The UK market is weak. When it moves, growth now outperforms value. The UK like much of the rest of the world is not sure whether it is about to be hit by runaway inflation or a sudden bout of implosive deflation. It will take a long time for the west to get its budgets back on an even keel and if that claw back takes too long then the result will be a huge debt overhang and high interest rates except that won’t happen.
It won’t happen because inflation resets that situation of grinding deflation and economic desolation, and inflation is easy and inflation is already here.
I say that but looking around there still seems to be a big cohort of deflation believers. This is perhaps because many a pay check depends of believing in the risk of deflation rather than seeing the result of ‘transitory’ inflation that has appeared. I have written many times about inflation here, while the consensus has called deflation. I might not be a certificated economist but right now I am right. The combined effect of 2020 and responses to Covid have accelerated inflation. Now thinking goes that the global economy is close to recovery and money printing will stop soon. This can only happen if debt to GDP at 100-150% is the new norm and no longer considered to be a level that kills economic growth. Unless the democracies of the west are prepared for an sever economic and social come-uppance the alternative is keep on printing.
We will see.
So the UK’s FTSE index is buffeted more than most by the pandemic and it has underperformed European and US markets but a large amount leaving many companies in the bargain bin to be snapped up particularly by the US. There will be plenty of drive in ‘take-aways’ from the UK market especially when its less inconvenient to go shop in the UK rather than zoom around for corporate snacks.
So here is a chart of bargain basement Britain versus bubble S&P 500.
So it is a no brainer for the canny investor to stake out big profitable UK companies selling at half price. The list may as well cover the top 350 companies in the UK. Meggitt and Ultra Electronics are recent examples of the sort of takeover activity due to erupt in the UK. It is simply as case of when not if.
But then there is the inflation deflation argument to consider. Inflation of a not to hot, not to cold type will mean a strong market as assets continue to inflate. Deflation means implosion economically and socially, which to me means that route is unlikely however much politicians and central bankers huff and puff to try and manage ‘inflation expectations.’
Central bankers pretend to believe that inflation is created by ‘inflation expectations’ not an over-supply of money. They do not remember or want to remember Milton Friedmann’s classic statement that ‘inflation is always and everywhere a monetary phenomenon’ and the will say ‘inflationary expectations’ are not rising. This would be comforting if the main component of ‘inflationary expectations’ wasn’t extracted from the bond market they are cornering. If they stopped buying mountains of bonds they would soon divine significant ‘inflationary expectations.’
However what else can they say while inflicting a vast haircut on the economically passive.
So here is a FTSE 100 chart with some short term projections with either inflation or deflation as a underlying development.
If the FTSE was any other first world index it would already be 8000. I think that is the way ahead but that UK investors should be cautious at least till the autumn or untill its clear if the SP500 is going to continue its moon-ward march.
If the SP500 is not a bubble then it is pointing to high inflation for a long time to come. As such index scales lose their meaning because SP500 at 10,000 is no different than todays level if money has been devalued by 50%.
For me that is a real risk, not only for the US but for the UK too.
What exactly might be the politically acceptable or practical alternative?
So for me this is a stock picking market where you have to hunt the takeovers and that field should be very fruitful indeed.