Issue 110: 2017 06 22: Meanwhile, In The White House… (J R Thomas)

22 June 2017

Meanwhile, In The White House…

The administration looks at Syria and Wall Street.

by J.R.Thomas

Events in the UK have rather distracted from what is happening across the Atlantic.  We can confirm that Mr Trump is still President, though you might have thought from some reports that he was about to be removed therefrom.  And he is still pursuing at least some of the strategies that he suggested he might when campaigning for the Presidency last year.

But one area where he is perhaps varying his approach is to be more interventionist in foreign affairs.  Nothing hugely dramatic; but the United States’ has quietly stepped up to a more active role in Syria (more active than during the time of his immediate predecessor that is), and all those who made jokes last year about the worries of The Donald’s finger on the nuclear button will no doubt be re-warming them now.  But what seems to be going on is actually Pentagon-led; the generals have asked to be allowed to take the gloves off a little when it comes to protecting American interests in the area.  Hence the very carefully targeted attack on President Assad’s biological weapons depot several weeks ago, and the shooting down of a Syrian army SU-22 jet fighter at the weekend.  The depot bombing was communicated to Russian personnel on site a few minutes before, allowing them to get clear, in accordance with rules of engagement agreed between the Russian and US military forces, which were further reinforced and clarified after the bombing.

In relation to the downing of the SU-22 it is not clear what warnings were given; as it was Syrian the State Department in Washington have said that strictly speaking no warning was required, but as it was part of joint Russian-Syrian forces they did communicate intent.  The Russians have said no warning was given and have suspended the pre-warning communication structure, aggressively criticising the US action.

From here your perspective, and your decision as to whether to restock the emergency supplies in your private nuclear fall-out shelter, will depend on which of the various area experts you believe (no doubt bearing in mind Mr Gove’s comments on experts).  The doves say that the Russian response is in fact a friendly one, doing what they have to do to calm the anger of their Syrian allies and concerned local military, but actually refraining from more precipitate actions.  The hawks though say it is all bad news as it is likely (or, designed, say the very hawkish) to lead to a situation where there will be further breaches of the restraint code of conduct which will lead to retaliation against American forces, rapid build-up of American involvement in the area, ditto Russian, fingers on buttons, and Armageddon. The proponents of this view do seem to be the same ones that suggest Mr Putin and Mr Trump are secret best friends, slightly disrupting this argument, but maybe they have a secret plan to rebuild the world in their private ownership when it has been nuked.

What seems to be a more likely explanation of the weekend’s events is not any form of conspiracy theory, but that much more common cause of trouble, the cock-up.  And in Syria this eventuality is not at all surprising.  The Americans are supporting Kurdish forces, the Russians Assad government forces.  Both these clients and their sponsors are trying to destroy ISIS; but the clients also hate each other.  In this incident the Russian-Syrian military claimed to be attacking ISIS but found that the Kurdish-American effort got in the way.  The Americans say the plane was shot down to protect Kurdish ground troops which they claim had become the Syrian target.  General Joseph Durnford, who is chairman of the US chiefs of staff and thus the man in charge for operational purposes, said that “Every effort [was made] to warn those individuals [responsible for the jet] not to come any closer”.  You don’t have to be a lawyer to recognise that there is some very careful wording in that statement.  The Russians say there was no use of the “de-confliction” (add that to your dictionary of expressions not previously encountered) communication system.  Those of us who have to try and work all this out can see that the various statements are actually not very conflicting, indeed deconflicting.  Nevertheless the Russians are saying that US fighter planes are now legitimate targets, though word is there are conversations going on between Washington and Moscow.  Let’s hope that jaw-jaw will prevail, that the striking of fierce attitudes can cease and life on the battlefield can get back to normal. And, just a suggestion, maybe the parties might also involve the local population in communication strategies and remove them from their current role as collateral damage on that battlefield.

In domestic matters though, Mr Trump’s administration is currently less in need of clarity in its pronouncements and actions.  Top of Mr Trump’s little list currently is to sort out those pesky Wall Street bankers.  His method here is to offer them a great deal of rope, an approach seemingly welcomed by the bankers who think there is lots of money to be made in rope dealing.  Not literally of course; what The Donald wants to do is to force them to be more like other industries – such as, say real estate developers – who if they get it wrong go bust and have to call in the bailiffs.  This is generally how bankers behaved until relatively recently, helped occasionally by the Federal Reserve Board (in the UK by the Bank of England) who would if approached by naughty bankers to say that they had got the pluses and minuses the wrong way round, or left the bank cheque book with a rogue trader over the weekend, try and help out.  This usually meant forcing a merger on terms very painful for the bankers in trouble; it also meant that banks should not get so big that they became impediments to the structural integrity of the banking system.  Things have moved on though, on both sides of the Atlantic.  In the US the system is now based on the Dodd-Frank Act which sounds like a comedy routine but is actually what drives the current system of regulation.  The bankers think, rightly, that the regulation is extremely intrusive, expensive, and gives enormous powers to the regulators.  It is meant to, so to that extent it is working well, but the bankers complain further that it is driving up their costs to uneconomic levels, prevents them using their (shareholders’) capital to maximise profits, and means that they cannot compete or expand whilst faced with the growing threat from other forms of deposit taking, advising, dealing, and lending.  They would like Dodd-Frank amended or abolished, and so would much of the Republican Party in Congress, some because they think it is over-interference in business, and no doubt a few because they are bankers or are friends thereof.

Mr Trump agrees, not because he wants to take up banking after his retirement from politics or because he likes bankers – the inhabitants of Wall Street say on the contrary, he detests them – but because he wants bankers to go back to standing on their own two feet.  He would like smaller banks that are competitive and business like.  And if they go bust, go bust.  In accordance with this, Mr Trump last week appointed Jim Clinger as Chairman of the Federal Deposit Insurance Corporation, the key bank regulator.  Mr Clinger has long been in various jobs a vocal and determined opponent of regulation.  The House of Representatives has recently passed a bill to abolish Dodd-Frank that the anti-regulator lobby consider to be the perfect solution to how to control the sector, but it is thought to be unlikely to get through the Senate.  So the second best solution is to put in charge of the regulators a man who wants a lot less regulation.

Which suggests that Mr Trump is indeed learning how to get his way on Capitol Hill.  Just one problem remains – getting Mr Clinger’s appointment confirmed by the Senate.


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Issue 110: 2017 06 22: After Isis (Neil Tidmarsh)

22 June 2017

After Isis

To the victor, the spoils?

by Neil Tidmarsh

The news this week suggests that the end really is in sight for Isis as a territorial power.

Abu Bakr al-Baghdadi, the Isis leader who declared its caliphate in 2014, has been killed in an airstrike on the Isis capital Raqqa, according to Russia. The Syrian Democratic Forces (an Arab/Kurdish coalition backed by US Special Forces) are fighting their way into Raqqa and have reached the old town.  In the battle to liberate Mosul, Iraqi forces have entered the Old City, their final target, and are now within reach of the Great Mosque of al-Nuri, the very place where Abu Bakr al-Baghdadi announced those pretensions to statehood three years ago.  Another Western-backed group, the Free Syrian Army, is preparing to advance on Isis’ final stronghold, the town of Deir Ezzor in the desert of eastern Syria.  Iran launched ballistic missiles at Isis bases near Deir Ezzor in retaliation for last week’s terror attacks on Tehran.

The question is no longer ‘how and when will Isis be defeated?’ but ‘what will happen now to the towns, cities and territories once held by Isis?’ Or, more specifically, what do the Kurds – who have proved to be the most successful opponents of Isis – intend to do with the territory they’ve taken from Isis in Syria and Iraq? Will they return it to the legitimate governments of those countries (if Syria can be said to have a legitimate government) or are they hoping to keep it for themselves as part of the independent Kurdish states they’re trying to build?

In Iraq, at least, the latter seems more likely.  This week Masoud Barzani, the president of the Kurdish region in Iraq, announced a referendum on independence to be held this September.  The government of Iraq would respect Kurdish independence within the boundaries of Iraqi Kurdistan; but Mr Barzani wants to incorporate areas outside those boundaries into his autonomous region, areas which were under Isis control but which are now under Kurdish control.  They include the oil-rich city and district of Kirkuk; Sinjar in the north, which links up with Kurdish territory across the border in neighbouring Syria; Khanaqin in the south; and Makhmur near Mosul.

Before the advent of Isis, these ‘disputed territories’ had been under central government control since 1991, and it’s unlikely that the government would agree to cede them to an independent Kurdish state.  Quite apart from their strategic and economic importance, these areas are populated not just by Kurds but also by Arabs, Turkmen and Yazidis, all of whom are hostile to the idea of Kurdish rule.  Iraq’s Shia militias have already said they would fight the Kurdish Peshmerga to stop that from happening.  The militias who recently drove Isis from the last village they held in Yazidi territory, in the north west of Iraq near the border with Syria, have accused Kurdish forces of ethnic cleansing there, claiming that the Yazidi populations previously displaced by Isis are reluctant to return to territory now controlled by the Kurds, and that the Kurds are now displacing the remaining Yazidis.

Post-Isis conflict in Iraq is a clear possibility; but in Syria it has already begun.

The Syrian Kurds have largely co-operated with Syria’s Assad regime and its allies Russia and Iran since the start of the civil war.  They have fought alongside rebels only in the struggle against Isis, not in the struggle against Assad.  But their success in taking territory off Isis (with the help of the US and other Western powers) now seems to be worrying the regime.  This week, according to the Pentagon, regime forces attacked the Kurdish-led Syrian Democratic Forces for the first time; a Syrian fighter jet apparently dropped bombs on SDF troops who were engaged in the fight against Isis in Raqqa.  It was shot down by a US jet.

It wasn’t an isolated incident.  Elsewhere in Syria, it seems that the regime has turned on another anti-Isis coalition, the Free Syrian Army, even though the FSA has strict instructions from its western backers not to take part in the war against Assad.  This week, an Iranian-made regime drone threatened a base occupied by the FSA and western Special Forces preparing for the assault on Isis in the eastern desert.  It was shot down by a US jet.  Last week, a US jet shot down an Assad-regime drone and hit two regime trucks when the western-backed anti-Isis coalition forces at al-Tanf were similarly threatened.  And last month, a regime convoy of suspected Iranian-backed Shia militias was hit by a US airstrike when it approached a coalition Special Forces airbase and refused to turn back.

The Assad regime is confident that the rebellion against it has failed, thanks to Russia and Iran.  It’s confident that the war against Isis has been won, thanks in part to western-backed groups such as the SDF and the FSA.  So now it appears to be preparing itself for a third conflict; the struggle for those territories liberated from Isis.  Its attacks on the SDF and the FSA could well be its opening attempts to seize the initiative in this new conflict.

Whether it will succeed depends largely on the resolve of the USA.  The US and its western allies have largely kept out of the Syrian civil war.  Their efforts in Syria have been concentrated on putting together coalitions to fight Isis.  But the regime’s recent attacks on those coalitions are drawing the US and its western allies into open confrontation with Assad and his allies.

It remains to be seen how much territory the Kurds and other successful anti-Isis forces will try to retain, and how far their US and western sponsors are prepared to back them up. Those sponsors will face a terrible dilemma, particularly in Syria: to agree to the return of those territories to Assad would be to legitimise him and to abandon their clients; but to refuse their return would risk taking sides against him. The territorial struggles over the ground from which Isis has been driven have the potential to be as dangerous as any of the other Syrian conflicts so far.


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Issue 110: 2017 06 22: A tale of two committees (Frank O’Nomics)

22 June 2017

A Tale Of Two Committees

Should the Fed and the Bank of England swap strategies?

by Frank O’Nomics.

The 1980’s comedy about a tabloid newspaper, Hot Metal, once had an episode where the editorial team agonised over a lack of subscriptions when producing headlines like “Pound has a quiet day on the money markets”.  On the face of it, writing about last week’s widely predicted central bank activity might seem to have the same level of interest – but please bear with me.  While the Fed raised US interest rates by 0.25% to 1.25% and the Bank of England kept UK rates at 0.25%, as predicted by pretty well every economic commentator, these moves look at odds with the economic data being released.  Indeed, if you just look at the inflation numbers (and inflation targeting is the focus of most central bank policies), it is the Fed that should have done nothing and the UK that should have responded.  We need to ask whether the Fed is stuck on a pre-announced course that it struggles to turn back from, and whether the Bank of England has become bogged down in inertia.

Taking the US situation first.  Not only did the Fed announce a 0.25% rise in its funds rate, but it also pointed to a further rise later in the year and announced plans to unwind the $4.5trn of assets acquired through the process of quantitative easing.  This stance runs entirely contrary to the latest economic data releases.  Inflation is falling in the US, with CPI last week reported at 1.9%y/y in May, down from 2.2%.  Core inflation is even lower, with CPI excluding food and energy running at 1.7% (down from 1.9%).  Other indicators also show a slowing economy, with retail sales down 0.3% on the month, when a rise of 0.1% had been expected.  Why then, given a 2% CPI target, has the Fed decided to carry-on regardless?

There are a number of reasons. Firstly, there is an inclination to look through short-term data, with some seeing inflation as subdued for structural and technical reasons.  Labour market data appears to support such as stance, with the uninterrupted fall in unemployment from its 10% peak in 2009, to its current level of 4.3%.  There is inevitably some concern over the extent to which the policy of low interest rates has inflated the value of most asset classes to a point where there is a renewed threat to financial stability if the bubble bursts.  While other nations seem intent on adding to the pressure (Russia cut rates this week), the Fed is trying to gently undermine the bull market.  Perhaps more significantly, the Fed seems keen to get rates up, and to reduce its balance sheet, so that if the economy does take another lurch down they have built up a reasonable level of ammunition to ease the pain.  If the danger of deflation is currently seen as minimal, a return to a more normal level of interest rates would appear to have a limited risk. The Fed regards 2% inflation as being most consistent with their mandate of achieving price stability and maximum employment over the longer run (although the Fed Governor Janet Yellen has been encouraging a debate over the possibility of raising that target), but they do not have to respond to short-term deviations from this target.

The Bank of England’s inertia may be a little harder to justify.  They too have a 2% inflation target, but the weakness in sterling meant that the latest CPI data here hit a four-year high of 2.9%y/y, well ahead of expectations and above the peak that the Bank had warned we would hit.  The Bank has encouraged us to look through what they regard as a short-term phenomenon, and the level of average earning has been slipping in the last few months to suggest that, at present, a spiral is not developing.  However, the logic regarding asset prices would seem to be as well justified here as in the US.  Low interest rates are encouraging the build-up of household debt to unprecedented levels, and the ongoing reinvestment of the Bank’s £445bn balance sheet, developed via quantitative easing, has pushed bond and equity prices to levels that leave a high risk of a destabilising sharp correction at some stage.  As in the US, creating some latitude to help the economy, when and if a correction does come, makes a lot of sense.  Such arguments seem to be winning over elements of the Monetary Policy Committee, with 3 (of the current total of 8) voting for a 0.25% increase last week. However, one of the 3 dissenters (Kristin Forbes) is stepping down from the committee, to be replaced by an academic, Professor Silvana Tenreyro.  It is rare for new MPC members to go against the consensus and Prof Tenreyro’s background suggests she will be more dovish than Ms Forbes.  The Bank’s Governor, Mark Carney, in a speech this week, said that he wanted to see how the economy reacts to Brexit negotiations – and, given the long timetable envisaged, such an approach probably makes it a little premature to expect a rate rise in the very near future.

What do markets think of all this? Well, the US bond market does not expect the Fed to be able to follow-through on its rate rise initiative, pricing a less than 50% chance of a further increase this year, and 10 year inflation expectations are currently near a 7 year low (at 1.7%). The Bank of England’s current stance, however, does seem to be accepted by the gilt market, where 2 year bonds yield just 0.17%, and even 10 year bonds offer little more than 1%.  However, markets are not always right and, if we look just at the data, the danger is less that it stays the hand of the Fed, and more that it encourages a reaction from the Bank of England.


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Issue 110: 2017 06 22: Debt (John Watson)

22 June 2017


Disaster waits in the wings.

By John Watson

Image of shabby wallet with £27000/person written across it

Everybody owes Somebody …. a lot

If you go by the newspapers, you will probably think that the central issue of British public life is how to carry through Brexit; how to strike the right balance between our need to participate in European markets and the public’s anxiety to avoid uncontrolled immigration.  If you think that you will be wrong.  Serious as the issues around Brexit are, and they certainly are, the thing which keeps the politicians awake at night, which they babble about sweating as they cling to their teddy bears, the thing which drives them to drink too much and then drive home, is the national debt and the austerity measures which are necessary to get it under control.

We all know that the 2008 crash and its aftermath left the country with huge debts which it is the fashion to describe as “eye-watering”.  It is more helpful to look at a figure, and the latest estimate is £1,730 billion, more than three times the level prior to the crash.  Actually, though, it isn’t the absolute figure which is important.  In looking at whether debt is too high you have to compare it against the ability of the economy to service it.  The most important measure of the size of the economy is the Gross Domestic Product, and the seasonally adjusted figure for the first three months of this year was £471.388 billion.  Multiply that by four and you get an annual figure of £1,888 billion.  A quick look at the calculator will tell you that debt is between 91% and 92% of GDP.

Everybody owes Somebody… a lot

Economists differ as to when debt levels become unsustainable, and a World Bank study suggested that they damage growth once you go past 77%.  Still, it depends heavily on facts and circumstances so perhaps the matter is best tested in another way.  Clearly one must not get debt to a level where its relative growth becomes uncontrollable – i.e. the percentage of debt to GDP cannot be stopped from escalating.

The big test, then, is whether the government can hold or reduce the debt/GDP ratio.  In times of prosperity that can be done by relying on the growth of GDP, but relying on that will go wrong in times of recession when GDP falls.  The safer approach is to balance the budget over the economic cycle so that the debt does not continue to increase.  That means the country meeting government expenditure, including interest on the existing debt, out of taxes.

The austerity campaign pursued by the government has brought some results here.  In 2009 the deficit (i.e. the rise in debt) was £50 billion. In the following year it was £103 billion.  However, the coalition government brought it under control and it is now down to £52 billion, but this budget year’s borrowing is expected to increase by 12% year on year. It is hoped that we will achieve a balanced budget in the 2020s and that after that the debt mountain will begin very slowly to reduce.

To achieve this result a price has had to be paid and one cannot but sympathise with the teacher who told Gavin Barwell “you know I understand the need for a pay freeze for a few years to deal with the deficit but you’re now asking for that to go on potentially for 10 or 11 years and that’s too much”.  Wherever you look you see the price of austerity.  Cuts in the police, larger classes, reducing standards of living. Move the money around and you rob Peter to pay Paul, but the government has to decide where the burden will fall.  Should it be on the NHS? on the armed services? on the police? or should more money be raised through taxation? The latter is a way of moving the burden to the wealthier which seems fair enough but, of course, it will become counter-productive if it goes too far. If centres of profit dry up or move abroad, GDP falls and that is just as deadly as increasing the debt.

What is already difficult is made harder by politics.  Bribes have long been the bedrock of UK democracy.  No, not the “buy all the voters a pint” type bribes from the 18th century.  Those were bad bribes, paid by the candidate or his supporters.  Highly corrupt.  I am referring to good respectable bribes where you use public funds rather than your own money.  You will find examples of these all over the system.  Will we see money flowing into Northern Ireland as the price for DUP support?  Of course we will.  That is how politics works.  And before the opposition parties get too cocky on the point, what about the triple-lock on pensions, a measure originally introduced by the Coalition? The idea of this was that pensions, which had fallen back in purchasing terms, should be increased each year by the higher of the rate of inflation, the increase in earnings and 21/2%.  A sensible measure you might think and indeed one which in an era of low inflation and low wages pushed pensions up substantially. Has the time come to drop the 21/2% element? At the time of the 2015 election the Conservatives thought not, but by then you had to wonder whether the promise was still good policy following the rises which had already been achieved or merely a bribe to the grey vote.  By 2017, the Government accepted the consensus view that the automatic 21/2% element would have to go and made no pledge to renew it.  But it would be a shame to waste a good bribe so up it comes again in the Labour and LibDem manifestos. And then what about Cameron’s pledge that national insurance would not rise which so obviously hamstrung the Chancellor at the last budget..?

It isn’t just the need to bribe parts of the electorate which gets in the way of good economic management.  There are unexpected events as well.  Pitt the Younger once produced a scheme to pay off the national debt which was applauded from both sides of the House of Commons. Then came the need to pay for the Napoleonic war.  Pitt’s plan was stillborn.

But the worst threat to the figures comes neither from the need to pay bribes nor from the unexpected.  It comes from human weakness, the political equivalent of putting off that training session for another few days because obviously it will be all right if you start properly then.  Around the debt question the temptations to weakness are legion. One example is the suggestion that debt is all right if it is spent on capital projects.  If the project ultimately pays for itself there will have been no cost but, then, what happens if the project goes wrong? The Government borrowings incurred in order to refinance the 2008/2009 bank rescues are excluded from the national debt.  In the case of Lloyds, of course they have their money back.  Jolly good.  In the case of other banks they will not.  Sooner or later any deficit will have to be transferred to the general debt mountain.

Another problem with the “it is capital so it will pay for itself” theory is that it is a slippery slope.  As the government sees the political advantages of funding more projects, it will slide into “projects which might fund themselves” and then to those which any idiot (except of course the Government) can see will not.  Very very stringent tests would have to be used.

So what happens if all this goes wrong and we do get to the stage where the debt is mounting inexorably and we can no longer stop it? Interest rates rise, of course and the pound falls.  We have already seen how the currency movements following the Brexit vote have caused inflation.  This would be something of a different order.  Tumbling standards of living?  The rise of the far right?  Goodness knows, but that is what puts the politicians into such a sweat.

Sir Alec Douglas Home lost the 1964 general election because he tried to explain economic theory to the electorate using matchsticks.  He was unsuccessful and they opted for the young economics don Harold Wilson instead.  Then, economic competence was the core of the campaign.  This time, in an era of economic crisis, the parties merely talked about the Brexit negotiating position.  That is to miss the ball with a vengeance.  Next time the focus should be on the debt figures and the parties should be pressed on how they are to be reduced or at least contained.


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Issue 109:2017 06 15 Terror in Tehran (Neil Tidmarsh)

15 June 2017

Terror In Tehran

Isis strikes at the heart of Iran.

by Neil Tidmarsh

President Trump’s one success so far has been his visit to the Middle East last month, where he delighted both his Arab and Israeli hosts by denouncing Iran as a sponsor of terrorism and a dangerous destabilising influence in the region.

Saudi Arabia and Iran are enemies; they’re the region’s rival super-powers, opposed to each other along sectarian lines (Saudi Arabia is Sunni and Iran is Shia) and engaged on opposite sides in the civil wars in Yemen and Syria. Israel and Iran are enemies; Iran backs the Lebanese militant group Hezbollah which has sworn to destroy Israel, an ambition which Iran itself shares.  So both Saudi Arabia and Israel were appalled when their ally the USA, under the Obama administration, attempted a rapprochement with Iran and secured a freeze on its nuclear weapons program in return for a lifting of sanctions.

The return of the USA, under the Trump administration, to its traditional Middle Eastern alignments was therefore a huge relief to Arabs and Israelis alike.  The anti-Iran rhetoric and diplomacy escalated immediately after Trump’s visit.  New sanctions against Iran, in retaliation for its support of militant groups, were proposed in the US Senate.  The Saudi deputy crown prince warned Iran against trying to take over the Middle East.  “We will not wait until the battle is in Saudi Arabia but we will work so the battle is there in Iran” he said.  Bahrain, the United Arab Emirates, Saudi Arabia and Egypt turned on Qatar, the one Gulf state with friendly relations with Iran, and imposed a stranglehold of embargoes and blockades on it.  In Syria, a US airstrike hit a convoy of suspected Iranian-backed Shia militias heading for a Western-backed anti-Isis coalition special forces base; eight troops were killed and four vehicles destroyed.

And then, earlier this week, Iran itself came under attack.  Two coordinated groups of armed militants struck in the centre of Tehran, one fighting their way into the parliament (the country’s political heart) and the other opening fire on guards, police and civilians at the mausoleum of Ayatollah Khomenei (the country’s theocratic heart).  Seventeen people were killed and forty-two were injured.  All the militants were killed – either shot by police and guards or blowing themselves up with suicide bombs.

It seemed, in the immediate aftermath, that this atrocity might escalate the region’s hostilities out of all control.  The Revolutionary Guards were quick to blame Saudi Arabia and promised retaliation, swearing that it would “never allow the blood of innocents to be spilt without revenge.”  The world held its breath, and then breathed out with a big sigh of relief when the Iranian authorities announced that the militants weren’t Saudi Arabian after all; they were in fact Iranians, from the country’s Sunni minority population, and had fought in Syria and Iraq for Isis.  Isis claimed responsibility.

It seems that Isis may well have shot itself in the foot, yet again.  Whether accidentally or deliberately (consciously or unconsciously seeking destruction in accordance with its creed of victimhood, martyrdom, death and suicide), Isis does have a perverse habit of reminding the various participants in the convoluted Syrian conflict that defeating Isis really should be their top priority.  And these reminders are usually very timely, coming just as the participants think that they have other goals or targets to aim at in the region.

When all those countries involved met at Vienna and Geneva in the autumn of 2015 at the beginning of the Syrian peace talks, they agreed that Isis was the common enemy.  Some countries seemed less committed than others, however.  Russia and Turkey, though backing opposing sides in the civil war, both agreed to send planes to bomb Isis in Syria – but in fact Turkey bombed Kurdish forces instead, and Russia bombed anti-Assad rebel forces instead.  One would have expected Isis to stand back, delighted, and leave them to it; but no, Isis promptly launched a deadly suicide bombing campaign within Turkey and brought down a Russian passenger plane in Egypt.  That immediately reminded both Russia and Turkey that Isis was an enemy they had to get to grips with.

In recent weeks, Iranian-backed forces in Syria and Iraq have been concentrating on opening a land corridor from Iran’s own western border across the breadth of both Syria and Iraq to the Lebanon, where their protégé Hezbollah is based, and thus securing Iranian influence and movement across the whole of the region.  Earlier this week they came close to completing that plan by occupying a desert area in Syria on the border with Iraq.  That occupation, however, risks conflict with Western-backed forces fighting Isis in the area, and cuts those forces off from their objective – the Isis-occupied town of Deir Ezzor.  With Isis facing defeat in Mosul and Raqqa, it is vitally important that Deir Ezzor is taken before Isis can regroup and dig-in there.  The fall of Deir Ezzor really would be the end of Isis’ claim to statehood.

So this is just the time when Iran needed to be reminded that the defeat of Isis should take priority over conflict with anti-Assad forces, and the attack on Tehran (although tragic and appalling, as all such attacks are) may well have done just that.

Tension and friction remain between Iran and the allies who oppose it.  Iran continues to supply Qatar in an attempt to frustrate the blockade and the embargos.  The US Senate passed those sanctions against Iran in spite of the attack on Tehran.  Iran has received overtures from Hamas (which is trying to regain Iranian support because it fears losing Qatar’s support). But there are signs of a more co-operative approach behind the scenes. The Iranian authorities announced that their security forces, with international co-operation, have tracked the organiser of that attack to the foreign country whence he’d fled, and killed him. The countries involved in that co-operation weren’t named, but with luck they include one or more of those countries opposed to Iran; so perhaps a similar co-operation will see a united front against an Isis last stand at Deir Ezzor.

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Issue 109: 2017 06 15: The need for a new leader (John Watson)

15 June 2017

The Need For A New Leader

The Conservatives need to move on.

By John Watson

It is hard to know how to take Teresa May’s decision to remain Prime Minister.  Is this just an interim step while the Conservative party considers behind closed doors who should lead it next, or does she really think that she can still regain the confidence of the British people, following the misjudgments of her campaign?  We will soon find out, but I must say that I hope it is the former because the time has come to select a prime minister of quite a different stamp.

The Conservative’s link with the Democratic Unionists will give them an initial majority of two, which in practice is rather bigger than you would think as there are seven Sinn Fein MPs who traditionally do not take up their seats.  Still, there is plenty to go wrong: a breakdown between the Democratic Unionists and the Conservatives under the pressures of Brexit, perhaps; or a combination of lost by elections and a decision by Sinn Fein to help Mr Corbyn defeat the government on a matter of confidence; or even a group of breakaway Tory MPs appalled at the abandonment of their favoured Brexit strategy.  Whichever it is, it is likely to be followed by an election which the Conservatives will probably lose.  Suppose they do.  Suddenly there is a reversal of approach to the negotiation and the country’s stance on Brexit softens.  The City becomes less important and we confirm to the EU that we will not walk away without a deal.  Well, if you’re a Remainer you might like that.  Off we go towards free movement of people as a price for membership of the market.

For the government to negotiate Brexit against the possibility of fundamental change is, of course, far from satisfactory.  Such a change would bring complete confusion, not to mention the effective shortening of the article 50 period, and it is important that mechanisms are put in place to reduce the potential damage.  We are not at war so there is no argument for a coalition between parties which represent different factions within the electorate, but it is important that there should be some common ground between the main parties as to the way in which the Brexit negotiations should be carried out so that, if the need arises, one can take over from the other.  To begin with, they need to understand each other’s positions.  If, for example, the Governments reference to “no deal being better than a bad deal” is more about negotiating stance than about where they want to end up, it should be something of which the opposition parties are well aware.  If Labour’s comment that there “will” be a deal is actually conditional on there being a deal which does not require free movement of labour, the Government should be aware of that too.  It is not unusual for leaders or prominent members of opposite parties to discuss the main issues of the day.  The Labour leader John Smith was said to enjoy a late-night whisky with John Major, and Harold Wilson gave unofficial advice to Margaret Thatcher.  Probably there are many other links too.  At the moment that sort of liaison is badly needed but it is hard to imagine that it is quite Mrs May’s thing.  That is the first reason why she needs to go.

There is another reason to why we need a softer Prime Minister.  The election results seem to show a generational split with the young feeling disenfranchised over University Fees, a shortage of homes and cutbacks in school finance.  These are important issues on which new thinking is badly required, but the resetting of the balance between taxation and these needs will need some flexibility.  Again it is probably time for a new broom at the top, a leader who listens to what Labour and SDP voters had been saying and seeks common ground with the other party leaders of those reforms on which everyone can agree.

If these are the practical points, the psychological points are stronger.  The electorate clearly lost confidence in Mrs May during the campaign and it is hard to see how that confidence could ever be rebuilt.  But more important than the psychology of the electorate is Mrs May’s own mindset.  She is said to have told the 1922 committee that having got them into the mess she would get them out again.  That is brave thinking but not very practical.  Any commercial organisation will tell you that if somebody gets something badly wrong the first thing to do is to get someone else to take charge of the issue.  That is not a matter of blame but simply that when there has been a disaster the person clearing it up needs to be clear-sighted.  If they created it, their vision will always be warped by a feeling of guilt, by a tendency to justify their past actions.  There is no room for that at the moment.  Clear-sightedness is everything and just as Mr Cameron did not regard himself as the right person to follow through after the Brexit vote, Mrs May needs to hand over the running of the country to her successor.

That is not intended as a criticism of what Mrs May has tried to achieve.  Much is being written about how she should have taken more care not to alienate her core supporters.  Some point to the loss of the triple lock on pensions, others to the means testing of the winter fuel allowance; then there is the ill-fated dementia tax.  Judged by narrow interest those changes may have been foolish but there is a different perspective to them too.  I suspect that Mrs May would tell us that the grey-haired generation are being given more of the available resources than the country can afford and that it is necessary to push the balance back.  She must have known that this was risky but have believed that it could be done on the back of her own popularity.  That was hubris if you like but it was honourable and principled hubris.

Still, look at it in the round.  We have an alienated younger generation and that is bad.  The country is divided 50:50 between parties saying very different things.  Yet pull away the rhetoric and the problems for both are much the same.  How do we balance immigration control with the need to participate in European markets?  How do we split limited resources between services?  If taxes are to increase, how will that effect GDP?  In the end these questions are practical as much as political.  No one has a monopoly of wisdom on any of them.  From the public’s point of view we need some pooling of ideas and a movement towards cooperation.  Labour, on the back of its gains, will quite understandably not start that.  The first move, then, must come from the Conservatives.  Now that Mrs May is back in office, the whispering in the committee rooms should begin.  Then the party should present a more consensual leader to the public.


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Issue 109: 2017 06 15: Why Owen Jones wants a “democratic revolution” (R D Shackleton)

15 June 2017

Why Owen Jones wants a “democratic revolution”

The man behind the surge of youth support for Labour

by R D Shackleton

He’s cuddling a cat in the photo on his twitter handle.  This is not the look you’d expect from a political activist trying to be taken seriously.  But you can bet that doesn’t worry Owen Jones.  It’s just part of the clean-cut, regular boy-next-door schtick that has helped him become such a powerful force in the far left’s electoral turnaround.

To many outside Labour circles, he may still be a fringe agitator, a Guardian columnist, a writer of socially-concerned (and best-selling) polemics.  And even within the ranks of Corbynistas, Jones is treated with varying degrees of distrust. He may have made his peace with the party by means of an “unreserved and heartfelt apology”.  But the fact remains he denounced Corbyn as a lame-duck candidate as recently as March, calling for him to step down for the good of the Labour movement.

For all that, it was Jones, in association with the Momentum movement, who has played such an important role in converting to the hard-left the young and so many other voters disengaged from conventional politics.  And you’re going to hear a lot more from him as a revitalised Labour pins its hopes on the Conservatives’ tenuous hold on power collapsing into another General Election.

That’s certainly what Jones is expecting.  “In the not too distant future we will elect the most radical Labour government we have had since 1945 and it will only be done by you building up that mass movement across the country”, he tells his supporters earlier this week in a podcast posted on his YouTube Channel just days after the election.

So who is Owen Jones?  Who does he speak for? And what does he mean when he talks of dragging Labour policies more than seven decades back in time to the end of the Second World War?

He’s 32 – but looks a great deal younger.  He lives in North London, but with his unreconstructed Manchester accent his Northern supporters take him as one of their own.  He’s a fixture on the political talks circuit.  As with the rest of Corbyn’s main advisors, he’s Oxbridge educated, with a History degree from University College, Oxford.  Yet he can legitimately claim to be working class, brought up in Stockport, attending the no-frills Ridge Danyers Sixth Form College.

One of four children, his father a local authority worker and union shop steward, the Labour movement was a big part of his childhood, with both of his parents belonging to the Militant Tendency.  And so the involvement continued with his career to date, working as a Trade Union and parliamentary researcher before branching out into the media.

So far and so predictable.  What lifts Jones so far beyond the run-of-the-mill Labour activist, however, is the calibre of his writing and debate and his understanding of what it takes to mobilise the legions of disaffected voters to represent a real challenge to the Conservatives.  Just as the economic journalist Will Hutton was seen as laying down the blue-print for New Labour with the publication of “The State we’re in” in 1995, so Jones could be considered to be the intellectual engine behind Corbyn’s politics with his books, “Chavs” and “The Establishment”.  Far more important than that, he has built up a formidable platform to champion his views, as a social media star with a current tally of near 600,000 twitter followers – and rising.  This, together with his hyperactive YouTube channel and other social media initiatives explains why he has been so successful in mobilising the Millennial generation.

He’s unpredictable.  Jones seems to operate at two speeds. There’s his folksy side where he uses his Youtube channel in a jokey series of interviews with staff at the Momentum movement – with which he is closely associated – to  demolish, as he says, the myth that they are all Trotskyist extremists.  And then there’s the cold anger where he famously storms out of a Sky interview after he felt the news show hosts downplayed the homophobia involved in the Orlando nightclub shooting.  He’s a passionate supporter of LGBT rights.

He’s angry, too, in his writing.  In the first of his books, “Chavs – The Demonization of The Working Class”, he is looking to: “Refute the myth that Britain is a classless society” given that so much wealth and power is, he argues, concentrated in the hands of so few.  He wants to dismantle the “myth” that social problems such as poverty are the result of individual failings and feckless lifestyles.  And thirdly, he is looking to propagate the idea that social progress: “Comes about by people with similar economic interests organizing together to change society.”  He writes well with a convincing blend of rigorous and well-sourced analysis brought to life with his own subjective observations.  His most thought-provoking conclusion perhaps, is that the more the under-class –  Chavs – are demonised as being the authors of their own predicament, the harder it is to empathise with them.  And once effectively dehumanised: “Why would anyone want to improve the conditions of people that they hate?”

Far less convincing, perhaps, is his attempt to challenge the concept of individual aspiration.  As he observes, “Both Thatcherism and New Labour have promoted this rugged individualism with almost religious zeal.”  This doesn’t wash in Jones’ world.  “If everyone could become middle class, who would man the supermarket checkouts, empty the bins and answer the phones in call centres?  But this glorifaction of the middle class – by making it the standard everyone should aspire for, however unrealistically – is a useful prop for the class system.”  That’s well and good – but he’s putting forward no credible alternative.

The themes of class struggle are developed further in “The Establishment and how they get away with it” a polemic against what he sees as the grossly unfair distribution of wealth resulting from the prevailing social and political order.  The book is all the more effective because of the generous way he treats those who he clearly regards as class enemies.  “Little can be understood simply by castigating individuals for being greedy or lacking in compassion.”  But for Jones, it is the system – The Establishment – that is the problem, not the individuals who comprise it.  Hence, for example, he is at pains to describe the CEO of  Ernst & Young as a “generous, charming thoughtful individual” whilst denouncing the accountants’ commitment to philanthropy as a “return to a Victorian ethos where social provision was patchwork and dependent on the generosity of individuals rather than an efficient, publically provided universal system funded by progressive taxation.”

What Jones is looking for in The Establishment – and this echoes the rallying call in his post-election YouTube – is nothing less than a ‘democratic revolution’  to “reverse the achievements of the neo-liberal outriders.”  And in their place to usher in a new Britain to be run in the interests of people’s needs and aspirations.

You’re going to hear a lot more from Owen Jones.  He’s helped bring passion back to politics and will continue to mobilise the young.  Even if his dreams for a socialist utopia still seem unlikely to transform Britain anytime soon.


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Issue 109:2017 06 15: I puke on them(Richard Pooley)

15 June 2017

I puke on them

All change in the French elections

by Richard Pooley

photo Robin Boag

It was all too much for Nicolas Sarkozy’s former speechwriter.  If Henri Guaino ever wrote anything memorable for his old boss, it will now be forgotten and replaced by what he said after his humiliating defeat in last Sunday’s first round of France’s parliamentary elections.  Guaino has been in politics for over thirty years and was the Républicain MP for the third constituency of Yvelines, on the edge of Paris, in the last National Assembly.  But he fell out with his party when he openly criticised their presidential candidate, François Fillon, for not standing down over allegations of corruption.  So, unable to defend his own seat he offered himself to the voters in Paris’ second constituency, despite the fact he was up against the official candidate of Les Républicains, Nathalie Kosciusko-Morizet. She got 18.1%, well behind the 41.8% hoovered up by the candidate of President Macron’s La République en marche.  Guaino got less than 5%.  He let rip in his opinion of those who had failed to vote for him.

“I puke on them.  On the one hand the bobos who wallow in their selfishness.  On the other, the traditional Right, so hypocritical, fundamentally a little Pétainiste, who aren’t able to conform to the values they themselves proclaim.  There are those who go to Mass, who make their children undergo religious instruction, and who then go and vote for someone who has been cheating by every means possible for the past thirty years.”

Not satisfied with excoriating his own party’s supporters and politicians, he launched into a diatribe against those standing for La République en marche.  He called them “opportunists, wheeler-dealers and liars.”

After fondly recalling his political mentors of yesteryear, he admitted that “This is no longer my time.”  It was perhaps unnecessary for him to add that he was leaving politics for ever.

The tumbrils are rolling across France for the majority of those politicians, like Guaino, like Fillon, like Sarkozy, who have strutted the national stage for the past thirty years.  Most will disappear from national public life after this Sunday when La République en marche and its allies in Mouvement Démocrate are expected to win around 70% of the seats in the National Assembly.

If you read my article last week, you may want to know how well La République en marches Huguette Tiégna did in the first round of the constituency where I live in the Lot.  Well, it looks as though she will be the MP for this once-safe Socialist Party (PS) seat. This is despite the fact that the PS candidate, Vincent Labarthe, is well-liked, politically-experienced and local.  In contrast – what a contrast – she is a 35 –year old African immigrant who was born and brought up in Burkina Faso.  Her grandfather died fighting in France’s colonial wars in south-east Asia.  She only came to France eight years ago (and to this area in 2014).  She is a senior research engineer in a one-year old manufacturing start-up with five patents to her name.  She got 35.42% of the vote in the first round.  Labarthe got 19.09%.  It is still possible he could win.  He might get all 15.45% who voted for the far left France insoumise, the 3.65% who went with the Ecologist Party, the 2.39% who are fans of the Communist Party and the 8.47% who voted for the anti-immigrant, far right Front National.  But that still does not quite add up to half. A lot of these voters will stay at home.  Anyway, does Tiégna look like an opportunist, wheeler-dealer or liar to you?  She will win easily.

One of my neighbours was prepared to admit that he had voted for her, after we had finished discussing more important things over the garden fence (the health of each other’s’ tomatoes, the lack of rain and the likelihood of another heat wave).  I asked him why.  He didn’t give me a straight answer, which is unusual for him.  But his reply explained something which has been puzzling me during this election.  He gave me the impression that he had voted for her largely because he knew and respected her suppléant (substitute).

I had noticed that every poster and election leaflet had the faces and names of two people, not just that of the candidate.  Sometimes, the picture of the person next to the candidate was Macron himself (to the fury of La République en marche members, some non-REM candidates put his photo next to theirs as well).  But in this constituency, every candidate had a photo of their suppléant.  As my neighbour explained, this is the person who will stand in for the MP when needed.  I had thought that this was only in extremis, when the MP was seriously ill or had died.  But no; the suppléant’s role is much wider and more significant than that.  He or she gets paid a salary.  It’s lower than the MP’s, of course, but still a substantial one.  Should Tiégna become our MP, she will need to be up in Paris much of the time.  She cannot attend every constituency event or meeting.  Her suppléant can do so instead.  He is Olivier Desbordes, a doctor turned opera director, who helps run the prestigious Music Festival of St Céré.  I reckon he will find himself stretched to do both jobs well.  Mr Macron’s plans for France are going to require Mme Tiégna to be in Paris for much of the year.  Should he make her one of his ministers (and why not?), M. Desbordes will have to leave the music of St Céré to others and take her seat in the National Assembly.

I wonder what Henri Guaino will do with his new spare time. Write his memoirs? Should make for enjoyable reading.


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Issue 109:2017 06 15:Gone fishing (J R Thomas)

15 June 2017

Gone Fishing?

Mrs May still at her post

by J.R.Thomas 

It’s that David Cameron I blame.  And Ed Miliband.  Instant resignations must be wonderfully healing for those who do the resigning, but for those who have to go on steering the machine, they just create a monstrous mess, another layer of problems  left behind by electoral defeat.  Alec Douglas-Home did not step down in a huff when he lost to Mr Wilson in 1964; he carried on, to enable the Conservative Party to examine itself and try and learn what had gone wrong, and to select a new and democratically chosen leader.

Even Ted Heath, the huffmeister himself, carried on as leader after the 1974 defeat to enable the party to perform a similar self-examination (although probably fortified by the Heath certainty that he was right and everybody else was wrong).   Maybe we should really blame Gordon Brown (also a man convinced that at all times and in all ways he has always been right) who having returned the keys to Downing Street also instantly gave up as leader of the Labour Party, leaving poor Harriet Harman to manage that particular mess.

Mrs May apparently also decided to follow the instant Pickfords option on Friday morning but was dissuaded from it by the various men in grey suits who sought to give her advice following the shock of her defeat (or non-shock, for those following the opinion polls, which we will come back to in a moment).  Instead, she sacrificed her two closest advisors, Christopher Timothy and Fiona Hill, and promised a more open and consultative form of ministry.  That has saved her for the short term, not least whilst the Conservative Party tries to work out who might follow her, all of the obvious candidates having as many points against as for, it would seem.  Also, those obvious candidates may be musing, given what has to be done in the next few weeks, that there are a lot of advantages in letting Theresa do it.  If she gets things right, or luck runs her way, fine and she will be gone before 2022.  If she fails, she can be sacrificed any time.

Her immediate task is fishing for support in Celtic waters, not that either Ruth Davidson of the proudly independent Scottish Conservative Party or Arlene Foster of the Ulster DUP would consider themselves Celts.  Both are key to the ability of a May government to carry on, in particular to proceed into the Brexit negotiating room.  Ms Foster is playing her cards close to her chest and Ms Davidson is playing hers rather noisily, but no doubt both will in the end fall into line as they will not want to precipitate another early election, Ms Davidson in particular.

Those Tories who now think they have Mrs May where they want her might keep a careful eye on the lady though.  She was undoubtedly very shocked by the results on Thursday night, and her distress was touching – and was no doubt what led to a stumbling performance on Friday morning where she forgot to thank supporters or apologise to the newly dispossessed.  But she now appears to have recovered her mojo and whilst, sensibly, she has made minimal changes to her cabinet, she has made a number of key appointments – in particular the appointment of Gavin Barwell as her chief of staff and Damian Green as, effectively, deputy Prime Minister – that will give her some comfort and protection against the plotting which now must be underway.  On Monday she walked into a meeting of the 1922 Committee, which consists of all Conservative MPs, to a very muted reception, but after a thoughtful and apologetic speech walked out to reasonably rousing acclamation.  It does her no harm that Mr Osborne, not one of life’s instant quitters (Mrs May fired him) has seemingly now cast himself as Sir Jasper, the archetypal pantomime villain.  Having run a pretty anti-Tory campaign from the Evening Standard which he edits, and cackled his way through the ITV election night programme as the Tory disaster became apparent, he rounded up by calling Mrs May a “dead woman walking”.  She does not seem to be deceased just yet, but at least “Sir Jasper” Osborne has given his former party a villain to unite against – himself.

Which by no means brings us back to the performance of the opinion polls, but there we must now go.  It is of course the popular media’s constant cry that the opinion pollsters got it wrong.  Well, they didn’t.  They got it right, and they did so from the beginning to the end.  There are always the odd rogue polls of course, and even in the last days there were a couple that showed Conservative support recovering from what looked like a hung parliament a week or so before polling date.  Why polls should differ significantly is not always clear, but it is usually a result of inbuilt flaws in the poll methodology – telephone polling biased towards people who have phones was always a classic, but even polling at certain times of day may induce unconscious bias, simply because certain types of voters (shift workers, party animals) may be not available.  But overall the polls got it right, and what they tell is of that initial significant lead, but then Labour slowly catching up and the minor parties being squashed.  Then came the mis-step on the dementia tax, and the subsequent U turn, and suddenly Mrs M had lost her affections among the voters.  This was coupled, one suspects, with a growing dislike of a negative Tory campaign focused on the personality of Mr Corbyn, who was confounding the extreme attacks by simply going round being amiable and nice and rather human (and keeping John MacDonnell mostly out of sight).

The opinion polls can only report what people tell them; as we have said here before they can compensate for those who are fibbers or secretive.  But the largest imponderable, from a pollster’s point of view, is those who will actually turn out on the day.  The detailed analysis is yet to be done – and it will take a while – but what was feeding back on the day and has been confirmed since is that turnout among the young was unprecedentedly high – around 75% of those eligible it is said.  And also that turnout among the old was unusually low – that dementia tax faux pas really did some damage.  As young people tend to lean left and old people incline right, that is not good for the Conservatives. Why did young people suddenly turn out and vote?  Some reasons might be trite – students are mostly finished with exams, the weather was clement, Mr Corbyn has beard appeal.  Mr Corbyn promised not just beard but also bread, and many circuses; his past was less of an issue to those who weren’t there, who don’t remember the IRA and think the Palestinians a cause worthy of support.  Meanwhile, Mrs May’s Brexit did not sell well and her economics were difficult to understand but involved seemingly endless tightening of belts.

And one more thing. Or rather, two million more things.  Both sides in the Referendum made huge attempts to sign up those who had never voted before, especially the young.  They were wildly successful – two million new voters registered to vote in the six months before the Referendum.  Many of them were young, and in that odd way the young often are, idealistic. They probably mostly voted “Remain”.  And having got the voting habit, they turned out again, and probably mostly for the Love Anti-establishment Beards Open-wallets Unilateralism and Radicalism Party.

It seems most unlikely that this government will run its full course (though the Fixed Term Parliaments Act may help it do so).  So, the question for the Conservatives is can they recapture enough of their core vote to scramble back next time – or at least persuade Labour to fall back into civil war and the Lib-Dems to steal some votes from them to let the Conservatives through the middle.  Remember; Mrs May attracted a larger Conservative vote than they have polled for over thirty years.  That’s not a bad place to start from for next time.


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Issue 109:2017 06 15:So What? (Adam McCormack)

15 June 2017

So What?

Markets may be wrong in their initial reaction to a hung parliament

by Frank O’Nomics

When economic historians of the twenty-first century come to assess the impact of key events on bond and equity market charts they will struggle to pinpoint the 2017 general election.  Beyond a reaction in the currency markets (and sterling is still way above the levels hit earlier in the year) markets barely skipped a beat on the news of a hung parliament.  The events of last year, when the initial sell-off on the Brexit vote proved to be very brief, left most participants wary of taking a negative view that might leave them struggling to get back into a rising market.  There are a number of reasons to justify this relaxed approach, but the outlook does not look encouraging.  Inertia may not be a standard ‘knee-jerk” reaction, but it may prove just as mistaken as the brief sell-off last summer.

Let’s look first at why positive market analysts might argue that the election is largely an irrelevance.  Set against much more seismic events like our decision to leave the EU and the US electorate’s favouring Donald Trump, a UK hung parliament is undoubtedly much less important.  Given that it seems unlikely that the Labour Party will end up forming a government there is little likelihood of any significant change in policy and for most it will be business as usual for now.  Indeed, given that any deal with the DUP is likely to feature anti-austerity measures of increased spending on roads and infrastructure as well as defence spending, the election may be perceived as supportive for the economy.

From a market positioning point-of-view, there is also little to prompt a sharp response.  The election result was negative for sterling, but many participants are already underweight and are unlikely to want to add to positions given a potential increase in volatility. Similarly, given that most UK equities have substantial $ earnings, the impact of a weak currency on FTSE in particular is very limited, and those with a focus on exports will benefit from becoming more competitive.  Without winning the clearer mandate for a potentially hard Brexit, a softer outcome now seems more likely and this too could reassure some UK companies.

Why then is there any cause for concern? Perhaps the key issue is that the increased level of uncertainty has occurred at a time when the economy was already started to slow markedly.  Consumer spending in May was 0.8% lower than the same month last year, representing the first year-on-year fall since 2013, with retail sales in Q1 showing their biggest fall since 2010 and industrial production rising just 0.2% in April, when economists had been expecting 0.8%.  The UK was the weakest performer in the G7 in Q1, and a 1.9% fall last month in retail sales will not have helped.  The election outcome is not going to help turn around confidence in either households or businesses, leaving the growth outlook continuing to weaken.  Optimists will argue that the continuing high employment and low interest rate backdrop will allow confidence to rebuild, but there are threats here also.  Inflation has picked up to 2.9% this week (2.7% was the level expected by economists), which is the highest level for four years.  Any further pressure on the currency will add to this and, while the Bank of England is not likely to react by putting up rates for now, it is unlikely that they will feel empowered to help counter an economic slowdown with a rate cut or more quantitative easing.  It was these measures that helped reassure markets in the aftermath of the Brexit vote and this is a prop that cannot be relied upon this time around.  The impact of inflation on consumer spending is already being felt and will be compounded by low wage growth, which, according to the Resolution Foundation this week, leaves real incomes falling by around 0.5%.

Perhaps the bottom line in this discussion is that we are still leaving the EU, but our negotiating position has been undermined by the lack, for an indeterminate period, of a stable government.  Many will be reassured that this implies a stronger chance of a softer Brexit, but the pace of the process will be difficult to arrest.  Talks with the EU commence on 19th June and, unless we agree a delay (which would seem unlikely), the chances of being given a “take it or leave it” offer would appear to have increased in the last week.  Markets are faced then with the prospect of extended uncertainty but with a greater chance of a less favourable outcome.

What then are the investment implications of all of this?  Perhaps the biggest negatives are for UK bonds.  Higher (currency induced) inflation, together with increased borrowing as the tax take falls due a weaker economy and the inability to enact austerity measures, all point to higher long term borrowing costs.  In addition, the UK is highly reliant on overseas investors buying government debt (they currently own 27% of the gilt market) and there is not only a risk that they stop buying, but also that they start to reduce their current holdings. While higher long-term rates may help pension funds, they will have a negative impact on mortgages and credit in general. Equities may be more insulated given their overseas earnings, but will look less attractive on a relative basis if gilt prices fall.

In terms of what might look more attractive, European markets could be well worth exploring.  To some extent investors have already bought into this view, with European equities up around 18% year-to-date, which is around twice the return of the UK (in dollar terms). The main factors discouraging investment in Europe had surrounded electoral uncertainty, with most of this now successfully negotiated, the recent impressive progress in European economic data makes the area look increasingly attractive.

For now the state of market inertia in the UK looks set to persist.  Arguments that uncertainty will ultimately undermine asset prices have been valid for a long time; yet have failed to have any effect thus far.  Those sanguine investors who look beyond political factors that are impossible to predict and instead focus on areas where they perceive long-term value may well be justified.  However, with earnings valuations at demanding levels (and a record 44% of investment managers surveyed by Bank of America this week think that UK equities are overvalued) they may well have a very uncomfortable run through Brexit negotiations, and increasing one’s geographical investment diversity could be prudent.


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