Equity Rally: Can it Continue?

Try as he might, Macro Man has failed to muster any enthusiasm for the recent equity rally. Can it continue? Of course it can…perhaps markets will view a Big 3 resolution as a favourable outcome (though Macro Man will be sceptical of any resolution that fails to improve styling, build quality, and energy efficiency.)

That the Tribune Co. has gone bust is perhaps a timely reminder of the underlying economic forces at play; Macro Man expects more of the same throughout 2009. The S&P 500 closed yesterday at a level reached exactly two months ago; for all the sturm und drang of financial crises, bailouts, and stimulus packages, equities have been a lousy trade from both the bull and bear side.

One country at the forefront of bailouts and government stimuli is of course, the UK, Macro Man’s adopted homeland. Somewhat bizarrely, Gordon Brown’s approval ratings have started to recover as the economy falls off a cliff. This probably says more about the limp state of the Tories than any particular merit of the Labour government; David Cameron appears to stand for very little other than a vague desire to be PM some day.

Non-UK residents will struggle to understand the degree to which the government controls everyday life here in Britain. Highway safety is “ensured” by speed cameras, a revenue-generating bonanza straight out of 1984. Public safety is “ensured” by a police force that spends more time filling in forms than walking the beat. And worker safety is “ensured” by a series of onerous “health and safety” regulations that prevent the most of innocuous of activities on the basis that somebody might stub a toe.

At some juncture, there will be a public backlash against the imposition of the Nanny State and the dominating role of the government in everyday life. In the meantime, however, it just might be possible to see why big government bailouts are a vote-winner. More than a quarter of all employees in the UK now work for the public sector, a ratio that has comfortably reached record highs under the Labour government. Indeed, nearly half the jobs created under the Killer B’s (Messrs. Blair and Brown) have been up the public sector variety.

What makes working for the government so nice in Britain is that you get a final salary pension, a defined benefit of the type that has rendered the US auto industry ludicrously uncompetitive in the global marketplace. And as the ratio of public sector workers rises, the future tax burden on the private sector (which itself has a massive funding gap in its pension system) to fund those defined benefit schemes rises very substantially indeed.

It’s not difficult to imagine a scenario in which the UK is rendered utterly uncompetitive because of the tax burden required to fund its government obligations. While it is hard to begrudge NHS doctors a decent pension in their retirement, it is really quite scary to read about the emergence of so-called Soviet towns in Britain, where a majority of the residents work for the government.

And so it happened that Macro Man was struck by an epiphany when he saw a photo of a smirking Gordon Brown in the newspapoer this morning. Gordo is well on his way to turning Britain into some sort of Orwellian dystopia…and Macro Man realized that it is in his genes. For who does he resemble in looks, thoughts, and deeds other than Georgy Malenkov, one-time Premier of the Soviet Union?

The only way they weren’t separated at birth is the age gap…in which case Gordo might actually by Malenkov’s bastard love-child. Either way, Gordo is steering the UK down the Soviet path, both economically and socially. Sadly, it seems inevitable that the situation in the UK will get worse before it has any hope of getting better.

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