Niels Jensen: Investment Outlook (April-May 2012)

by Niels Jensen, Absolute Return Partners
Remem­ber the scene in A few Good Men where Colonel Jes­sup (Jack Nichol­son) and Lieu­tenant Kaf­fee (Tom Cruise) trade insults? Fol­low­ing some pretty intense ques­tion­ing, Kaf­fee yells at Jes­sup: “I want the truth”. With the deadly glare that only Jack Nichol­son can muster, Jes­sop retorts: “You can’t han­dle the truth”.
I was reminded of this rather famous moment in film his­tory when a long time reader of the Absolute Return Let­ter asked me recently: Why don’t you tell the truth about the UK econ­omy? Why don’t you tell it as it is – that the sit­u­a­tion in the UK is worse than it is in the euro­zone? I decided to take up the chal­lenge from the reader. I am not sure that I actu­ally agree that the UK is in a worse posi­tion than most euro­zone coun­tries; it is worse in some respects but bet­ter in oth­ers. More about this in a moment.
The UK government’s strat­egy appears to be based on the age old phi­los­o­phy that the best line of defence is attack. In recent months, Prime Min­is­ter Cameron has been unusu­ally vocal about the short­com­ings of the other major Euro­pean pow­ers at a time when every­thing is not plain sail­ing back home. On the major issues fac­ing the UK domes­tic econ­omy, Cameron and his gov­ern­ment have been deceiv­ingly quiet – per­haps because we can’t han­dle the truth?
It is not all bad news
Back to the out­look for the UK. There is no deny­ing that it is grim; how­ever, and despite all the weak­nesses of the UK eco­nomic model, it has two key advan­tages over most of its Euro­pean neighbours.
Firstly, it is a cur­rency issuer rather than a cur­rency user, mean­ing that it has full con­trol of its mon­e­tary and cur­rency poli­cies and can apply pre­cisely the pol­icy required at any point in time rather than being held hostage to the needs and require­ments of the other mem­bers of the Euro­pean cur­rency union. As a cur­rency user, it can­not overtly default unless it chooses to do so, although there are ways it can default covertly as we shall see later.

Sec­ondly, the UK has gone much fur­ther than most other coun­tries in terms of restruc­tur­ing its labour mar­kets (chart 1), grant­ing it key advan­tages over its Euro­pean com­peti­tors many of whom are still sad­dled with labour mar­ket prac­tices that do not stand a chance in today’s envi­ron­ment where the mar­ket place for both labour and goods has turned truly global.  (more)