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Position : Long Germany (EWG); Short Spain (EWP); Short Euro (FXE)

We’ve been vocal on rising inflation globally, a theme we’ve named Inflation's V-Bottom and outlined in our recent Q2 Themes call.  Certainly, today’s CPI reading out of the UK confirms as much, up +3.4% in March Y/Y, and is also a mark against Gordon Brown’s insistence that “staying the course” of Labour’s economic policy will bring prosperity.

The inflation print, which is up from an annual 3.0% rate in February, is now above the government’s soft cap limit of 3%, which itself was upwardly revised from 2%. As we noted in recent work, the UK economy continues to have its hands tied, struggling off its bottom, and we expect to see inflation continue to rise as commodity prices are up significantly over the previous year, nearing the prospect for stagflation. 

As the General Election approaches on May 6th, we continue to believe that party victory will hinge on the economic policy debate (it’s the economy, stupid!). Does Brown’s “stay the course” message have a chance?

Recent daily tracking polls show that the Liberal Democrat Clegg gained significant approval following last week’s initial political debate, one that set a historical precedent as the first political debate of its kind hosted on live television in the UK. While Clegg’s positive showing was a surprise, the recent average of most daily polls tracking the candidates shows a tight spread (YouGov for instance has a 6 point spread in conservative Cameron’s favor over Brown, or 33% to 27%, versus the Liberal Democrats at 31%), however Intrade, typically a stealth indicator in our opinion, would suggest that the favored candidate is Cameron, with a lead of over 70%.

While last Thursday’s debate focused on domestic issues, we’d expect the two subsequent Thursday night debates to cover such topics as banking issues (Goldman likely debated this Thursday) as well as the UK’s relationship to the EU, a position that especially pits Cameron’s Euro-skepticism against Clegg’s support.

Matthew Hedrick


Gordon Brown's Losing Game - 1