The FTSE 100, Boris And The Big Market Call

I like to say there is only one thing you need to know about the market and that’s, “is it going up or down.” Nothing else matters except perhaps whether it is going to travel sideways. Sideways is what I think we are looking at because the West can’t afford to deliver austerity. Without austerity you get elevated inflation but you don’t get an economic depression. With austerity you stop inflation but you get at least a deep recession.

The outcome is the same because economics has a kind of economic gravity when it deals with wealth, and the loss of wealth from Covid can be rebalanced either by a horrible acute shock with a wrecking of economic activity or a grinding chronic loss of buying power delivered by inflation.

If you were a politician, which would you deliver? Politics aside, would you be for a flood that wrecks indiscriminately in an uncontrolled economic disaster or would you prefer the medicine to be dripped in and tweaked so the weak in our society, the old, infirm and young are buffered from the process?

The latter is not in my personal interest but I think chronic is better than acute for most people so I think that the governmental systems approach to turning acute problems into chronic ones is best for the majority and so I support it.

However, there is a large cohort that thinks the medicine must be taken and must be foul to be righteous. These are of course conservatives in the main and we all can see a parade of grumpy old men predicting an old testament outcome with relish in the media.

But the economic equivalent of a biblical Sodom and Gomorrah comeuppance is not going to get anyone re-elected.

In the U.S. there could never be such a path. Austerity is just not on the agenda anymore, but in the U.K. the ruling conservative party still has an atavistic tendency in its “hang ‘em and flog ’em” DNA, to take the severe old school approach of hacking back the economy to weed out the weak in the hope that things will grow back stronger.

This appears to be a big theme underlying the current civil war in the U.K. ruling party. It appears to be a split between the group that wants to take the bitter economic medicine now and reset and the group that sees the best way forward as managing the outcome of lost wealth through balancing inflation and recovery.

The old school don’t mind losing power if they “do the right thing” as they still feel “moral hazard” is a thing. The other half sees a greater moral jeopardy in letting the other side in with their even bigger crowd-pleasing agenda.

This mirrors the call investors have to make. Are we in for a crash or a sideways trend where share prices don’t rise or fall too much but inflation erodes their value? In the crash mode you want to get out for the crash and get in after the dust settles, in the chronic sideways trend scenario to have to stay in and try and pick stocks.

In the crash scenario there is hell to pay for sure. In the sideways scenario we are already near the bottom.

Which is it?

Let Boris Johnson’s demise be the indicator. If he is replaced by an economic hawk then it’s all over for the U.K. stock market and might indicate the hive mind of western governance will go the same way. This seems unlikely to me but never underestimate politics’ capacity for chaos. If he is replaced by someone who is a dove, then the obvious, kick the can down the road dynamic is in place.

My money is still on the long road to recovery with elevated inflation, but that can change if once again the political elite lose their minds and that is never a remote chance.