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Quotidian Investments Monthly Commentary – May 2016

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June 5, 2016

The EU is suffering from the worst income inequality between member nations in recent memory. Whilst this is not a new phenomenon the income gap between richer EU nations like Germany and poorer countries like Spain, Greece, and Portugal has now expanded to an alarming degree.

In 2009, in US$ terms the annual income per capita was:

  • A sizeable $41,890 in Germany, compared to
  • A much lower $32,412 in Spain
  • A meager $29,819 in Greece
  • And a miserly $23,122 in Portugal

Over the past five years, though, the gap has become far, far worse. Income per capita has now:

  • Risen by a robust 13.9% in Germany but
  • Fallen by 4.2% in Portugal
  • Deteriorated by 8.1% in Spain, and
  • Plummeted by 27.6% in Greece

These figures clearly confirm the fact that some of the richer European countries have managed to recover from the Great Recession but many of the poorer member countries have fallen even further into the abyss.

In addition to generating resentment and disdain between social classes around Europe this trend has fomented envy and anger among member nations of the European Union. It is one of the forces that has driven migration from poorer to richer member nations and it sets the stage for the eventual political disintegration of the European Union itself.

As these imbalances become worse the rising tide of anti-EU sentiment sweeping across the Continent is now reaching critical mass. In evidence of that assertion:

In Hungary, the right-wing nationalist conservative Fidesz party enjoys an absolute majority under the leadership of Victor Orban and continues to have record-high popular support in 2016. Today the party’s agenda is viewed as so extreme by those in Brussels that, according to EU foreign policy chief Javier Solana, if Hungary were applying for EU membership today it would be flatly rejected.

In Poland, the fiercely anti-EU Law and Justice Party (PiS) has gained an absolute majority in parliamentary elections in October 2015.

In France, the National Front under Marine Le Pen emerged as one of the strongest political powers, taking more votes in 2015 local elections than the Republicans or Socialists. Again, greater independence from the EU is their primary goal.

In the Netherlands, the Freedom Party under Geert Wilders has vowed to immediately pull the country out of the EU. Although this platform was rejected by voters in 2014, Wilders now leads in the Dutch polls ahead of elections next year thus giving him the ammunition to flatly declare that the “EU is finished”.

In Austria, the Freiheitliche Partei Österreichs (FPÖ) is also staunchly anti-EU. In this year’s first-round election for President the FPÖ’s Norbert Hofer won comfortably with over 36% of the vote.

In Germany, the newly emergent Alternative für Deutschland (AfD) now has more popular support than at any time in its history and now stands just five percentage points behind the centrist Social Democrats. Until recently, although the party was staunchly against the euro, it was ambivalent about the EU. But now their new manifesto is very clear: To abolish the EU forever.

In the UK, the campaign to exit the European Union now enters its climactic phase leading up to the June 23rd vote. Whether the UK decides to stay or leave we will no doubt continue to see an increase in anti-EU opinion all around Europe and, barring a miracle, the days are numbered for the European Union as we know it today.

Does the UK want to remain to the bitter end or, by leaving, does it then want to lead the way forward to a truly democratic European Economic Union where free trade, protected borders and freedom of choice replace the anti-democratic and faintly absurd notion of a Federal Europe ruled by unelected and unaccountable bureaucrats.

Performance and Summary

On 31st May the FTSE 100 closed at 6230.79 (a fall of -0.18% for the year to date).  

By comparison the Quotidian Fund’s valuation at 31st May shows a positive investment return for the month of May of +6.25% and for the year to date is now –9.73%. Despite equity-market headwinds, the Fund continues its sharp recovery from a glum start to the year.

The two most obvious stock-market sensitive issues in June will be the Federal Reserve decision on US interest rates at its mid-month meeting and, of course, the outcome of the UK referendum on EU membership.

It will no doubt come as a surprise to regular readers that (for the reasons set out above and also in my April report) my strong view on the referendum is that it’s time for Britain to say adieu to the EU (adieu is much more permanent that simply saying Eu Revoir!). The European Union as it currently exists is a cesspool of rotten politics, inept leaders and a badly constructed monetary system which is the central cause of so many of the EU’s problems (and that was flawed from its very outset).

We continue to believe that US interest rate will remain unchanged until later in the year and that, whichever way the UK decides to go, any knee-jerk effect on the stock-market here will be transient. Far more pertinently, growth of M1 money supply in the USA has accelerated to 7.8% and that, together with increasing monetary growth worldwide, is usually a harbinger of better economic times.

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