We have a short week this week because of the early May Bank Holiday. This has been a relatively recent break from the working week for we Brits but in Europe it has been a holiday for some time and generally takes place on May Day, the 1st May.
Markets (and banks) are closed that day (as they are here on the following Monday), so it can be rather more relaxing to be in Europe on a holiday not generally recognised in the Anglo-Saxon world.
It happened that I was in Funchal, the capital of Madeira, for May Day last week. Given that this particular holiday is often taken to recognise the contribution of the working man – a labour holiday, if you like – it should have come as no surprise that May Day in this Portuguese outpost became a day of protest against the austerity visited on the nation by those providing their bail-out package.
Heavily led by unions, the banners (not all of which I could easily translate) pronounced opposition to pension cuts (no more pension misery, if I understood correctly), creeping privatisation of the health service and also demanded better treatment for those engaged in the hotel and tourism industry. It was a calm and well ordered demonstration, as befits a nation little given to hyperbole.
It did set me thinking, though. Europe has been drifting away from our thoughts recently but it lurks at the edges of our investment consciousness, always present to upset the equilibrium of those seeking to secure low risk, long term returns.
Portugal has not suffered as much as, say, Greece, but the transition to a less leveraged condition has not been without pain. Two of my favourite bars have gone out of business and this is the type of consequence I’m inclined to take personally.
In these pages I have often averred to the return of above trend inflation as the preferred solution for those governments eager to devalue debt and return their economies to more robust growth. But it hasn’t really happened – yet.
Perhaps this is what is exercising the minds of our political leaders. If everyone seeks a debt-reducing solution at the same time through devaluing their currency, nothing will be achieved overall.
Japan, of course, has started a new trend – one I suspect that has the tacit agreement of all the developed economies which will be viewing what transpires with considerable interest.
At home, Chancellor George Osborne has been refocusing on kick-starting the housing market. As many will wonder why, given the patent lack of affordability of homes, particularly in the South East, just remember that more of us own our homes than don’t and knowing they are worth more might encourage us to spend.
The reality is that the West needs consumers to unzip their pockets and resume spending. Whether this is prompted by inflation (buy now – goods will be more expensive next year), or by the belief that because your house has risen in value you can afford it, I suspect austerity may soon be consigned to history. In its place will be much rhetoric, but little concrete action.
The risk, of course, is that this shift does not take place swiftly enough for the embattled electorates of southern Europe, but last week’s interest rate cut shows the ECB mean business.
Democracy, as Churchill once remarked, is a poor method of governing a country. It just happens to be superior to the alternatives.
Inflation is to be avoided at all costs, goes the mantra of recent years, but if it sorts out the current conundrum – so what?
We may not yet have seen the rotation from bonds to equities in any measure, but my money remains on it taking place before too long.
Brian Tora is an associate with investment managers JM Finn & Co