The UK is stuck in a dogfight between prices and wages

It’s Wednesday and therefore also interest rate decision day in the US. With the European Central Bank (ECB) having tightened by 25 bps last week and with the Banks of Japan and England scheduled to meet tomorrow we should then have enhanced clarity as to what our central banks are thinking. Or at least we should do until at least next Monday when the speculation will begin again as to what they are planning to do going forward. As is my wont, I switched on the TV this morning while I was making my first hot drink to see what either Bloomberg or CNBC might have to contribute. When I heard the same old chestnuts about the Fed holding rates while offering a more hawkish opinion I thought of switching the darned thing off again. When some joker began to witter on about the dot plot I did. Have we not already talked this all to death?
 
I remember my old chum Morris Sachs – yes, I really do value his opinions as he, like myself, has withdrawn from markets and therefore has no book to talk and no axe to grind – remarking at the beginning of the tightening cycle that the Fed would continue to raise rates until it had engineered a recession. So far the US economy has steadfastly resisted the pressure to stall and therefore, in the Sachs school of thought, the FOMC cannot yet be done. It’s as simple as that. Or nearly.
 
The Fed’s remit is pretty clear. It has to aim to create stable employment as well as stable prices. For the past three decades of ever more open global markets and the growth of the globalised supply chain prices have not been a problem. Thus, the Fed and all its friends and relations have been able to focus on growth in their respective economies and monetary policy has become to an entire generation of traders and investors a tool with which the authorities underwrite the guarantee that everybody keeps on getting richer. Now that price stability has displaced growth as the central banks’ prime concern, markets are confused. They tacitly still expect the Fed, the ECB, the BoJ and the BoE to jump to attention if, as and when their economies begin to falter.
 
Let’s take a step back. Oil is heading north. Talk is of Brent, having peaked on Tuesday at US$ 95.83/pbb, pressing on to US$ 100.00 and above. Although, yesterday it did drop as low as US$ 93.27 and at the time of writing is marked at US$ 93.52. In the past, higher oil prices were often seen as the Fed’s best friend as rising pump prices took excess cash out of Joe and Megan SixPack’s pocketbook, in consequence then slowed wider consumer demand and ultimately subdued retail price pressures. Of that equation, I have long heard nothing. It used to be referred to as oil doing the Fed’s job for it. Maybe we have become more sophisticated in our econometric modelling but are we any more right? Judging by recent market volatility and by some of the performance numbers, the answer has to be: “Not really.”
 
So, sit back, wait for the Fed to leave rates as they are, for Chairman Powell to tell us what we already know and for any number of Fed watchers to write a piece late this evening along the lines of “Move on, Nothing to see here…”
 
The cases for the Bank of England and the Bank of Japan are a lot less clear. US$/¥ has been all over the shop since BoJ Governor Kazuo Ueda last week set the cat amongst the pigeons by indicating that many years of negative interest rate policy might be coming to an end. Speculative pressure on the exchange rate has been strong and Ueda new finds himself in a “damned if he does, damned if he doesn’t” fix. Either way, the BoJ is said to be in close touch with the Fed with respect to possible intervention in the foreign exchange markets if the decision, whatever it might be, were to cause undue volatility. The Bank of England is widely expected to follow the ECB and to raise UK rates by a further 25 bps from 5.25% to 5.50%.
 
Experienced owners know that if two dogs are in a fight one kicks the two but never, ever puts one’s hand into the fray. The UK is already trapped in a proper dogfight between prices and wages. Governor Bailey and the members of his rate-setting body, the MPC, will keep their hands clear and at worst execute a clear kick. I can already hear the howlers and wailers performing their voice exercises and limbering up their vocal cords.
 
Moving on, I had commented to a friend a few days ago that everything had gone quiet around Cathy Wood, the publicity hunting founder, and CIO of the ARK Innovation ETF. Wood loves to parade in front of us and declaim the benefits of being a disruptor. So far, as best as I can tell, the only thing she has successfully disrupted has been the increase in her clients’, as opposed to her own, wealth. Yes, she was the darling of the tech boom, and her ETF did between March 2020 and February 2021 shoot up from US$ 43.00 to just under US$ 157.00 but since then has only gone one way at the close of business last night was trading at US$ 41.51. Her 12 month performance has been +0.17% and that over 5 years a stunning -12.32%.  The Nasdaq by comparison ha put on 28.18% and 99.16%, respectively. And yet, for reasons I simply cannot fathom, the media adore the bespectacled disruptor who in February of this year predicted that bitcoin is headed for US$ 1.48 million. At the time it was around US$ 24,700 and now, 7 months later, is at US$ 27,000. Genius that she is, she sold most of her holdings in Nvidia just a matter of weeks before the stock went on its spaceflight. Although she claimed to have redeployed the proceeds across the AI complex, her fund investors will be wondering where.
 
Now it looks as though she has decided that if she can’t make any money it might be a good idea to buy not stocks but an ETF provider which might be able to do what she evidently can’t. Thus, it is that Bloomberg today reports that she has come to London and has acquired the thematic issuer Rize ETF. Wood has pronounced that she wants to have a stake in what she sees as the growing European market for trend-driven investing. Ark has US$ 25 billion under management – what that huge sum is doing under her supposed fiduciary care escapes me although and without prejudice I’d suspect that most of it is money from folks who don’t want to realise their losses by cashing out – and Rize has equivalent of US$ 450 million over 11 ETFs. All Rize’s ETFs are going to rebranded under the heading of Ark Invest Europe. Do I detect a move by which Ms Wood reckons that if she can’t make money herself, best buy someone to try to do it for her? Or, more cynically, is it just a matter of acquiring assets under management where fees can be collected based on how much money there is in the funds rather than on their performance.
 
Hedge funds at least have high water marks at which point the basic and conventional 2% of management fee gets turbocharged with a performance fee. Ark takes just 0.75% although that is well above the normal management for an ETF. Wood’s pay-out is not linked to performance. It is a simple function of assets under management. My old Dad, sadly no longer with us, used to tell me that success breeds success. I have for the past three years tried to apply that equation to Ms Wood’s endeavours and have failed miserably. P T Barnum was right when he said that there’s a sucker born every minute. Barnum was an entertainer and is by many regarded as one of the all-time geniuses of sales and marketing. That, without a shred of doubt, is what Cathy Wood is too. But punters don’t place money with her because they admire her sales and marketing skills but because they expect her to make money for them, something which for the past two and a half years she has proven not to be able to do. Yes, Barnum was absolutely right.  
 
The price that Ark paid for Rize is unknown. But while our Cathy is larging up the potential for thematic investing in Europe, Bloomberg reports a distinct cooling of enthusiasm in the US market. This year so far US$ 2.7 billion have exited thematic ETFs, following the US$ 2.4 billion outflow in 2022.
 
I was yesterday in London where I had very kindly been invited to attend a Livery Company’s lunch at Vintners’ Hall. My host and I made the great mistake of taking a taxi from Marylebone station to Upper Thames Street which, for the benefit of those who do not know London, is a section of the main artery along the northern bank of the Thames from Westminster to the City. This major road has thanks to both Boris Johnson as mayor of London and now his successor Sadiq Khan been converted from a two lane to a single lane road. The last 500 yards, right in the heart of the City, took the taxi some 10 minutes and as most of them were in a tunnel, we couldn’t even get out and walk the rest of the way.
 
London is supposed to be one of the most vibrant and important cities in the world and whereas other great metropoles are doing all they can to improve intra-city communications, London is going the other way. I briefly mused on the cost to the economy of goods and people sitting in traffic and going nowhere. The West to East lane we were sitting in had in my day two lanes and for the seven years during which II operated out of the offices of SwissInvest, my last seat in the City, I drove this route to work every morning. I understand Sadiq Khan’s wish to halve the number of cars crossing London but I don’t get that he doesn’t see that half the number of cars taking twice the time to get from A to B is a zero-sum game that does nothing for the city’s air quality but plays havoc with its economic efficiency. The two-way cycle lane which was formerly the second traffic lane was devoid of movement and my host who is not an old City boy at one point perfectly seriously asked me what the empty bit of road was supposed to be. Shortly thereafter a single bicycle passed us – we were stationary – and after that a motorbike overtook us on the bike lane. Oh dear.     
 
Yesterday the Prime Minister, Rishi Sunak, inferred that some of the more immediate changes in the law leading to the 2050 net-zero target date might be amended. Top of the list is the 2030 deadline for the sale in the UK of ICE powered vehicles. The UK is rightly proud of being in the vanguard – if not being the actual leading light – in the race to net-zero. But at the same time, the economic realities of the cost which has to be borne when other competing economies are doing so much less or at least are doing what needs to be done so much slower, has to be born in mind. I was staggered when Robert “The Pest” Peston, formerly economics correspondent for the BBC and now political editor of ITV, sat in front of a camera accusing the PM of cynical vote catching.
 
Time to once again roll out Bertholt Brecht and his great one-liner “Zuerst kommt das Fressen, dann kommt die Moral” – first grub, then morality. It’s surely no more than a week or so since Lord King, formerly as Sir Mervyn King the Governor of the Bank of England, popped up and pointed to the economic cost of pushing too quickly towards the net-zero target. I’m sure that I must have mentioned before that one of the first essays I was set as an undergraduate was on the subject of whether the law should lead or reflect public opinion. The answer is of course one of the application of dialectics, of taking thesis and antithesis and arriving at the synthesis. For all his failings, I cannot but admire Robert Peston for having been accused by the right of being a leftist and by the left of being a rightist. Either way, as a political correspondent he should know his Marx and his dialectic materialism.
 
Any fool should by now have worked out that the electrification of all cars is a pipe dream and that there is absolutely no conceivable way in which the UK will by 2030 be able to provide the seamless infrastructure required to phase out ICEVs and replace them with EVs. That’s not vote catching. In the immortal words of the late Robin Williams: “Reality, what a concept!”

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