Macro Digest: UK election - The end of centre left?

#Election2015: The end of the centre-left?

https://www.tradingfloor.com/posts/election-2015-the-end-of-the-centre-left-4748642

• Tory victory in UK underscores trend away from centre-left
• New economy will demand more reform, investment
• Post-election GBP rally likely to wilt as need for change grows apparent

By Steen Jakobsen

 

One of the biggest concerns during the Scottish referendum was that losing Scotland would mean the end of Labour's ability to get into 10 Downing Street. Fast-forward to yesterday's election, however, and Labour lost Scotland all by itself (and some of England as well).

 

This confirms a trend in which the centre-left across the world is having a hard time establishing itself as the solution to the new economic paradigm I have coined "the New Nothingness": zero growth, zero inflation and zero hope.

 

 

The frozen security of an Antarctic cave. Photo: iStock

 

They should theoretically be perfectly placed to benefit as their core voters — the unemployed, the lower-middle class and students — have lost more than anyone else in this economic crisis. Fact is, however, that the UK is following Sweden, Spain, Greece, New Zealand, and Australia into a political system where it's extremely difficult for centre-left parties to regain power.

 

Demographic destinies

 

The post-election analysis in the UK points to a situation wherein Labour was both not left enough in Scotland and too far left in England to succeed. There is also, among seasoned politicians and strategists, a new sense of urgency to redefine Labour in the mould of a modern society where technology and demographics are challenging all business models.

 

Demographics because the population is growing old, increasing the burden of health care as well as the taxation that pays for it; technology because it continuously creates new and disruptive ways to upset the status quo, introducing uncertainty where before there was a steady road forward.

 

LibDems pay the price

 

Traditional Labour voters must have felt more secure with Cameron and the Tories than both polls and strategists maintained. The election result, however, is far from a confirmation of the coalition's policy. The Liberal Democrats are now smaller than they were before their entry into politics in 1992 with seven – SEVEN! – members of Parliament. 

 

The price for a lack of reform and an economy that remains on the brink of disaster was paid by the LibDems, and it seems that the Tories received some sympathy votes. This was mainly to stop the frightening forward march of the Scottish National Party, which according to most polls would have been the kingmakers of a Labour-led government.

 

I don't think it's the end of the centre-left, but it's the end of this generation of old-timers trying to pretend they understand the new economy. The challenge of the next two decades will be to anchor the best values of the UK society in a model that moves away from an over-dependence on real estate and finance and toward an economy where a broader, better educated, and fairer society builds its wealth on cooperativeness, disruptiveness and investment in technologies that can replace the old ways of thinking and doing things.

 

There will be a shortage of workers 10 years from now, there will be fewer people paying for more people and there will a burden of integration and of applying the proper balance of individual rights versus the interests of security through technology. First and foremost, however, we are short on young people, women and idea people who see this next step as a challenge to improve rather than a chance to stifle reform.

 

Britain and Europe

 

Ironically, the UK election was both a call for renewal of the political role and a dose of non-reforms, but the tectonic plates of the centre-left are now moving towards an earthquake. This is a good thing in my mind because a broad, clear political spectrum is exactly what we need.

Away from the political analysis, the leaders of the EU need to pay attention and so do the financial markets.

 

Prime Minister Cameron seems willing to deliver on his promise to hold a referendum on the EU no later than 2017. The anti-EU vote is still strong in the UK, but Cameron can with some justification now expect some grace from Tory back-benchers as his surprise win is hard to ignore. 

 

I am sure Cameron also feels he is in position to secure the UK's role in Europe, but anyone who has lived in the UK knows that, given a bad day (such as one which saw Manchester United lose over the past weekend) the independent-minded British could well say "no, thank you" to an EU which is getting harder and harder to love.

 

Whither sterling?

 

I expect Gilts and GBP to suffer when the reality of this situation replaces the relief of the Tory victory. The UK remains largely unreformed and Cameron made a lot of expensive promises to fight off Labour – if he delivers it will mean steeper budget and current account deficits in a macro environment that I firmly believe will be challenging for debt-ridden countries.

 

The UK and Cameron have benefitted from ever-lower interest rates and inflation (because low inflation makes real GDP higher through the deflator). Now comes a time where yields will rise by a minimum 100 basis points during the second half of 2015.

 

I will sell Gilts on Monday, and I will initiate a negative long-term GBP short, AUD long into year-end. Cameron won the battle but will still lose the war against recession as his government will soon realise how expensive the levy tax on the UK banking sector will be. 

 

When I talk to investors across the globe, the old story of the UK being a safe haven of "rule of law", independence and tax benefits, has been replaced by one where more and more people ask how can the UK afford to stall on reform? For now, it seems the signal has been to tax more and promise more – exactly what just lost Labour the election.

 

 

Ex-Labour leader Ed Miliband may have resigned but the policies 

that led to his downfall are still in common use. Photo: iStock

 

— Edited by Michael McKenna

 

Steen Jakobsen is chief economist and CIO at Saxo Bank

 

 

Med venlig hilsen  |  Best regards
Steen Jakobsen  |  Chief Investment Officer

 

Saxo Bank A/S  |  Philip Heymans Allé 15  |  DK-2900 Hellerup
Phone: +45 39 77 40 00  |  Direct: +45 39 77 62 23  |  Mobile: +45 51 54 50 00

 

Research: http://www.tradingfloor.com/traders/steen-jakobsen

Please visit our website at www.saxobank.com

 

 

This email may contain confidential and/or privileged information.
If you are not the intended recipient (or have received this email
by mistake), please notify the sender immediately and destroy this
email. Any unauthorised copying, disclosure or distribution of the
material in this email is strictly prohibited.

Email transmission security and error-free status cannot be guaranteed
as information could be intercepted, corrupted, destroyed, delayed,
incomplete, or contain viruses. The sender therefore does not accept
liability for any errors or omissions in the contents of this message
which may arise as a result of email transmission.