have coined the eponym "Blue Labour" - [i] to reflect this sorry state of political affairs.

On the road to the new Wigan Pier of "Blue Labour", we passed Jim O'Neill in "Manny", strumming along to George Osborne's "Northern Powerhouse" riff - [ii].

All these points of reference now culminate at the General Election. And the scramble for the election becomes a party game of euphemisms for how to deal with the NHS and immigration. Whilst the parties pretend to have a magic silver bullet, to go through and through these two issues, the real issue of the budget deficit lurks beneath the waves to resurface soon after the election results are announced.

At the beginning of the week the polls showed that a coalition of some form was the most likely outcome - [iii], because each major party is equally as detested, therefore giving some marginal coalition power to the smaller players. This sense of reality was confirmed as the leaders of the major parties all emphatically denied that they would ever do a deal with their minor affiliated king-makers, in the form of the SNP and UKIP. It was then underlined as the LibDems tried to sell themselves as the "Tory Heart" and the "Labour Mind"; in an attempt to appear as a credible coalition partner to both - [iv]. The objective of politics is the preservation of power; so one can assume that any permutation is a possible outcome in the coalition of the future.

To some observers David Cameron looks terminally sick; but long-term readers will remember that this feigning of death is part of a bigger plan. The "Blue Labour" thesis assumes that Boris Johnson is the agency by which the UKIP renegades are brought back into the Tory broad church.

The fact that Cameron intimated that he will step down after re-election conforms to this thesis. Johnson's reference to Tony Bliar as an "Epic Tosser" - [v], for his position on UK EU membership, sheds further light on the matter. Johnson is angry that Bliar has bubbled the cunning "Blue Labour" plan, for Cameron to exit and UKIP to get its conditional referendum for coalition entry in the next parliament.

Nigel Farage confirmed the thesis when he later discretely extended an olive branch to Cameron - [vi], in order to allegedly tactically defeat Labour. The thesis was then ratified when Nicola Sturgeon signalled that the SNP would support an Ed Miliband Queen's Speech - [vii].

Epoch of Belief, Epoch of Incredulity (16) "May the Force be With Who?" - [viii] observed the little kerfuffle at the IMF, in relation to the correct house view on Sterling, that Christine Lagarde then swiftly changed. IMF analysis of the UK economy concludes that the economy is too weak to fix the budget deficit - [ix]; and also that fiscal austerity will kill growth more than it improves the deficit. Based on this analysis one should be a Sterling bear. Based on Lagarde's hastily contrived prognosis, that the English patient is healthy - [x], one should be a buyer. And then there is the issue of the other deficit i.e. the current account deficit. This hole in the UK's finances just keeps getting bigger. One year ago it was forecast to be 2.5% of GDP, now it is forecast to be 4.4% and rising. The fall in Sterling, versus the Dollar Bloc since 2008 thus far, has not put a dent in it by making exports more attractive. Sterling's strength against the Euro since late 2013, in addition to Eurozone economic weakness, presumably has exacerbated it.

The current account deficit is now garnering more attention - [xi]. When the US Dollar was haunted by the twin deficit issue, it suffered terribly. Sterling has led a charmed life since the Credit Crunch; because first the US Dollar, then the Euro, then the Yen and now again the Euro have been the whipping boys in the currency markets. The General Election however, throws an ugly spotlight on Sterling and its twin deficits.

So there you have it dear readers. Based on the numbers Sterling is a sell, but based on the optics it's a buy. Choose your signal carefully. In terms of optics, the recent unchanged interest rate decision by the Bank left the door open for earlier tightening than is anticipated and discounted in the market however. It therefore looks like the optics trade comes before the numbers trade.

- [xi]

- [x]

- [ix]

- [viii]

- [vii]

- [vi]

- [v]

- [iv]

- [iii]

- [ii]

- [i]

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