What May’s catastrophic gamble means for your money

 

“Strong and stable.”

That little phrase was always something of a hostage to fortune. Now it looks downright hilarious, in a blackly comic sort of way.

Just over six weeks ago, an apparently popular prime minister succumbed to the temptation to take on an apparently unelectable opponent to shore up her majority and put Britain into a comfortable negotiating position ahead of Brexit.

Instead, we’ve got a hung parliament. And the possibility of another general election. And a stalled Brexit negotiating process on which the clock is ticking.

“Strong and stable.”

Oops…

This year only: get two elections for the price of one 

Hands up – I didn’t expect to be writing this particular Money Morning. I thought the Tories would win comfortably.

Clearly, I was wrong. And what’s irritating is that the evidence was there. Smart people (like Nate Silver, US polling guru extraordinaire) were warning that we might see something unexpected. The tone throughout the campaign was off. The polls might have been all over the place, but they mostly didn’t scream “landslide”.

So a dispassionate look at reality on the ground would have made it clear that this morning’s result was a distinct possibility. As with so many contrarian bets, the real problem was confirmation bias.

I just struggled mightily with the idea that the British electorate would come anywhere close to backing Jeremy Corbyn.

Anyway, that’s a useful personal lesson for the future. What happens now?

The results aren’t all quite in yet. But we do know that Britain is facing a hung parliament.

The Conservatives went into this election with a slim majority, at 330 seats (331 if you include the speaker). They needed 326 to get a majority. It looks like they’ll get 318.

Labour are set to get 262, the SNP have really taken a beating, falling to 35, and the LibDems have avoided the wipeout they’d feared.

What does all of this mean?

Long story short (and more on this might be clear by the time you read this), Theresa May can try to put a government together. If so, it would almost certainly have to be with Northern Ireland’s Democratic Unionist Party. Alternatively, Jeremy Corbyn could try to put together a coalition with the SNP, LibDems and Green Party.

A coalition seems unlikely. Everyone saw what happened to the junior partner after 2010. So neither of these options seems likely to survive the rigours of actual government. The other option is to form a minority government and try to struggle through.

As I say, this is a fast-changing process – it’s not even clear as I write whether May will resign or not. However, my gut feeling at the moment is that we’ll end up with another election before the end of the year.

And what is very clear is that Britain faces a whole lot more uncertainty in the near term. So what does that mean for your money?

It’s easy to say this – but don’t panic

As I said yesterday, the main thing is – don’t panic. None of this will be much fun, but at the same time, there’s not a lot you can do about it in investing terms.

Firstly, sterling is likely to have a tough time over the next few weeks. It cratered when the exit poll pointed to a hung parliament, and then cratered again around 5am when it became absolutely clear that there was no chance of the exit poll being wrong.

That shouldn’t make any particular difference to your investments (particularly if they’ve weathered the Brexit volatility), because you don’t invest based on exchange rate forecasts, and you already have a well-diversified portfolio with plenty of international exposure – I hope. And in any case, a drop in sterling typically means a rise in the FTSE 100.

Secondly, the Brexit clock starts ticking from 19 June and there might be no one on the British side of the negotiating table. We’ll hear a lot of talk about how a “soft” Brexit is more likely now, and that idea might help to cushion the pound somewhat.

But in reality, Brexit was never likely to be “hard”. Everyone wants a trade deal. It’s just about what that costs and what the precise immigration rules end up being. So while Brexit will take up a lot of column inches, it’s still a longer-term issue, with plenty of changes possible before the final deal, and it’s not something that should have a big impact on your portfolio.

Thirdly, on the upside, this particular election result does suggest that another Scottish independence referendum has genuinely been put back for a generation (that’s a human generation, not a fruitfly one, as many nationalists had apparently believed).

It’ll be interesting to see how the SNP shifts tack now that voters in Scotland are clearly demanding a focus on governance, rather than never-ending calls for independence. But in any case, it’s one less worry for the fundamental stability of the UK.

Finally (for the moment), I think you can forget about any serious steps towards tackling Britain’s big problems (too much debt, too many unfunded pension promises, and too low productivity).

If May’s campaign demonstrated anything, it’s the sheer folly of attempting to tell voters something approaching the truth, rather than what they want to hear. From now on, expect manifestos that promise pain-free solutions that someone else will pay for.

A shame that – but that’s why you own a bit of gold in your portfolio. It’s insurance against short-termism and the unfortunate reality that the road to Hell is usually also the one of least resistance.

We’ll have a lot more on the election in the next issue of MoneyWeek, and handily enough, we’ll also have a tax and pensions supplement to help you make the most of your wealth and hang on to it in these interesting times.

If you’re not already a subscriber, sign up right now.

  • Peter Edwards

    “If May’s campaign demonstrated anything, it’s the sheer folly of attempting to tell voters something approaching the truth, rather than what they want to hear. From now on, expect manifestos that promise pain-free solutions that someone else will pay for.”

    Hilarious right-wing propaganda, let’s cut corporation tax, but threaten to raise income tax & national insurance…

    • Horiboyable .

      Do the maths, this is where the socialisms rubber meets the road. Turns out Maggie Thatcher was right, socialism eventually runs out of other peoples money. Every western government is broke and you will soon have sovereign defaults. That should end socialism in Europe thank god.

      • Peter Edwards

        Maggie Thatcher was dead wrong.

        With-out society there is no need for money or private property rights.

        And as for other people’s money most of that earning potential is from that society itself from those long dead. put a thousand Trumps on a desert Island with no access to the outside world and see how much wealth they produce.

        • Triple H

          Absolutely spot on. The right wing are so incredibly wrong on everything. We need a healthy society for there to be true progress. And no, socialists do not ask the money to be paid for by someone else, they ask the likes of Goldman, Google, Starbucks, Amazon etc to pay 20-30% for operating in a civilized, educated society where the rule of law allows them to recruit the brains and conduct business without fear. This was why young people like myself (despite earning well) supported Corbyn. But I guess for Tory-fascists, this is hard to grasp.

          • Horiboyable .

            How is socialism working out for Venezuela these days. How did it work out for Britain in the 70s, remember when we had dead bodies piling up because no one would bury them, you had to take a candle round the super market to shop and the rubbish mounted up in the streets. Yes they were great days alrighty.
            You need to read more history snow flake.

            • A Frith

              I was there in the 70s and the myth about dead bodies piling up is exactly that. It took a couple of extra days to get a Crematorium date, the rest was Daily Mail nonsense.
              Today of course, after seven years of sensible Tory government I had to wait three weeks to cremate a deceased relative. The Council can’t afford to run the Crematorium.
              Also the three day week, and the rolling power cuts were under Heath’s Tory government, albeit caused by the miners.
              Why do you think Thatcher wanted to close down Britains mining industry?

              • Horiboyable .

                I am a political atheist so you can bash the Torys as much as you like. Torys are just as socialist as Labour, they are fighting for the same ground. This is where the problem is that both political partys think exactly the same way and they cant see the cliff we are about to drive off so there is no one to save us.
                When the government bonds fail this will begin a domino effect that will flow on to banks because they hold government bonds as reserves, liquidity will dry up world wide. It will make 2008 seem like a minor bump in the road. This has happened before in 1932 when the whole of Europe defaulted on its sovereign debts including China. Britain technically did not because we went into a moratorium. Back then it started in Austria by a Rothschild’s Bank.

          • Jab

            You are right they should.BUT these are companies who can change country , going where its lower tax.Thats why people like yourself would quickly find your wage drop if Corbyn got his corporation tax

            • Triple H

              Libya had a low tax so does Saudi. Will these companies relocate there? It is a myth that companies will leave en-masse only because of being asked to pay for the ‘capital’ they depend on (money and human).

          • Firebird3

            Getting the big Companies to pay their ‘fair share’ isn’t really about socialism, it’s just about getting them to pay a fair share and no so called Tory-fascist would argue otherwise. But don’t only have a go at the big Companies, who don’t claim to be ‘all in it together’, far worse, although on a much smaller scale, is the celebrity luvvies who are supporting Labour and spouting on about a fairer society, yet are getting their accountant to, by any means possible, to pay next to no tax at all.
            And by the way, socialism in it’s true form, is you, who you claim to earning well, would be paid the same as someone who works behind the counter of a fast food establishment. Which is why socialism doesn’t work, because there is no incentive to better ones self.

          • Jab

            https://youtu.be/sSDClxjcR-4, is the video that Prof Peterson made which shows you what to left has in store for us.Regards the tax bit.Yes , I agree but how to extract tax from a global company?
            This is something the EU should have done years ago with its regulations.
            I hope you look at the video as it is so good at explaining left wing truths.

        • Horiboyable .

          Well Peter you are going to be witness the demise of socialism before your very eyes, because when the government bonds fail and they will because this clock has never been beaten, not even once. When the UK government defaults and they can no longer borrow money, that means your pensions are gone, no NHS, the Police will become corrupt and there is going to be lots of violence in the street. I have tooled myself up for this event to protect my family.
          When governments get themselves in this situation and they cant pay their bills they normally start a war somewhere to divert the populous and then tell the drones that it was Russia fault because of xyz.
          This will see the end of the EU religious project too. France = broke, Portugal = broke, Greece = broke, Italy = broke, Ireland = broke, UK = broke. The ECB now owns 40% of the Euro area debtbonds that means there are no other buyers, without the ECB nobody would bid on that crap. You know you are entering the end game when your country starts debasing their legal tender to stay in the game, they have to cheat. It never worked in Rome, Weimar Republic, Zimbabwe, Venezuela or any other country you care to name in history that have tried it. I see in that socialist utopia Venezuela folks can not buy toilet paper, they are breaking into zoos to kill animals to eat. I suggest that you take a 6 months break there and then come back tell us how good socialism is, that’s if you are still alive of course because their murder rate is higher than the USA.

          • Jab

            I try to “tool up” but am thinking there is nowhere to run!

          • Peter Edwards

            The same has been said about Japanese Bonds for decades…

            The EU is going nowhere as long as the Germans want it, the EU has huge trade surpluses, German/French productivity is very high. Outside war their problems are not insurmountable.

            Government debts most of the industrialised world has them China, US, UK, EU, Japan.. when default occurs they will still be able to raise money just because where else can capital go.

            • Horiboyable .

              Bonds blow up and then folks lose their pensions. Pension funds are already taking on water because of interest rate suppression so the state can stay in the game. Pension funds that were setup 40 to 50 years ago used a model that allowed for an interest rate of 6 to 8% which historically was the norm, so these guys have been losing money for over a decade now. The short fall in the UK is estimated at 800 billion. So many folks in their old age are going to be very poor. When folks are losing and they have nothing else to lose they lose it. In the states right now states are going bankrupt and folks are leaving because they have to raise taxes, Illinois is one to watch.

          • Triple H

            Start the war? You mean the ones that Tory-fascists wage in our name? And who on earth is suggesting we should model ourselves on Venezuela? You cannot compare the UK to Venezuela because they were run under dictatorships (which your beloved Tory-fascists on the right love around the world until they stop selling cheap oil or buying your weapons to drop on semi-naked children). Venezuela, like many others, did not govern well, depended on only one commodity mainly and as a result are now suffering from low revenues due to falling oil prices.
            You can tool up all you want. You’ll definitely need it if the Tory fascists (or Blairite Labour) take the country to further right, causing community division and mass unrest due to there being no health, no education and no jobs for the masses.

            • Horiboyable .

              Socialism was so good that it collapsed the USSR and I see they have not been stupid enough to try it again. It was no accident that the Nazi’s were socialist to. The book, The Road To Serfdom highlights the reason why socialism will always lead to authoritarianism.

              Chavez was voted in.

              Socialism is for the beta males in society, real men want to stand on their own two feet and not depend on the state stealing wealth from your neighbor to survive. Real men want to be independent of the state and provide for their own family.

              Vote Labour and vote yourself rich.LOL

              https://campus.aynrand.org/works/1957/01/01/the-meaning-of-money/page1

              Also there is a moral hazard borrowing all that money for consumption and then handing that debt on to your children to pay for, turning them into debt slaves.

          • Jab

            https://youtu.be/sSDClxjcR-4
            This is how they did it!

            • Horiboyable .

              Jab, thank you the link. I watched last night and others from this professor and he is right on the money.

        • Horiboyable .

          Individual Rights

          A “right” is a moral principle defining and
          sanctioning a man’s freedom of action in a social context. There is only one
          fundamental right (all the others are its consequences or corollaries): a man’s
          right to his own life. Life is a process of self-sustaining and self-generated
          action; the right to life means the right to engage in self-sustaining and
          self-generated action—which means: the freedom to take all the actions required
          by the nature of a rational being for the support, the furtherance, the fulfillment
          and the enjoyment of his own life. (Such is the meaning of the right to life,
          liberty and the pursuit of happiness.)

          The concept of a “right” pertains only to
          action—specifically, to freedom of action. It means freedom from physical
          compulsion, coercion or interference by other men.

          Thus, for every individual, a right is the moral
          sanction of a positive—of his freedom to act on his own judgment, for his own
          goals, by his own voluntary, uncoerced choice. As to his neighbors, his rights
          impose no obligations on them except of a negative kind: to abstain from
          violating his rights.

          The right to life is the source of all rights—and
          the right to property is their only implementation. Without property rights, no
          other rights are possible. Since man has to sustain his life by his own effort,
          the man who has no right to the product of his effort has no means to sustain
          his life. The man who produces while others dispose of his product, is a slave.

          Bear in mind that the right to property is a right
          to action, like all the others: it is not the right to an object, but to the
          action and the consequences of producing or earning that object. It is not a
          guarantee that a man will earn any property, but only a guarantee that he will
          own it if he earns it. It is the right to gain, to keep, to use and to dispose
          of material values.

  • Chammers

    Excellent summary – spot on in my opinion.

  • DiverPhil

    Yes we have a problem with debt and the balance of our economy that we are not ready to face up to yet, but we have had it for years it will come to crunch time but not just yet, The hung parliament will have to operate with a greater consensus which might be a better solution than the Conservative right constantly force feeding us this hard brexit nonsense. Europe is beginning to turn round, bank bailouts are on the table and forced consolidation allied to growth will gradually turn it round, not quite Venezuela yet and a bit more European fudge.
    I think Horiboyable needs to get out more he is becoming a bit of a blog stooge.

    • Horiboyable .

      “Europe Is beginning to turn around”

      I nearly fell off my chair in laughter.

      I have often pointed out the fate of the city of Mainz. They had their technological boom with the invention of the printing press there. The politicians couldn’t wait to spend tax money assuming the business cycle would never end. So they spend the money before the taxes were due and borrowed against future tax revenues. The debt quickly became a Ponzi scheme issuing new debt to pay off the old as we are doing today. The interest kept rising so they just raised taxes. The rich began to leave and the city was quickly left with the people who didn’t really pay taxes. The bubble burst when they could not sell the next new issue of debt to pay off the last one. The city defaulted. The Pope excommunicated the politicians. And eventually the city was simply sacked and burned to the ground.

      • DiverPhil

        They always say laughter is the best medicine! we are constantly in economic cycles. Mainz is a glorious city with thousands of years of history they got over it.

  • Cynic_Rick

    https://eureferendum.com/blogview.aspx?blogno=86504

    Quote from above link concerning outcome of the GE:

    “But, whether consciously or accidentally, the British people may have given us an opportunity to save our country from another reality that is far, far worse.

    Encouragingly, the immediate outcome has been to reactivate interest in the Efta/EEA option, with us seeing Ambrose Evans Pritchard dipping his toe in the water with an entry-level briefing in his Saturday column.

    Although nearly a year has passed since the referendum, few journalists have displayed any evidence of improving their knowledge on the nature of the EEA option, largely trotting out the “same old, same old” mantras about losing the ability to control immigration, not having any influence over new laws and having to make contributions to the EU budget.

    AEP does, however, make a passing reference to an “emergency brake” in respect of immigration, which suggests that he’s actually regressed – choosing to opt for the prestige-laden, yet error-strewn outline from Lord Owen, ignoring the more reliable Flexcit of which he has been fully briefed.

    Should the Efta/EEA option lodge this time round, we are going to have to go through the tedious process of watching sundry journalists and politicians attempting to ascend a precipitously steep learning curve – with no help from the academics and think-tanks who have nurtured their own ignorance to quite a staggering degree.”

  • Cynic_Rick

    https://peterjnorth.blogspot.co.uk/2017/06/brexit-dont-tell-me-what-i-voted-for.html?m=1

    Quote from above link concerning outcome of the GE:

    “The trade benefits from Brexit only come from cumulative minor increments over many years. There are no “bumper trade deals” waiting in the wings and the only people salivating at the thought of the UK leaving the single market are those with ambitions of asset stripping the UK. Staying in the single market [via Efta/EEA] still means we can make our own deals so I see no good reason to self-harm. If leavers wanted it some other way they should have exploited the opportunity when they had it.

    As it stands I have yet to identify a single mainstream leave politician with even the remotest grasp of how trade works in the real world. Of the trade negotiators I do know, none of them thinks we would get a better deal than the EEA and if we want to avoid a major long term recession even a bespoke deal would have to replicate 90% of EEA functionality. We could do a lot of damage trying to reinvent the wheel, adding to the uncertainty to only achieve what we could have had from the outset. This is the ultimate folly of the Tory approach and this is what cost them my vote – and I am not alone in that.

    In that regard do not let anyone tell you the debate is settled or let them interpret the result of the election for you. The question of how we leave has always been open ended and there is every reason to get involved. Plenty of people want to close down the debate by telling lies. The usual suspects. I’m not standing for it and this ain’t over til it’s over. The fight over Britain’s destiny did not end in June last year. The referendum was only the beginning and hardline leavers do not own this debate.”

    • Horiboyable .

      “As it stands I have yet to identify a single mainstream leave politician with even the remotest grasp of how trade works in the real world.”

      BREXIT wasn’t about trade, it was about democracy and sovereignty. Looks like you misunderstood the whole issue. The only people talking about hard or soft BREXIT are the cry babies that wanted to remain, like Nick Clegg which folks obviously had had enough of his abuse on democracy. The UK traded for many hundreds of years without the EU and back then we did much better.

      Britain was strongest when it was its freest, when Britain believed in laissez faire
      capitalism it ruled the seven seas.

      • Cynic_Rick

        “BREXIT wasn’t about trade, it was about democracy and sovereignty.”

        Leaving the EU is about democracy and sovereignty. Leaving the EU need not mean leaving the Single Market.

        Leaving the EU and remaining in the Single Market is about enhancing our trade.

        Leaving the Single Market would make the UK a ‘third country’ in the view of the EU and our trading position with EU states would suffer as a result of the plethora of constituents of NTBs (Non Tariff Barriers).

        Leaving the EU and rejoining the EEA via renewed membership of Efta would largely retain our position within the Single Market whilst also benefitting us by allowing us to trade FREELY with the ROW.

        Leaving the EU and leaving the Single Market certainly is about trade; in the short to medium term, about trade in a deleterious sense.

        So, the kind of BREXIT (the Hard Brexit) the Ultra Brexiteers hanker for may well be intentionally about democracy and sovereignty but it very much is also unintentionally/inadvertently about adversely affecting the UK’s trade.

        • Horiboyable .

          “Leaving the EU and remaining in the Single Market is about enhancing our trade. ”
          The cost are to high when we would have to accept any Muslim in that Merkel has let in over the last five years. BRITS are being regularly slaughtered on out street which includes the targeting of teenage events. I am not willing to trade my child’s life so we can sell cheese to the Germans.

          • Cynic_Rick

            “The cost are to(o) high when we would have to accept any Muslim…”

            I take it you mean by remaining in the SM having to accept the four Freedoms of Movement, in particular the Freedom of Movement of People.

            In reply to this misinformation being bandied about, I refer you to the following link; I refer you to some of the work of an extremely reliable and very learned source:

            https://eureferendum.com/documents/BrexitMonograph001.pdf

            As members of the EEA and of Efta (see bottom of Page 9):

            “Should we chose to invoke Article 112 [of the EEA Agreement], the important thing to recognise is that it is not bending or twisting the law. Nor is the Article an emergency provision or a “loophole” – it is a fundamental part of the EEA Agreement. Thus, to enlist it to cap immigration is to use it precisely for the purpose for which it was intended. Given that – for Efta states – its application is unilateral, as an Efta member, the UK would be entitled to invoke it, this being entirely in accordance with the provisions of the treaty, recognised even by the Schuman Foundation.”

            If you wish to visit the source of this wisdom:

            https://eureferendum.com/default.aspx

            • Horiboyable .

              Dude do you remember what the Cameron deal was? We are either in or out!!
              We voted out, no soft, no hard, no in-between. You remoaners are making a mockery of democracy. No wisdom has come out of the EU.

              • Cynic_Rick

                We voted to LEAVE the EU; in or out of the EU. We did not vote to leave the Single Market.

                I am not a “remoaner”. I voted to LEAVE the EU.

                If we leave the SM we’ll be in deep trouble in the very short term. If we do not leave the EU we’ll be in deep trouble in the longer term.