Gaeia's Market Insight - December 2013

Since the last commentary, equity markets are little changed overall, albeit this inevitably masks the reality of the ebb and flow that investors have witnessed. As summer drew to a close, markets had stabilised somewhat from the volatility seen earlier in the year. However, the picture was about to change again - this time driven by the political shenanigans in the United States, where the federal budget needed to be approved and the debt ceiling raised to avoid the US government defaulting on its debt. By way of reminder, the debt ceiling previously stood at just under $16.7 trillion. Yes, trillion. Pretty soon we might be talking real money. The impasse between the Republicans and Democrats saw the government go into partial shutdown on October 1^st, which lasted for a fortnight before a resolution came forth. Equities had begun to sell off in late-September when it became apparent that these issues would not be cleared up before the expected deadline – but then started to rally sharply once the prospect of the resolution came into view. This rally took the likes of US and UK equities to new record highs. Crisis, what crisis?! Although the shutdown in the US was ultimately resolved with agreement over the budget and the raising of the debt ceiling, the picture portrayed to the outside world was not a good one. The prospect of the US defaulting on its debt - as would have happened if the debt ceiling issue had not been dealt with (albeit only temporarily) – was a remote one, but the very fact that it was even being discussed reflects poorly on the US political establishment. Possessing the world’s reserve currency and trying to project your military power across the globe while engaging in childish disputes that threaten global financial stability are not behaviours that go together. Perhaps the most dispiriting aspect of the whole affair was that many people were thoroughly unsurprised by the way events unfolded - and people wonder why electoral turnout figures in the West suggest disenchantment with our appointed representatives. Here in the UK, policymakers have been heartened by generally positive economic data, indicating that although the economy has yet to surpass its 2008 peak, it is getting closer to doing so. “The austerity plan has worked!” – although consumers suffering from squeezed disposable income and meagre savings rates aren’t cheering! Meanwhile, the government is encouraging the advancing of heavily-leveraged mortgage loans into a market where house prices to income levels are still well above the long term trend. With interest rates only going to rise from current levels and with many borrowers on variable rate mortgages, one must seriously question the logic in encouraging higher levels of mortgage debt. Pushing prices up further will only exacerbate the affordability problem; it is a sensible solution to the supply of homes that is needed. But then sensible solutions aren’t particularly common currency right now. Previous commentaries have referred to the energy market issues here in the UK. Since then, we have seen further tax breaks for the shale exploration industries alongside a revision to the proposed renewable energy subsidy levels. The impact of the latter is to favour wind production offshore over onshore, a decision which may do little to ease the potential energy crisis being talked of in 2015. Couple this with sound bites about the need to row back on “green taxes” and it is hard to square with the supposed commitment to implement policies to try and mitigate climate change. Here’s hoping for some coherent and long term planning on energy and the environment in 2014.     HSSHBlog/121213