Pull Up The Drawbridge – a recap
Posted by: Brian Dennehy
“No spreadsheet can adequately quantify
a self-interested politician’s tendency to stupidity”
Me, July 2011
Having mostly held my tongue for 2018, I wanted to put the ludicrous spectacle of the last few weeks, both in the House of Commons and the media, into perspective.
Way back in January 2007 we said:
“the most vocal protectionist bedfellows are based in the U.S. and France…. What is worrying protectionists? What’s wrong with free trade?
In the U.S. there are a very large number of individuals (particularly unskilled) that have not participated in the boom of recent years, and they are a significant voting block for Presidential hopefuls…
At some point in future years, when a more marked global slowdown occurs, the globalisation bogeyman will be wheeled out by politicians.” (TopFunds Guide, 11th edition)
The evidence of disquiet was clear. That was our observation more than 10 years ago - before Lehman’s went bust, many years before the term Brexit was invented, and when Donald Trump was an irritating TV show host with no known political ambitions.
In July 2010:
“Politicians and electorates of developed nations had broadly been in harmony for 30 odd years. An aura of prosperity was created. Consumers took on more debt, a culture of “buy today, pay tomorrow” took a hold; similarly governments took on more debt knowing that tomorrow’s growing and increasingly prosperous population could meet the bill. That is until the population stopped growing, and individuals weren’t so prosperous” (TFG 18th edition)
Again in 2010:
“the powers that be in Europe have bought time to reform the eurozone. If they don’t, the voters will take control.”
The same point was also made by us about of all developed markets – this was most certainly not just about Europe.
In July 2011:
The political temperature is clearly rising throughout Europe and beyond, and political risk is very dangerous…
from 2008 politicians in developed economies took on vast amounts of debt with, in most cases, no mandate from voters to do so… This is where the “two D’s” collide – Government debt and demographics.
Throughout Europe, mainstream parties are already being routed…
In the US, voters and taxpayers are not just increasingly aware that the boom years since the 1990s were a fiction built on debt, but also that there was little benefit to most of them. For example, after allowing for inflation, the average worker has not had a pay rise in almost 15 years. (TFG 20th edition)
In January 2015 we put more meat on the debt and demographics issue:
Ageing population. Ageing populations mean slower growth – it is that simple. The more advanced economies are ageing fast, with Europe and Japan being particularly vulnerable. Once we cease working we are not, economically, productive and tend to rely more on the State.
This problem is all the worse where the number of retirees is growing while the working population is falling. And remember that the baby boomers are only just beginning to retire, and the peak for this problem is not until after 2030 in most affected countries.
Too much debt. From 1791 to 1999 economic growth in the US was 3.9% per annum, after allowing for inflation. Over the last 5 years it was a dismal 1.4%. What changed? In 1999 their economy reached total debt of 250-275% of gross domestic product (a measure of the size of their economy).
Various studies have shown that at this level of debt the growth rate will fall noticeably – income is used to pay interest rather than spend, and capital is used to repay debt rather than invest.
It is the same elsewhere, but worse. Total debt in the US now stands at 334%, but is 460% in the eurozone and 665% in Japan. Yuk. (TFG 28th edition)
In January 2016:
Politics continues to be the big variable around the globe…Everywhere there appears to be a lack of leadership and clear ideas on how the economic mess (particularly overwhelming debt) will be resolved….Such vacuums tend to be filled with unexpected (if not extreme) outcomes, so we will stay on our toes, as we believe a political accident remains one of the biggest risks in the year or two ahead. (TFG 30th edition)
In January. 2012 we said: “any investor or adviser who chooses to ignore the political risks is being negligent”. One or two readers thought we should sidestep politics, but we are recognising an investment risk which has become much more stark, whether in the UK or US or across the continent of Europe. The unhappy coincidence of too much debt and ageing populations is gradually but inexorably building cohorts of disaffected citizens, and not just in Europe. (TFG 31st edition)
And in the same issue:
The Brexit vote... reflects the growing anger of citizens throughout the developed world, and it helps to understand the bigger picture that triggers such a reaction. Lack of economic growth creates a sense of the many being underpaid and under-appreciated, while the few flaunt their wealth and (allegedly!) don’t pay their way…. the evidence explaining that anger could not be more stark….
… growth in profits [from the early 1960s] was possible because of high spending baby boomers, and the use of debt (whether by consumers or companies). Confidence grew, and financial markets boomed.
Then the baby boomers got older and started spending less, and they began retiring from around the turn of the millennium. But debt kept going up. As debt piles up, so do the interest payments, and payments of interest act like oxygen being sucked out of the economy.
Rather than reforming and restructuring our economies, the politicians have ducked the problem. Instead unelected central bankers are centre stage, taking part in a vast financial experiment to keep markets afloat – not to keep economies afloat, but markets. A key, stated objective of QE was to push markets higher – meaningless for the greatest number of voters and tax payers in the developed world.
As the ageing, less affluent, voters and taxpayers realise this, they increasingly look for political solutions beyond the mainstream. This creates a difficult mix for the years ahead. (TFG 31st edition)
Yet those voters and taxpayers across the developed world still need to take care. As Plato put it:
“Those who are too smart to engage in politics are punished by being governed by those who are dumber”
Which neatly brings me back to Brexit.
You don’t need to be a ranting, self-interested, Little Englander to believe that pulling up the drawbridge is the right thing to do just now. As a Plastic Paddy I could at least never be accused of being a Little Englander.
As you can see from the above there are serious and deep-seated problems which the developed world needs to tackle, particularly the debt which is sucking the dynamism out of economies.
A strong, dynamic, independent, free-thinking nation will be in a vastly better position to deal with these issues, both domestically and in co-operation with other nations throughout the developed world.
It will be much more difficult for the UK to act in its best interests, and those of its voters and taxpayers, if it has to do so within an EU whose fragility inexorably grows, year on year, with each new election or social outburst.
Our choice was between the crumbling cliff (of the EU) and the dense fog (of the post-Brexit world).
The choice was made.
Now we all just need to keep our nerve.
The investment implications are clear to me. Global money will flock to a strong independent and dynamic nation, while much of the rest of the developed world dithers on the debt issue, and comes under the spell of extremist politicians.