Blain’s Morning Porridge – Oct 18^th 2023: Gaza Atrocity – who benefits? Lag in Wage inflation and Job Losses in UK.

“I sold my soul for the second time, because the man don’t pay me..”

Who wins from atrocity in Gaza? UK wages are still rising, but the threat is no longer wage spiral inflation, but job losses and a crash landing as the lag effects of rates rises, inflation and consumer spending create a perfect slough of despond.

The world is racked again with the latest horror from Gaza. Accusations are being flung. Who bombed the hospital? Are the Israelis that careless? In what calculus of death does bombing a hospital win global support? That is the question to ask.

Who benefits? Israel is consumed by righteous anger and an overwhelming thirst for brutal revenge. Hamas has shown indifference to suffering, and its willingness to martyr the Palestinian people. Hamas has already reaped a dividend; Biden’s visit to Jordan meeting King Abdulla, the Palestinian President and President Sisi of Egypt has been cancelled because of the destruction of the hospital.

All Hamas needs to win is for Israel to look worse than them in the Court of Global Opinion– and to stop dialog to maintain its’ momentum of suffering. Heaven help the people of Gaza caught in between. The internal reporting from Gaza is horrifying, but Hamas will be controlling that news flow. It’s unlikely anything positive will surface. It’s an unremitting stream of horror – which is just a little too trite at times.

Hamas know Western audiences will soon tire of death and destruction time zones away in a land to which they have limited connection. In contrast, the Arab nations are fully engaged with the suffering of their immediate cousins – and will remain so, increasingly angry. As a result, the perceptions divide between the West and the Arab Middle East is widening – and that has serious geopolitical consequences which Hamas (and Iran) will exploit to broaden further.

Ultimately, to win Hamas knows they have to break the support link between the US to Israel. To stand any chance of success, that would require the whole Middle East to renounce the US, unravel all the recent dialogue on recognising the Jewish State and around regional growth and prosperity, and have Saudi and the Gulf swing more clearly into the arms of the China/Russia axis. Strip out domestic US political forces, and the decision for the US would be support Israel vs the threat of China plus Gulf in an oil war – a recipe for global market and economic crash. Had Hamas waited, they may have had an isolationist US under Trump 2.1 in just 16 months time. That may be part of their plan.

I have no way of knowing who is lying and who is not. Are the Israeli’s that stupid to target a hospital? (Every society spawns fanatics, and I fear the mindset of the Orthodox Right.) Did Hamas stage a false flag missile attack on their own people? (My balance of probabilities suggests it’s more likely.) Or was it just a tragic moment of mistake in the fog of an unnecessary war. Let’s see what the investigations show. That may be good for Gaza. If the Israeli’s are clever they will wait. And waiting means passions may ebb.

The truth is always a victim. Maybe the tragic events will trigger a stand-down.. but this is the Middle East we are talking about….

Back in the markets – Lag!

UK inflation remains sticky at 6.7% – higher than forecast. I am not in the least surprised. The market seems unwilling to grasp the reality of interest rate and event consequences, or the effect of higher for longer. I am less and less convinced the market, and possibly the authorities, understand the concept of “lag”.

The market assumes any action by central banks have an immediate effect, like the immediate swarm of airborne misery that results from poking a hornet’s nest. Not so. Rate hikes are like waking a sleeping bear – at first nothing happens.. it snores and sleeps on. Then there are some disturbing yawns. Finally the groggy bear emerges, makes some shambling stretches, issues a couple of worrying bellows, before charging out the cave, an angry bear with a sore head bent on the destruction of whatever it sees first.

Angry bears are inevitable in economic reality. (The Happy Bear of the Soft Landing is as likely as Baloo, rubbing its back against a tree, while singing catchy songs. (I watched the Jungle Book too many times with my children when they were young!)

One effect of lag is on earnings. As rates rise it takes time for the higher costs of borrowing to hit earnings, and the causal chain is obscure because rising inflation raises the costs of production. Earnings start to fall as higher costs bite. They fall faster as demand falls in line with declining consumer spending. The key thing is it doesn’t happen immediately – which foolish markets seem to assume. Even if rates fall tomorrow, the lag means many companies are still to suffer the effects of previous hikes, and crashing corporate credit market will continue declining. The darkest moment is actually after the dawn.

Thus it is with UK wages. Yesterday’s numbers show UK wages are still rising, faster than inflation, but are rising less quickly than they were before. Spiralling Wage Inflation is a massive danger – according to conventional orthodox monetary economists, and the Government. Earlier this year Rishi Sunak was telling nurses they can’t have higher pay because that would be inflationary. Public sector pay is rising less quickly than private sector pay – meaning long-term fewer and fewer people will be attracted to nursing as pay falls relative to stacking shelves for Amazon. Doh.

However, any smart economist will point out private sector pay as a component of the overall cost of goods is small (about 1/3^rd of what it was in the 1970s, when a relative-wage-inflation spiral did drive industrial unrest and prices). The trigger for further inflation (because inflation is never transitory, whatever Bank of England economists would have us believe), is going to be oil and energy prices. The outlook for the economy is more strikes.

But rising wages distract from something more fundamental – a rising pace of job losses. Yesterday the UK lost jobs across the economy. Rolls Royce is slashing 2500 “soft-middle” office and management jobs worldwide as part of a re-organisation. The soft-middle class of the UK is being hollowed out, which has enormous consequences for consumption.

KPMG, one of the Big 4 accounting/consultancy parasites is decimating its consulting business – these firms expanded too quickly expecting post pandemic recovery, but are struggling to use their new staff.

(One of the issues I will never fathom is why firms use consultants? I reckon it’s because the boards of UK industry are now filled by very earnest accountants, MBA and business graduates, HR officers, compliance officers, diversity officers, CFOs (definitionally accountants), and lack founding entrepreneurs, engineers who actually build stuff, designers, or salesmen – firms are managed by bureaucrats. These corporate drones speak the same consultancy bullsh*t as consultants. They are all well versed in woke. Consultants delight in knowledge packed PowerPoint presentations – without an erg of insight. The partners don’t listen to expertise. They are parasites. I suggest disinvesting from any firm that is excited to have awarded a project to a consultancy firm.)

Jobs in the UK are being lost because of rising costs, falling earnings, but also ongoing supply chain issues. Y’day a Swedish Electric Lorry maker filed for bankruptcy because it can’t source batteries, triggering 600 job losses in the UK. Other jobs are being lost as companies rationalise global production, and if you are selling to Europe, frankly it’s a flaff to export from the UK – whatever Brexiteers still think. (Guarantee I get an angry comment about that one..)

The bottom line is lag effects mean the aircraft that represents the economy may look like it’s on course for a soft-landing, could stall out, and crash much harder as the effects of lagged interest rate rises, declining credit, falling earnings and crashing consumer spending bite. That said, yesterday’s US spending data was a surprise – there is nothing able to stop US consumers from Spend, Spend, Spending their way into credit hell…

(I will comment on Scotland’s plan to launch its first bond tomorrow.. frankly… I’m peeved. My dream job in finance was always to run Scotland’s Debt Management Office, but since I’ve written so many times about what a shower the SNP are, perhaps it’s no surprise I didn’t get the gig…)

Five Things To Read This Morning

FT                               US Bond Market is Losing Its Strategic Footing

BBerg                          Country Garden Default Looms After Builder Says Unlikely to Pay

BBerg                          China Is Becoming a Data Black Hole, Short Seller Aandahl Says

WSJ                            Goldman Sacks Posts 33% Profit Drop

TOrygraph                  Recession Looming as jobs market weakens says Bank rate-setter

Out of time, and wondering what to do with the rest of the day…

Bill Blain

Market Strategist…