The world has changed. Covid is the main reason. In the UK Brexit is also a major factor. Add them together and the assumption of many within financial markets that there is going to be a return to ‘normal' is wrong.
A mass of data reveals that today. I can only pick a selection. Start with food supply. As the FT has noted today, the UK farm workforce has been reduced by a sixth as a result of Covid-19 and Brexit. One of the consequences is that 5 to 10 per cent less chicken is being produced than normal and there is 10 per cent less turkey production. Christmas turkey production is expected to be done by 20%. Get your orders in early. Other areas are obviously impacted as well.
The result is that food shortages are not just due to a shortage of drivers. They are due to genuine shortages. And as for drivers, John Lewis is apparently planning to pay them £5,000 more a year, which will however simply correct a long term wage decline and a supply problem that was predicted long before Brexit because the UK based workforce was ageing and not being replaced by new recruits.
But this is not the only disrupted market. The forecast was that once Covid was over (and there was a naive expectation in the spring that this would be happening by now) then financial markets would return to normal, interest rates would rise, and ‘usual' relationships would be re-established. But again, this is not true. As the FT again reports, the stock of negative-yielding bonds in the world is growing again, and has now reached US$16trn, only $2trn short of its peak. All German state debt now trades at negative yields. Japan is back in negative rates for some of its debt, and so too are France, Spain, Italy and even Greece with regard to their shorter-dated debt. Those buying this debt know they will make a loss from doing so, and buy it nonetheless.
What is the combined message? I suggest there are a number of points to note.
First, real markets are in a mess and it is not clear when they will get out of that mess again. What is clear is that labour is being undervalued. It's not just labour shortages are real, but that the long term suppression of wage rates, which has around the world been most associated with the decline in trade union power over the last forty years, and which has been associated with steady increases in corporate profitability, has to be reversed if people are to be attracted into what have become deeply unattractive jobs because of the conditions and pay attached to them, like truck driving. Covid is not sending out temporary signals in this case: it is sending out long term indications that there needs to be a change in the balance of power in the marketplace, and labour needs a larger share of the rewards.
Second, the financial markets are suggesting that they do not think Covid is over as yet.
Third, they are also sending out the strongest possible indication that they have little faith in corporate profitability being restored, which is why investors are willing to take a guaranteed loss on placing their money in government bonds.
Fourth, markets also think the corporate sector has no answer to the problems it faces or they would not be placing their money with the government. Markets are clearly indicating they see neither indication or adaptation in financial markets to suggest that corporate fortunes are changing.
Fifth, there is the clearest indication that markets see no hint of government defaults as a result of quantitative easing. In fact, it would seem that they are reassured by it. Nor do they think inflation a real risk, come to that.
Sixth, governments are clearly not issuing enough debt to meet demand for it. As a result of QE restricting government debt supply, excess liquidity in markets because of QE, and insufficient actual government spending on infrastructure despite low rates there is not enough debt to meet demand so its price may be too high, and hence the yield is negative. The obvious solution is for governments to spend more, including on training, as a pre-requisite.
What is to be concluded? Simply that as I noted at the outset, the world has changed. Covid was, first of all, a blip, then a recession, and now it is something else. Now it looks as though it is the precursor of a reset. We need that reset. Over-powerful corporations do need to be constrained. Real wage rates do need to rise. Markets do need to re-orientate. Governments do need to appreciate that the world now sees them as not just a safe haven, but as a real creator of value. Rethinking of long term investment strategies, both in real and financial markets need to change as a result. And all that is before I ever mentioned climate. But, in truth, I think the awareness of that hangs over all this.
The transition to the world we have no choice but live in now has begun. The route to it will not be smooth. But the pre-March 2020 economy is now history, never to be seen again. What is emerging is something new. It may be better. We will have to wait and see, but it is possible that the myth that corporations know the answer to all life's mysteries may have been shattered. The world will be a better place if it has been.
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The real economy is what matters and things do look perilous.
The aging workforce and a lack training/career paths has long been evident… papered over by imported labour. Indeed, so obvious has this been that it was clearly a feature of Government policy rather than a bug. Covid and Brexit have starkly revealed the problem.
Presumably, the government hopes that the rush to herd immunity, an end to furlough and a reduction in “pinging” will reverse the Covid related labour shortages before the riots start. This does not address the Brexit related labour squeeze but the government seems to think more money should be enough to lure drivers (and others) back.
In short, policy is based on a view that “the market”, with the right nudges (or sticks in the case of furlough cuts) will solve the issues but it fails to understand that “labour” is not such a simple commodity – it is, in fact “us”…. and it is now apparent that many of “us” want something different.
What changes do we want? Well, the “manifesto” you published the other day probably captures it nicely….. now, if only we could find a political party to articulate such a manifesto!!
Meanwhile, in financial markets, nothing to see here…. same old stuff. Low policy rates (negative in Europe) have worked in the sense that they have driven up asset prices…. but the essential corollary to that (for the policy to make sense) is that this should lead to real investment. It has not…… but this has been the case for more than a decade. At what point will monetary policy makers get it? At what point will governments embrace a Green Deal? I am not holding my breath.
Me neither
Usual breathtakingly bold and sweeping analysis Richard.
Is a key question whether the reset which will increase the returns to labour, will happen via market readjustment, as corporations understand they need to pay more to get the labour they need.
Or are you saying the pandemic has/will operate as a Picketty-like ‘war’ catastrophy which entails vast destruction of physical capital and infrasture. And does that in turn mean that the government has to impose some of the readjustment, through raising minimum wages, destroying climate-threatening capital and associated production, and and investing in green capital etc etc.
That we have to work out
But.. Governments – or their central banks – own a very large portion of their sovereign bonds. It can’t be therefore, a market price. It is a manipulated price – and reasoning from a manipulated price is not a sound basis for delivering an argument
No, the £1.3 trillion left has a market
It is heavily QE influenced but that does not mean there is no market price
Heavily influenced = manipulated the n the scheme of things. A fair market is without Central Bank intervention where CBS are by far and away the biggest player.
Huge QE buying Central Banks has been matched by even larger government bond issuance. The quantities of gilts held today by the private sector dwarfs the size of the pre-GFC era market. Also, the BoE buys fixed quantities at the marginal clearing price (rather than any quantity at a fixed price) so I think that gilt yields DO have signalling value.
Interesting to see that there was NO trade in the key benchmark JGB yesterday through the IDB (FT story). Being a JGB trader must be fairly dull these days….. but where Japan leads we might follow.
I noticed that absence of JGB trade …. Extraordinary
The bad news is that Covid is getting into the animal population, so it is with us forever. The majority of the population also think that the EU is responsible for all the problems, so that is with the UK for ever.
The business model chosen by HMG will continue to be low wage, low productivity, exacerbated by EU competition, increasingly protected behind regulatory barriers.
Will there be anything but managed decline? I cannot see it.
I’ll take “managed decline” any day…. it’s the “unmanaged decline” we see right now that scares me!!
🙂
As I said recently about the public sector, what were higher scale jobs are now being advertised with the same responsibilities at lower scale rates.
Yes – the public sector needs a wage rise right across the board – the Government has this power at its finger tips and then it offers 3% to nurses only and to no one else.
The fact is that we just cannot recruit. The people applying for these posts at these rates don’t to have the desirable skills, let alone essential ones. You ought to see the application forms!
To me, it looks deliberate – debilitate the public sector and then justify privatising it further.
Good luck….