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Money & Markets: It’s technology, not politics, that creates the feel-good factor

Weak economies and strong employment are not meant to go together, yet that’s what we’ve got at the moment. How can this be? The answer is: technology.

You can be forgiven for being confused when trying to guess the future of the UK and world economy and therefore the direction of travel for the markets. There is no shame in that; a state of confusion is the aggregate state of investors, hence the day to day grind of volatility which is a solid measure of uncertainty.

Interest rates are low and predicted by many to go lower or at least stay low. This is said to be because of a general weakness in the global and local economies of the major industrial nations. That sounds believable and media backs this up with a constant flow of woe. If there isn’t a trade war going on, it’s a political crisis heating up, or both.

So why is it that employment has never been stronger? It’s stronger pretty much all over. Strong employment is meant to be the inverse of economic weakness.

It gets worse, because high employment is meant to cause wage pressure which is meant to cause inflation. This inflation is why interest rates get arbitrarily raised to squish the economy so that the workers don’t get uppity and demand more money and create a loop of rising wage costs and price increases. This is not happening.

Full employment and low inflation are meant to be the utopia all governments are striving for, a magical balancing act until now seldom seen. So exactly how can economic conditions be bad?

This is of major concern to companies in engineering and technology that have to plan long-term investments. Are they in a bull or bear market? Should they be holding off investment or piling it on?

Stock markets love technology and don’t think much of engineers, which is bizarre. An engineering company is lucky to get a valuation equal to sales, while a technology company is unlucky to have less than a 4× sales valuation. Hop across the Atlantic and even for ex-growth tech companies the multiple can head for 10×.

You could make an argument that there is not much publicly listed tech left in the UK, having had its software, chip and other tech concerns strip-mined by foreign companies whose local stock markets support their technology companies with lashings of capital and adulation.

This leaves the UK with its engineering core, once again languishing after a rotation out of the stock market doghouse in the early 2000s when their valuations were incredibly low, to lofty heights and now back down the slippery slope under the shadow of Brexit.

Doomsters, of which there are always many, would say that the high employment, low interest rate and a global slowdown are easy to reconcile. Employment will crater, interest rates will stay low and the global slowdown will turn into a recession which, of course, will be mighty.

Like the market capitalisations of UK engineering companies, the issues at hand may be a matter of fashion rather than intrinsic value.

In the medium term the only thing holding back prosperity is the Trump-China trade war – and this could be very bad news for everyone. The theory goes that global trade is the most efficient allocation of resources and that everyone wins from it. History seems to back this up, but from a lot of viewpoints free trade is horrible, and a long-term US trade deficit of $500bn a year is a real issue.

This US trade war – and it’s not just with China – could hammer global trade, creating an acute slowing in growth. This should hit employment. Many bad things should follow. You could write a series of disaster novels based on scenarios that might come from such a trade war; many have played out in the past. This is the main threat to us all.

However, it still doesn’t help us with understanding why we have such good employment, low interest rates and no inflation. The impact of a trade war has yet to be broadly felt.

Have the central banks cracked the economic code or do the statistics lie? Which is easier to discount as the reason for this good news: competence or deceit?

In fact, the answer might be technology. There have always been great politicians. Rome had them, Ancient Greece had them, every age and country has had them. Human wellbeing, however, does not correlate with the presence of great leaders or polities. It correlates with technology. There have never been so many humans and they have never lived so long, and that’s because of engineering and technology.

Technology is deflationary, it makes things cheaper and better. It also keeps people running about the place being busy. Unlike primary materials, new technology quickly permeates societies because the value-add is large.

Technology keeps inflation down and just as it deflates prices by making things cheaper and better, it creates a kind of economic growth that does not appear in GDP but does appear in employment.

Luddites say technology will make you unemployed, but in fact the opposite is true.

Politics, however, can very easily make you unemployed – and it is the US trade war with the rest of the world that just might do it.

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