Friday 1, July 2022
Housing
House sales are down by 50% since the peak in the UK. There are a lot of distortions in the UK, not least the mad “Stamp Duty Holiday” of last year. The big problem is the wariness of lenders. The UK has had, for the last few generations, a chronic supply problem with housing, which is combined with very low rates of internal migration. This might keep prices high, but it’s hard to see the 10% annual rates of increase being sustained for long. If the pound drops, this might give house prices a boost, but the demand from overseas buyers must have been damaged by the UK starting to take sanctions and anti-money-laundering regulations seriously.
The End of Indexing
Passive investing has had a good run, but it’s subject to Stein’s Law. If ten percent of holdings are held in passive vehicles, the holders of that portion can have a free ride on the analysis of the 90%. It probably works at 50%, but at some point, someone has to do some analysis. If 100% of investors invest in index funds, there is no rational basis for price discovery. It will be as though nobody can buy or sell individual stocks. At the very least, this will result in a collapse of volume. The problem is that when all active investments have been liquidated, flows into the market portfolio will stop, and the fully-invested bias which drives the market up will stop too. The first half performance of equity markets has been dire. If people become more selective, maybe going into sectors (XLE?) and individual stocks, the long march into passive funds will reverse, and as it does so liquidations will probably snowball. Well, that’s the Michael Green theory. I am not sure we’re seeing it yet, but it sort of looks more plausible now than it did a couple of years ago.
Clintonization
After Reagan and Thatcher, the world changed. The legacy of Attlee and FDR were consigned to the dustbin of history. Clinton and Blair took control of their left-leaning parties and tried to adopt a ‘middle way’ between redistribution and support for the poorest and neoliberalism and Friedmanite free-market worship. Clinton became convinced that the bond market would destroy his administration unless he adopted ‘sound money’ policies. The same went for Blair, who promised to stick to Conservative spending plans, and to hold taxes from rising.
I don’t really know what drove this change. For sure, Reagan and Thatcher were very popular leaders. Inflation had been a huge problem, and tight fiscal policy must have helped purge the system of it. Somehow, in all of this, nobody cared about distribution, redistribution or even ‘pre-distribution’. For the first time, the US and the UK had left-wing governments with right-wing economic policies.
For sure, both parties did do some stealth tax increases, and did some modest increase to in-work benefits. Blair spent more money on public services, although more by increasing the salaries of public-sector workers than by actually increasing their output. Both administrations were fixated by spin and what Clinton called ‘triangulation,’ i.e. positioning his party a tiny distance to the left of the Republicans on all divisive political policies, so that his natural supporters would have nowhere else to go, but that an absolute minimum of right-leaning voters would support him. Well, eventually, voters decided they were fed up with ersatz conservatism, and might as well vote for the real thing. The short-changing of the baskets of deplorables drove them into the arms of Trump and Farage.
I have no idea what happens next. UK politics always seems to follow the US lead, which suggests that Starmer might have a narrow lead. If he follows the policies of Biden, he will be a one-term catastrophe, but with a growing influence of wealthy donors and Tony Blair it’s hard to see anything else happening.
Wrap
This is the first day of the quarter, and the beginning of the Independence Day long weekend. Volumes were low and prices were all over the place.
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