Jeremy Corbyn’s historic appreciation of Hugo Chavez has also been reported widely as Venezuela has drawn media attention. Socialist Venezuela has been praised by many within the Labour party, since Jeremy Corbyn gained control of the reins in 2015. Somewhat unsurprisingly, it has been a little quieter in its support since things started going awry over the last few years.
The seeds of destruction of the Venezuelan economy were sown when Hugo Chavez came to power in 1998, in which he soon embarked on huge state backed subsidies and price controls funded with the world’s largest proven oil reserves in the world (1). All it took was a drop in the oil price in 2014 to set the wheels in motion to where Venezuela finds itself today. The lack of revenue forced them to do the only thing possible, borrow and print money. This almost always ends in disaster.
According to the IMF, Venezuela will suffer inflation of ten million percent in 2019. It has encountered a complete collapse in economic activity, hyperinflation and a huge deterioration in the provision of public goods and services. Somewhat surprisingly, the Venezuelan people decided to re-elect Nicolás Maduro, the successor to Hugo Chavez. However, the Venezuelan National Assembly declared the election invalid, and appointed their president, Juan Guaidó, to be acting President. This view has since been endorsed by many other countries, including the UK. However, this view was not shared by Jeremy Corbyn, or Labour, who still recognise Nicolás Maduro as president and resent the outside interference in Venezuela.
Of course, Venezuela is not the only socialist state, but I think most would struggle to name a country where socialism has been a roaring success. This should not be viewed as a criticism of socialism and it should not be viewed as a ringing endorsement of capitalism. Of course, capitalism has its own shortfalls, just look back to 2008. Make no mistake, there is a difference between the traditional left in the West and the state-run redistribution of wealth. The latter almost always breeds inequality and corruption, whilst the former does tend to deliver a wealthier and fairer society but with some caveats. If anything, capitalism and the traditional left have shown that they can coexist side by side, with each keeping the other in check. However, we believe very few would support full blown socialism in the same way very few would support unbridled capitalism that offers few protections to the people.
In a recent UK poll, it suggested the Tories and Labour were neck and neck which is remarkable given the fact that the Tories couldn’t currently organise a proverbial drinking session in a brewery.
This is not just reflected at home, but also throughout the rest of Europe, with support for socialist parties dwindling. The socialist party in France almost collapsed entirely, the social democrats in Germany and the Labour party in the Netherlands have all suffered in recent elections. What is behind this fall in socialist ideals across Europe? There are several factors likely for their continued demise. As well as the lack of coherent policies and infighting that all political parties are plagued with, other factors include a domestic working class increasingly replaced with immigrants that tend to be more fragmented and share different cultural norms – appealing to all is difficult. Fundamentally, socialist parties need to appeal to the middle classes to win elections, an inherently difficult thing do when traditionally their only concerns are the very poor and the very rich, and specifically how to redistribute wealth from the latter to the former. The middle class has never been at the forefront of socialist policies, hence the main reason why so many are not making any headway.
However, we believe it comes back round to the European Union. Outside the UK, battle lines have been drawn with those firmly pro-EU to the left and pro-exiting the EU to the right. Funnily enough this is not a problem in the UK, partly due to the fact that many within Labour also want to exit the European Union. However, across Europe socialist parties are losing support in similar measures to the EU. Not only that but support for far-right extremist groups is rising.
The EU is often perceived as left wing due to its support for agricultural subsidies, fiscal redistribution between countries and other left-wing policies. However, some would make the argument that it supports right wing policies like free trade, which ultimately gives workers little job protection. Nevertheless, as it is viewed as left-wing within some corners of the EU, socialist parties have continued to lose support, and this should concern the EU.
The EU does not help its impartiality by endorsing political parties, for example Jean-Claude Junker endorsing Labour’s view that the UK should sign up to a customs union and single market alignment. The EU views this as the only way to breaking the impasse between them and the sitting Government. However, what they are happy overlooking is the fact that the Brexit vote was won on the promise of creating our own trade deals, something the UK will be unable to do, should it remain in a customs union.
If socialism within the EU is going to survive it needs to communicate its messages more clearly and aim them at the right audience. Bashing the rich didn’t work before in the same way as a magic money tree didn’t work for Venezuela.
(1) OPEC - Accessed 18/02/19
Global Equities Rally On US/China Trade Optimism
Global equity markets were firmly on the front foot last week, buoyed by positive rhetoric coming from the US/China trade negotiations in Beijing. President Trump suggested that a trade deal was close to being agreed, also reiterating the possibility that the 1st of March deadline could be pushed back if necessary, preventing the next round of tariffs from kicking in. The S&P500 rose by +2.5%, the 8th consecutive week of positive performance with the energy and industrial sectors recording the strongest gains (1).
Closer to home, large and mid-cap companies continued their strong starts to the year. The FTSE100 added +2.3% with the FTSE250 +1.8% higher despite the Prime Minister suffering another Brexit-related defeat in Parliament. Across the Channel, European bourses shook off further negative macroeconomic data, the STOXX Europe 600 concluded the week +3.0% higher. In Asia, the Japanese Nikkei and the Shanghai Composite increased by +2.8% and +2.5% respectively.
With risk assets continuing to dominate the spotlight, it was a largely uneventful in sovereign debt markets. The Domestic 10-year Gilt yield was unchanged at 1.16% with its American Treasury equivalent 3 basis points higher at 2.67%. Meanwhile in Germany, the 10-year Bund yield rose modestly to 0.10%, albeit not much above its recent 2-year lows. Last week it was revealed that the German economy narrowly avoided a recession during Q4’18 having recorded 0.0% growth during the quarter (2).
Sterling endured a difficult week after, falling by -0.8% to $1.285 versus the Dollar and modestly against the Euro. Further Brexit debates took place in the House of Commons on Thursday with MP’s voting down a series of non-binding amendments, heaping selling pressure on the domestic currency. Alongside its rise over Sterling, the Dollar recorded gains against both the Euro (+0.6%) and the Yen (+0.8%)
Finally, in the commodity markets, oil enjoyed a strong weak with Brent crude spiking by +6.7% to $66.25 a barrel. Oil has benefitted from supply constraints with both OPEC and Russia voluntarily limiting their production whilst US sanctions on Venezuela have also had an effect. Gold remained largely flat, rising by +0.1% to $1,315 an ounce.
Figures relating to employment are the standout data from the UK this week. Unemployment is forecast to have remained unchanged at 4.0% during the 3 months to the end of December level whilst the pace of wages growth is expected to have accelerated to +3.5% (annualised). The latest Government borrowing figures are also released later in the week. Fed minutes are the standout release in the US this week with housing sales and durable goods orders the only significant data of note. In the Eurozone, early production indices covering February are released on Thursday whilst the ECB also releases the minutes from its most recent policy meeting on the same day. Chinese and Japanese data is in short supply on this occasion.
All data from either DataStream or Forex Factory