Monday, May 09, 2011
Well Friday afternoon certainly saw the resurgence of Greece to No.1 in the markets pop charts with talk of them leaving the Eurozone and sailing off into the sunset across of sea of un-fundable debt. Since then it would appear that every Eurocrat and even the Greek's themselves have been instructed, in small boy and dyke style, to plug every possible thought leak that Greece could ever, ever, ever leave the Euro zone. Now we can't decide if this could possibly be because, from the Greek's point of view that, if they were to leave, their funding would be so right royally stuffed they wouldn't even be able to borrow the time in a clock shop or whether its because the German's are so absolutely terrified of the Greek debt time bombs in their bank's vaults, or perhaps it's just that Greece is really so absolutely wonderful there is no reason to ever think that such a beautiful friendship should ever end (cue clip of Mafia boss reassuring proven snitch as he gets into mob car for a "little ride").
TMM think this is all just part of the predictable path to a restructuring that has long been due and is part of the brinkmanship involved. But having landed in a market that was looking for something to hang a falling EUR/USD on, it has resulted in the Euro-cupboards being emptied of the Eurowoes that were being filed away as they weren't fitting with the recent rally.
As far as the recent general sell offs go, TMM think the moves over the last 4 days are something bigger than a short term correction, with remaining trapped longs that need to get out in all the recent hyperbolic assets. We are JSTFR rather than JBTFD.
Now, TMM ask their readers forgive them for covering an issue that is probably not of particular interest to many, but in light of TMM's Non-Prediction that the UK's Alternative Vote referendum would NOT pass, but the coalition would also NOT collapse, they thought they would take a more detailed look at the implications of Friday's election results.
Whilst we would like to think that these instructions, spotted by a friend of ours, contributed to the LibDem whitewash we really ought to delve a little deeper:
TMM reckon the council election results are quite significant in several respects: (i) a Scottish independence referendum is now certain, (ii) the Liberal Democratic vote collapsed, (iii) the Conservative vote held up very well with 53% of the English vote, and (iv) the combined Conservative and Labour vote share hit 80%, which is the highest for many years.
Delving a little deeper, Scotland voted for independence as Labour, the Conservatives and the Liberal Democrats all lost seats in a dramatic swing to the SNP. According to TMM's models, were the Scottish election carried out under the First Past The Post (FPTP) system as per the General Election, that Labour would have been all but wiped out, only holding a couple of constituencies. Scottish First Minister Alex Salmond has already been making demands in the media, and it appears that David Cameron will acquiesce to some of these, particularly in the case of allowing Scotland to raise its own debt. Alex Salmond is a shrewd political operator, and is not unaware of his ability to extract concessions from Westminster while delaying an eventual referendum on Scottish independence. Now, TMM are pretty sceptical of Scotland's ability to survive as an independent nation within the Euro given that it shares many structural problems with the PIGS (low productivity growth, high dependence upon fiscal transfers etc). A discussion of how independence mechanically would work is far beyond the scope of your humble bloggers, but it is clear that the division of oil revenues, Gilt stock and the cost of bailing out RBS and HBOS will play centrally. But intricacies aside, TMM reckon the Labour Party will be especially worried about how things play out.
Onto England... TMM reckon the UK council election results are particularly surprising, as based upon national polling, the swing from 2007 (the last time many of these constituencies were asked to vote) suggested that Labour should pick up around 1300 council seats, but instead only picked up 800 seats. That is a disappointing performance, especially in the context of the Conservatives *winning* 81 seats, something none of TMM's Westminster mates were expecting. What appears to have happened is that the Liberal Democratic vote has collapsed, but also, minor parties and independents have been squeezed too, moving England back towards polarised two party politics and reversing the trend of the past 30years. The seat shares for England were CON (53%), LAB (27%), LIB (12%) and OTHERS (8%). Professors Rallings & Thrasher's electoral models reckon the overall results put the national equivalent vote shares at CON (38%), LAB (37%), LIB (16%) and OTHERS (9%). That would equate to the first time the Tories have led Labour in the polls since last Autumn. Aside from Liberal Democrat infighting, TMM expect Cameron and the Tories will be reenergised by these results as they show a clear building of momentum on the national polls. The fact is, for such a stage in the economic and political cycle, Labour should be further ahead.
But this also raises a further question: how much more momentum do the Tories need to gain in order for there to be a snap election?
The coalition document is key in its agreement of the next election date being 2015, something the Liberal Democrats wanted in order to stop the governing part from calling snap elections. However, the key Tory electoral reform proposal - the boundary review - has been passed into law (in the same bill as the AV referendum), but the fixed term parliament legislation has not. TMM reckon that the Lords may try and remove the fixed term parliament clause from the Bill, allowing the Tories to call a snap election should the right circumstances arise, as Labour do not currently have the momentum (or the money) to win a national campaign should an election be called shortly. It is worth remembering here that polls always narrow in favour of the incumbent as an election date approaches and currently, Labour do not have enough momentum (or cash) to fight an election. The Tory aim now should be to try and appear "above" the squabbling going on within the LibDem camp, and quietly refuse to enact anything that is not within the coalition document. Given public anger with the LibDems, the MPs will either wear it and grit their teeth for fear of losing their seats in an election, or else out of "principle" or whatever else, they will force a breakup of the coalition. TMM genuinely don't think Cameron has an agenda either way, in this respect, however they would expect others in the party will be plotting behind the scenes. The key is to appear reasonable and attempt to drag things out for another 6-9months. TMM will explain why below...
Obviously, one of the most famous political quotes ever is "It's the economy, stupid". Nothing is more important in TMM's opinion, and we think things are about to get interesting...Firstly, the below chart shows a model of UK Consumer confidence based upon various lagged economic variables. The fit is not perfect in recent years, something TMM believe to be the result of the volatility in the RICS survey (one of the model inputs) over the past four years, as well as base effects that we couldn't be bothered to adjust for properly, but you get the idea - consumer confidence is largely a function of the economy. Several of the inputs to this model have begun to turn over the past couple of months, and after last week's oil collapse, the petrol price component should do too, soon...
The next thing to look at is how Consumer Confidence behaved in the context of similar economic conditions (the early-1980s). Getting data back to the late-1970s is not easy, so the data is not as granular as TMM would like, but you should be able to see what we're trying to illustrate. The below chart shows consumer confidence (red line, left axis) vs. the Conservative vote share in polling data (blue line, right axis). The 1981-83 period is covered in a bit more detail below, so we'll just say that you can see that from 1979-80, confidence rebounded with the new government and the end of the Winter of Discontent, but then stalled until around mid-1981. It then began to rebound sharply as the economy exited recession, and dragged the Conservative polling share higher (more on this and the Falklands below). As economic restructuring in the North continued into the mid 1980s, both confidence and the Conservative vote share fell. At the height of Thatcher's battle with the unions, the unpopularity of Thatcher became widespread and their share collapsed, though as the economy rallied into 1987 with the Lawson boom, confidence led the vote share higher... And then subsequently lower as the economy slid into the 1989-90 recession, bottomed and rebounded back into 1992, before collapsing after Black Wednesday. That was the point at which economic credibility was lost and the Tories descended into infighting, detaching from confidence.
Zooming into 1981, it is possible to put paid to the common belief that the 1983 election was only won as a result of the Falklands War. As can be seen from the below chart, Consumer confidence had been moving higher for a while and the Tory vote share bottomed in August 1981, before rebounding sharply with the economy to around 40% just prior to the Argentinean invasion. That was only a couple of percentage points away from the level needed to win a majority, and would inevitably have been built up once an election was called (remember the poll narrowing point).
So how is this relevant now? Well, there are several similarities. Firstly, the Royal Wedding saw a large bump in consumer confidence in 1981 from -28 to -17. With a 2bn global audience and excitement all around, it is easy to see how many will have been cheered by the event. Secondly, the recession here ended a while back and the recovery is currently tracking the 1981 experience reasonably well. TMM are not convinced that the blip in the UK data is anything more than an Easter/bank holiday effect - certainly that is the impression that a few other metrics they look at are giving (notably, housing, mortgage approvals, Lloyds business barometer, consumption etc). Thirdly, the weather has been fantastic, aiding the High Street (see Next's recent statement). TMM reckon that the outlook for consumer confidence is beginning to turn positive.
It is clear that the hurdle for the Conservatives is no longer that high given their essential level-pegging with Labour in the polls and their electoral performance. Clearly, the momentum is likely to energise the party and should economic conditions improve over the next 6-9months then it seems to TMM that an early election is suddenly significantly more likely. It's worth remembering that there are large numbers of both LIB-CON marginal constituencies that just turned a "virtual" blue and several more three-way marginals. An encouraging development for the Tories is the squeeze on "Others" and "Independents", implying that UKIP voters (of which a mere 1500 cost them a majority last year) are coming back into the fold. The key barrier to an early election is the current constituency boundaries are stacked against the Tories, and won't be set under the new legislation until 2013. Of course, should polling thresholds be met, TMM do not doubt that Tory High Command may take a gamble.
As far as the LibDems go, they now are - in electoral terms - reduced to their SDP/Liberal "rump" as Labour defectors have already moved back and students (who are too lazy to vote anyway) move into Labour's arms. The Clegg resignation calls were inevitable, and Chris Huhne has clearly been positioning himself as the left's candidate, but he is a clown... and his ex-wife has threatened to embarrass him by releasing potentially damaging information on him. TMM's gut says Clegg will stay in control, but anger will simmer more broadly within the party, something which the Conservatives may try and take advantage of in coming months should their polling position improve. As above, the key for them is for the LibDems to blow themselves to pieces such that the government falls as a result of the LibDems. This is clearly a risky proposition...
...but one thing is certain, the probability of an early election has risen and, with it, TMM's Non-Prediction (the first half of which they got right) is looking slightly more vulnerable.