What caught my eye?v.73:Is higher uncertainty =higher growth?

We discuss how a link between uncertainty and outcomes often can be faulty.

Do investors remember the ‘UK recession watch’ that economists discussed inthe first three months after the Brexit? Does anyone remember that the electionof Donald Trump was supposed to lead to catastrophic outcomes, includingrecession and collapse of asset classes? Most estimates were lowered in thewake of Brexit and Trump’s win. Investors are now exposed to the same direpredictions of a potential win by Le Pen in France. One has to feel foreconomists, as theory clearly states that uncertainty is bad for confidence andhence for most macroeconomic outcomes. Unpredictable elections and risingpopulism are supposed to translate into less confidence, consumption andinvestment, requiring an immediate CB support (a la BoE QE re-start in Jun’16).

Instead of course, British consumers reduced saving rates following Brexit, thusboosting consumption and GDP. UK HH saving ratio dropped to 5.6% in 3Q’16(6.1% in 1H’16) and it is likely to have declined in 4Q to ~5%. As a result,consumption rose in 4Q’16 to 3.2% (highest since 4Q’07). At the same time, HHdebts continued to climb, reaching ~86% of GDP, while growth remained steadyand even gross fixed capital formation picked up slightly. While it is early for harddata, Trump’s election was greeted with exuberance rather than dismay.

Whether one looks at consumer or business confidence, both underwent a sharprise. As in the UK, the US personal saving rates fell. Equity investors were notwaiting for confirmation and executed a 180-degree U-turn. The samecommentators who were expecting an Armageddon started to forecast gains.

Why did supposed negative outcomes not translate into a drop in confidence?There could be several answers. First, one could argue that global reflation thatstarted in mid-16 (in the wake of massive China stimulus and state sponsoredcredit creation) is masking what would ultimately prove to be negative outcomes.

Second, not enough time elapsed, and therefore it is not the fault of conventionaleconomic models and theories, but rather it is ignorant households who failed tobehave rationally but eventually they would come back to their senses.

Our preferred answer is that ‘silent majority’ demands and embraces deglobalization,state interference and populism because people aredisoriented by changes that are deforming labour markets. From retail tobanking, transport to manufacturing, there are few jobs that over the last decadehave been untouched by technology and globalization. Policymakers’ call forimproved skills and greater creativity as the keys to success is irrelevant for mostpeople. It is debatable how many can be creative, but studies found thatbetween 70% and 80% are mainly followers who want to feel appreciated andrewarded but cannot create. In 19th-20th centuries, they were the ‘salt of theearth’ with valuable contribution of ‘sweat and hours’. However, rapid value shiftstowards innovation (zero to one) makes hours worked a largely irrelevantconcept; hence the popular angst, even in the face of lower unemployment. It isnot about labour slack but about desire for pride in a job well done. That’s whereBrexit, Trump and le Pen come in. If the system is perceived to be unfair, anychange is better than current predicament. In our view, this explains theyearning for ‘strong leaders’ and higher confidence post elections as mostpeople feel they now have their champion. The fact the ‘cure is likely to beworse than the disease’ is for now irrelevant. In the meantime, Vive Le Pen!Portfolios: ‘Global Quality Sustainable growth’ (150bps YTD) and ‘Thematics’(650bps YTD) are up strongly; Asia ex eased largely due to one stock.