Capital Flows and Asset Markets
Capital Flows and Asset Markets


The pro-labour trade is about the political system correcting the excesses of the economic system. I am not sure the political system is working as I expected, and this fills me with existential dread

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I have always been a big fan of the late historian, Eric Hobsbawm. Reading his classic trilogy, Age of Capital, Age of Empire and Age of Extreme, made me acutely aware that much of the world that we take for granted is relatively new. Capitalism as a way of organising society only really has a history of 200 years or so. Its benefits are manifold. Efficient use of assets and resources. Decentralised decision making, that allows supply to meet demand without government intervention. A largely meritocratic society. However, the negative side of capitalism, the concentration of power in fewer and fewer hands, and the rise in income inequality is a well understood downside. Capitalism’s weaknesses are purely political, as more and more members of society are disenfranchised, it creates a political pool upon which enterprising politicians can feed upon. I think politicians are aware of this, and have focused on trying to keep unemployment low. Using the UK, as an example, politicians have succeeded on this front. Policy seems focused on avoiding spikes in unemployment.

While the large pool of unemployed during the Great Depression led to disillusionment with capitalism and the rise of fascism and socialism, we can also see that rising inequality is another obvious way to disenchant the voting public of the merits of capitalism. Ever more expensive housing costs is a political problem.

I understand the political decision to avoid a Great Depression after the GFC, and the focus on raising asset prices. But in a democratic political system, at some point workers would rebel against this system. So far this rebellion has presented as “populist” outcomes such at Brexit and Trump. For me, the “best possible outcome” would be rising wages and rising interest rates that would allow economic imbalances to be reset - without a political breakdown. Unfortunately, 2023 has shown a reversal, with wages in the UK falling when rebased to food inflation.

The US shows a similar trend when wages are looked at terms of food inflation, 2022 and 2023 has seen wages fall.

Similar analysis shows that Japanese wages in food terms are collapsing.

The flip side of falling wages in real terms, is that asset prices have also begun rising. MSCI World has recouped most of the losses form 2022. That is we are seeing falling wages and rising assets prices. This is the opposite of what I expected to see. Housing prices in the UK and the US have also been strong, recouping losses from 2022.

There is one market where the pro-labour trade has worked in terms of rising real wages and falling asset prices - China. The Chinese stock market is back to 10 year lows.

Chinese CPI has been much lower, implying any wage growth has been kept by workers.

It should be noted that China has done a far better job of raising wages than any other Asian nation.

So one possibility is that we are in a world where ONLY China has gone pro-labour, and the rest of the world is still pro-capital. China is a such a big player in gold and in treasuries it could definitely be causing GLD/TLT to trade well.

Why does this fill me with dread? When the political system is captured by one group, it can only be resolved through revolution, and the destruction of the system. You can already see the outlines of this collapse. Trump has a good chance of being re-elected despite leading the capitol invasion. You have to wonder who will stop him next time? Large cap US corporates evade taxes on their operations in rest of the world, starving European allies of tax revenue, while Congress is considering cutting military aid to Ukraine.

Eric Hobsbawm in his Age of Extremes argued that the threat of the Soviet Union and Socialism made sure the elite in the US ran a system that benefitted everyone. That is capitalism that broadly worked for everyone. He feared that the collapse of socialism would allow greed and the profit motive to run unchecked. I fear that he is being proven correct - and that this will usher in an age of conflict and revolution. The optimist in me hoped for a rising wages and rising interest rates to correct the economic and political imbalance within the existing system, but I fear that the evidence this year might be saying this is impossible. I am filled with existential dread.

Capital Flows and Asset Markets
Capital Flows and Asset Markets
Explaining how capital flows and asset markets work