The Badger of Broad Street on the July slowdown and the stretched middle

July markets are always about the worst markets one can experience. They are thin, they are dull, they are listless.. There is more liquidity in a bucket of sand. The only thing to look forward to is long lunches, but most of my chums seem to have sallied off to Cornwall for the duration.

And that got me thinking.. Why are so many people I know heading off to Cornwall? Before some Kernow nationalist decides to spike me, it’s a place I love and know well, but it’s hardly a luxury break. I ask: how many Rick Stein meals in Padstow can one actually enjoy? So I called up a retired mate who retreated to a nice pad in Rock a few years back and inquired about coming down for the weekend. Apparently the lanes of Cornwall are chock-a-block with “Crockles” this summer. Why? With the pound strong, why aren’t bankers taking their breaks in the South of France or Chianti-Shire?

I called a few folk who were Cornwall bound and asked.. “well, it’s nice to have a staycation, and what with the school-fees and a small bonus last year, we though we better save some money..” And that sums up the Middle Classes… our once modest homes in London’s suburbia may now be worth more than Spain, but that doesn’t actually leave much ready dosh in the bank account.. not after paying for Tarquin’s expensive school and Anabelle’s gap year in Oz… And heaven forbid, my own middle daughter is currently working in a high street store – and complaining bitterly how her stingy parents won’t give her the money to her spend the summer at festivals…

Meanwhile, reading a blog this morning I read about some Union Leader telling the BBC his members have got a 1% pay rise in the last 3-years, but seen 20% inflation at the same time. That’s surely not right – but it’s not that wrong either – 2%+ inflation and after a few years prices are 10% higher.

No wonder the middle classes are stretched!

And it’s even worse down the earnings slope. The minimum wage has been a disaster for the working classes – it was introduced as a support level for the very meanest paid in our society, but instead it’s become a maximum sub-living wage level more and more manual works find themselves trapped beneath. Don’t even get me started on the topic of Zero-Hours contracts – I had to get my son out of one recently.

Together the stretched middle and the growing legions of poverty poor are a potential disaster for our modern economy – inflation is beginning to bite and more and more workers are behind it, meaning their consumption continues to drop and thus the pace of economic recovery keeps slowing.

We’re now seeing economists increasingly question what’s really going on – from the French economist Thomas Piketty (subject of an intense credibility attack based on inconsistencies in his data) to other commentators declaring that QE has simply defended the capitalist system and the risk, while making life tougher at the bottom. I would simply ask – how will economies that are simultaneously deflating and suffering inflation fare? It’s called stagflation, and its nasty.

And inflation is now beginning to make itself known. At the most recent Fed meeting there were mutterings about how the rapid increase in US jobs will fuel wage-inflation – brining forward expectations of an early rate rise. James Bullard, the St Louis Fed chief – said inflation is going to overshoot well above the Fed’s 2% target.

Meanwhile, the end of QE low interest rate repression in October, and the likelihood the Fed and the Bank of England will be raising rates as early as next year certainly spells trouble for the bond market. Some blogs say it’s about to happen with government bonds and credit markets looking distinctly vulnerable to a reversal.

It’s not a pretty picture – inflation starting to rear its head, the bond markets looking overbought and equity markets looking puffed out? What’s the trade of the week… stay cash I’m thinking….