This time we cover Reeves leading us a merry dance, AI losers and tactical voting.
By last weekend I realised the long budget run up was a dance of deceit and seduction, offered not to the voter nor the media, but to the huddled masses on the Labour backbenches. Not knowing what they wanted, but it was not what they had been getting.
So, they had to be educated, distracted, and shown lots of blind alleys. They had to stop noticing the opinion polls. Markets needed to be given a run around too, creating the illusion of exhaustive work. All to avoid being like the fine Ruff and Reeve (calidris pugnax, or dull but stroppy, in the vernacular) in our photo: shot, stuffed, then left on the shelf.
We never believed the horror stories on the so-called head room. It made no sense, you force fiscal stimulus into the economy in the 2024 budget, add a bit more from welfare U turns in the spring, borrow £20 billion more than forecast six months ago, and all economists knew growth had to go up. Just how it works. So, a model output that did not know about the last two extra inputs, had to underestimate growth. So, it proved.
The result is some very modest fiscal tightening, but nearly all far in the future. No one seriously believes a government can hold personal allowances for an entire Parliament: just ridiculous. So that will be duly released either by a then defeated Labour Government, or a newly elected Reform one.
The headroom is still thin, but enough, if they keep overshooting on borrowing and hence adding “unexpected” stimulus. As they will. Interest rates are still high, by European standards, so we still expect those to drift down.
She also has to deal with the hard world of inflation data and a cautious Bank of England. Hence the effort to fix inflation by one-off tricks, which reduce government revenue and so increase borrowing, which is pretty short-term thinking. Most of these tricks are transient, such as fuel duty, which duly starts to rise again within a year, but hopefully they work long enough to get base rates down. Although an out-of-control minimum wage, increasingly untethered from actual labour demand, across even more of the country, will not help.
From : the house of commons library
The caravan moves onto May, local elections, when panic will sweep through the complacent flock of wittering MPs once more. The hunters will come out again.
Pain delayed
As for the tax side, it was just the HMRC wish list again, barely any political input, it could have been produced by any of the centrist parties. More complexity, some nonsense on capital allowances, more restrictions on saving, more closing of perceived loopholes, some correcting past errors – all reasons to increase the headcount at HMRC. A few more thousand pages of tax legislation.
But fiscal expansion, lower interest rates, is still the market friendly big picture.
The long term remains horrible, growth is not being helped, but she has bought her (and Starmer’s) rule another year.
Who knows what might turn up then.
The other side of AI
Something has been happening all year to the sectors threatened by AI, which the market sees as broadly anything which holds, manipulates or sells digital information, be it numbers, words, images or code. Along with any business that hires people to do that.
The net of AI worry is wide, from stock prices, where the London Stock Exchange Group has been hit, through advertising where WPP seems in freefall. Then including professional publications and legal reports at Reed Elsevier (RELX). Even to market research at YouGov. Quite a few software names like Sage are also looking tired. Even music publishers and streamers, like Universal Music.
No one really knows what the impact is, but everyone is jumpy.
For a while the list included Alphabet.
But as we noted a month or so ago, and the big hedge boys like Pershing Square probably worked out three months before that, Nvidia actually has plenty of competition, not least from Alphabet’s in house chip design. Which meant they have suddenly jumped from victim to winner in this game.
We could see Pershing (and even Berkshire Hathaway) furiously working out where within the Mag 7 of tech giants the winners were and then building large positions. Overlain with a negative adjustment for China exposure (either as buyer from or seller to).
The winnowing goes on, but the huge AI margins and by implication costs, are being competed away.
We wrote about competitors in our last post.
Voter sophistication
While Reform ploughs on, a recent by-election close to the snipe’s marsh, saw this result.
This is compared to two years ago, clearly even at these little local polls, tactical voting was in play. The Tory vote almost halved (it was a very safe seat). While the Lib Dems picked up tactical voting from the Greens and from Labour. Who in turn with little real chance, were wiped out. I would see this as the Tory vote splitting, and the other votes shifting one third to Reform, the rest to Lib Dems, as the anti-Reform vote beneficiary.
That too will vary seat by seat.
I expect this to stay Tory in a real election, it certainly is not a Lib Dem seat and while Reform gets the free shot protest vote, from both main parties, I doubt if that lasts. Yet it is taking too little from the wider Left to overcome Tory strength. So, an interesting, not indicative result.
The Reeve survives, as a fellow, although rather less showy waterfowl, the Snipe is intrigued. A notable reinvention, a budget handled, if not well, at least not recklessly. Another year to sort out spending and generate some growth.
Politicians need both luck and skill, she may have the former, at least.
The fine stuffed fowl are at the Musee de la Chartreuse de Douai, a minor gem, not far off the A26 in Nord-Pas-de-Calais. Especially good on Flemish and Dutch works.