Cleaning Overton’s Window

You could hear the crack of the starting gun echoing around the markets last week: the race for the 2020 Democratic presidential candidacy is on and American equities dipped noticeably. And the leading message from those leading the Democratic pack is that capitalism itself is broken and needs radical reform.

You could hear the crack of the starting gun echoing around the markets last week: the race for the 2020 Democratic presidential candidacy is on and American equities dipped noticeably. And the leading message from those leading the Democratic pack is that capitalism itself is broken and needs radical reform.

Companies have become too concentrated and society itself is too concentrated on profits at the expense of people and the environment, the Democrats argue. Politics is broken, they rage, when the rich don’t pay their share and the poor live right at the breadline, when climate scientists are ignored or discredited by foundations run by coal magnates. All of this is personified by an unabashedly rich businessman living in the White House who, it’s rumoured, can’t be bothered to read past the front page of briefing notes.

Anger like this leads to massive changes in what is considered possible or even reasonable in political debate – what political junkies call the Overton Window. That can either energise people or freak them out, leading to an absolute rout like when George McGovern was annihilated by Richard Nixon just two years before his Watergate disgrace. Take the American Overton Window: the US has always prided itself on being a capitalist paradise. Anyone with a brain, a good work ethic and health insurance can strike it rich in America. Wait, was health insurance always a prerequisite for the American Dream? And what if you can’t get a good job because you were born poor and can’t afford soaring university tuition? You can see how the window of political discourse shifts to cater for changes in the nation’s mood.

Last week, Democratic contender Senator Elizabeth Warren announced she was in favour of breaking up the giants of Silicon Valley because they were distorting their markets and wider society while stifling innovation. You could easily make an argument for the first two of these charges, however, it seems a bit of a stretch to say that Silicon Valley is detrimental to innovation. Perhaps in time this could be the case, but today tech companies are investing a much heftier amount of their sales into research & development (R&D) than other industries. Take Alphabet – one of the companies singled out for Democratic ire – it ploughs 16% of each year’s revenue into R&D funding. Last year, that equated to $21.4bn spent on innovation.

Obviously money’s not everything – Microsoft, Apple, Google, all of them were built using shoestring in a garage. But it really does help! For all the street cred accrued to these West Coast start-up champions, people shouldn’t forget the heavy contributions to communication and digital technologies made by the extremely well-funded Bell Labs, on the East Coast, in the 20th century. In many cases, this was the bedrock for the mobile phone culture and internet of things that is developing this century. Bell Labs also built the first prototype solar cell, another technology that is hailed as our 21st century future, in 1954. And almost 10 years later it used this technology to power the first orbiting communications satellite. You can’t build that in a garage.

Source: FE Analytics, data sterling total return to 8 March


European subsidies

Fears about a European recession have been compounded by another central bank U-turn.

The European Central Bank (ECB) decided to turn the money tap back on for eurozone lenders last week. A few months ago it had started winding down some of the programmes it had used to boost economic growth in the trading bloc, but after a series of bad data from all over the region it reversed course and announced it would be subsidising billions of euros worth of loans in a bid to encourage more borrowing (and therefore investment).

While the news of this move wasn’t in itself surprising, the timing was. Investors increasingly believe the eurozone slowdown could become a serious problem seriously quickly. The ECB’s decision to push more cash down the pipe seems to show that the central bank feels the same way. Weakness in China is a good part of the reason why European economies have ebbed lately, so another delay for the “almost there” Sino-American trade agreement won’t have helped any. Slower growth in China means less demand for the heavy machinery, coffee makers, cars and other gadgets that European companies send east.

Jarring news popped out of the US as well. The February nonfarm payroll figure – the net number of new jobs added – came in at an extraordinarily low 20,000 (it was more than 300,000 in January). This number is always extremely volatile, however, so much of the information you can glean is from the revisions to past months that are released at the same time (the past two months’ numbers were revised up, so the three-month average is a respectable 186,000 each month). One point to note is that the unemployment rate fell from 4% to 3.8%. Also, pay growth continues to expand well, up 3.4% compared with a year ago. That means more cash in the pockets of Americans, which should keep the US economy healthy.

The European-based organisation for Economic Co-operation & Development (OECD) appears focused on the effects of the situation in the Old World, however. It reduced its forecast of 2019 global growth by 0.2% to 3.3% and 2020 was cut by half as much to 3.4%. It cites political policy uncertainty, ongoing trade worries and an erosion in business and consumer optimism as reasons for its adjustments (the second in two quarters). It also notes, perceptively, that Brexit is a cluster-problem residing far, far away from a healthy resolution. “A disorderly exit would raise the costs for European economies substantially,” the OECD warns.

So with that dire warning ringing in her ears, Prime Minister Theresa May steps up to the plate on Tuesday, testing her swing wearily as virtually her whole team jeers with increasing violence from the batting cage. She is widely expected to strike out for the second time when she brings her compromised-comprise deal before Parliament once again. After that, it’s up to the House of Commons to decide whether its wants a hard Brexit at the end of the month (unlikely) or a vote to delay Article 50. That would give just enough time to roll a prime minister, but nowhere near enough to rewrite a departure deal with an intransigent and increasingly impatient trading bloc.
 

Bonds

UK 10-Year yield @ 1.19%

US 10-Year yield @ 2.63%

Germany 10-Year yield @ 0.07%

Italy 10-Year yield @ 2.50%

Spain 10-Year yield @ 1.05%

 

Economic data and companies reporting for week commencing 11 March

Monday 11 March    

US: Retail Sales, Business Inventories, Fed Chair Jay Powell speaks in Washington

EU: GER: Trade Balance, Industrial Production           

Final results: Banco Santander, Clarkson, HGCapital Trust, Old Mutual

Interim results: River and Mercantile Group
 

Tuesday 12 March

UK: Trade Balance, GDP, Industrial Production, Manufacturing Production, Construction Output Index of Services

US: NFIB Small Business Optimism, CPI, Real Average Weekly Earnings

Final results: Computacenter, Cairn Energy, Domino's Pizza Group, French Connection Group, G4S, Menzies (John), Pendragon, Pennant International Group, Surgical Innovations Group

Interim results: Close Brothers
 

Wednesday 13 March

US: MBA Mortgage Applications, PPI, Durable Goods Orders, Construction Spending

EU: Industrial Production

Final results: Advanced Medical Solutions Group, Avast, Balfour Beatty, Burford Capital, Dignity, Hikma Pharmaceuticals, Kenmare Resources, Marshall Motor Holdings, Morrison (Wm) Supermarkets, Prudential, Quilter, Standard Life Aberdeen, StatPro Group
 

Thursday 14 March

UK: RICS House Price Survey

US: Trade Balance, New Home Sales

EU: GER: CPI

Final results: Capital & Regional, Cineworld, Capita, Just Group, Marshalls, Oakley Capital Investments, Savills

Interim results: Brooks Macdonald, DFS Furniture
 

Friday 15 March

US: Empire Manufacturing, Industrial Production, Capacity Utilisation, University of Michigan Sentiment Survey

EU: CPI; GER: Wholesale Inventories               

Final results: Restaurant Group

Interim results: Wetherspoon (JD)

Trading update: Berkeley Group

Total votes: 8