Blain’s Morning Porridge – Oct 20^th 2023: Reverse Big Bang is coming, rising Political and Geopolitical tension, and Higher Energy Costs… Anyone for the last few choc ice?

“There may be trouble ahead.. let’s face the music and dance..”

There is a crisis brewing – things are likely to get worse before they get better on the back of Political Dither, a Reverse Big Bang in the City of London, and the Escalation of the Middle East crisis threatens higher energy costs and inflation!

Do not read this Morning Porridge if you are of a nervous disposition…

In many respects I’ve had a good week. I’ve not spoken with so many clients in a single week since 2008 – which is maybe a bad sign, because then the Global Financial Crisis was raging all around us. Wearing my strategy hat, I was on the TV and Radio, highlighting what a great team of colleagues I work with. I had umpteen periodicals pick up articles I’ve written. I was absolutely delighted to get yesterday’s comment on the Scottish Bond Issue picked up by both CapX and Global Capital – I was the first news-editor on its predecessor magazine “Euroweek” back in 1987! Ah, back in those glorious day I was happy being broke, poor and miserable. (Today… same as, same as, but not so happy..)

Good weeks are often followed by bad years. I can feel pain is coming. I can feel it in my bones – and after nearly 40 years in markets… I probably need a new knee! (I went to the gym yesterday for a “Bosu” workout. Ouch. Next time I might chose the SAS “interrogation and evasion” course as a softer option.)

I admit I am oft-times a grumpy old man. As I said yesterday, it would be unusual for a Scotsman to be mistaken for a ray of sunshine in these confusing and threatening markets. While I stick to one of my key market mantras – “Things are never as bad as we fear”, balancing that with “but, seldom as good as we hope.” – the outlook is looking increasingly dark – as bleak as the smoke over Gaza.

There are storm clouds gathering everywhere I look. Let me try to explain:

First up is the UK, where the Labour Party won two stunning by-elections in the Tory Heartlands. If these numbers are repeated at a general election – the Conservatives will be reduced down to rump of less than 60 MPs. That isn’t going to happen. The turnout was exceptionally low, perhaps reflecting conservative voters disgust with their previous MPs, the surly Nadine Dories (who resigned in a pique because she didn’t get the House of Lords sinecure she so richly did not deserve) and the sex-pest Pincher by Name, Pincher by Nature.

I’m of the opinion there is nothing the UK needs more than a new government. Nothing against Rishi Sunak – and I’m worried by the reports circulating around the lobby correspondents about how depressed, tired and jaded he has become – but let’s face it; the current administration is trapped in a last-days of the bunker mentality.

The problem for Labour is timing. Sir Keir Starmer would be wise to ease off, and delay the election as long as possible. That raises some risks – that Labour will stumble, dropping the “Ming Vase” of its current electability in a long run up to the campaign. Critical to Labour success in Government will be discipline and a large majority to neutralise the effects of any left-wing distractions – much as the right successfully undermined the last 13 years of Conservative power.

The economic reality is it’s likely to get much worse over the next 6-9 months, before they start to get better. If Labour wins a landslide in March, then by the end of their critical first hundred days they are going to be facing multiple rising domestic and international pressures.

Let’s start with the domestic economy.

If London sneezes, its “ring-a-round-the-roses” for the UK economy. (That quaint nursery rhyme is about bubonic plague ending in “we all fall down”.) I suspect the City of London is on the verge of Reverse Big Bang. Speaking to clients, colleagues, city figures and “sources”, it’s clear the business of finance is struggling:

• Deal fees are tumbling – we’ve seen it in investment bank results, leading to lower bonuses in prospect. City salaries and bonuses have driven the London Economy for decades. London housing will suffer.
• The big four consultancies massively over-hired during the pandemic in the expectation of booming new business – now they are scaling back. The same effect will be seen on other City service firms from lawyers to coffee shops.
• The rapid bear bond market has pummelled investment funds – leaving many sitting on large bond portfolio mark-downs, which will borne long-term as bond mature, but focus investment decisions back onto dull, boring and predicable, a flight to safe-havens, and a rising concerns about market liquidity – hence more pain to come for the investment banking and trading sectors.
• When interest rates hit 5%, savers are less concerned about zero returns on investment portfolios. When savings are under pressure from inflation, they have less to save, and look to reduce investment fees – perversely buying cheaper tracker products in markets that require real skill to navigate.
• It’s a brutal truth of investment management that it costs the same to manage $500 bln as it costs to manage $500mm – many smaller IMs are going to be squeezed.
• The UK stock exchange and London Financial expertise once dominated global markets. Now London is in danger of being marginalised. Although Finanzplatz Europa didn’t happen immediately post Brexit, the financial tide is flowing out of London. That tide is going to get stronger as the UK and London continue to lose relevancy in polarized global markets where the UK finds itself adrift and alone.

Meanwhile, the rest of the economy will remain in crisis from stubborn inflation from renewed energy price escalation as events in the Middle East and Ukraine reassert themselves.

Outside the UK, the picture continues to deteriorate.

The shenanigans in the US house, where its proving impossible to elect a new speaker is raising serious political-consequential concerns around the US economy, the dollar and the US’s ability to lead the West. Such dither could not come at a better time for China and side-kick Russia. It also raises serious questions about Democracy in the US. The people vote in a nationwide plebiscite for their choice of president to lead them. They don’t vote for the speaker – because that was never envisaged as a political role.

There is an emergent myth the role of the Speaker as a political leader is enshrined in the founding principles of the US Constitution. It’s not – the role was initially lifted straight from the UK where the Speaker; the person sitting above the chamber, notionally neutral and independent, managing procedure and debate, is the foremost official of the parliament – is not a party political role. The speaker should NOT be directing the ebb and flow of decision making, and certainly not setting themselves up in direct political confrontation as an alternative President – which is how the current crop of Republican’s now see the role, politicising it to the extent of mounting vindictive impeachment motions. (Apparently the fact the Speaker follows the Vice President in succession planning was an admin clause added in an amendment in 1917!)

I fear a coming polycrisis in US politics will unravel over the coming year in the lead up to the Nov 2024 election. Watching President Biden on his whistlestop tour of Tel Aviv airport did not fill me with hope. He is no longer the man to lead. The main thing in his favour is the alternative is likely to prove worse. There is an expression that “cometh the hour, cometh the man”, and I am sure the ancients didn’t write that in expectation Donald Trump.

Meanwhile, and related – the overnight news of US destroyers engaging Iran-backed Houthi missiles in the Red Sea, and strikes on US airbases in Syria highlights the growing escalation of the Palestine Israel war. The expression Great Satan is common again.

The papers note increased engagement between the two foes for dominance of the region: Saudi Arabia and Iran. The dialog is not about how to deescalate, but how to ensure the Arab World remains committed in its’ support for Palestine. Sadly, it doesn’t matter the evidence points to a failed Hamas missile striking the Gaza Hospital: across the Arab World the “irrefutable truth” will always be the Israeli’s callously murdered 500 innocent women and babes in arms. Truth died a long-time ago.

The battle lines are now being defined – enfolding Israel back in the same geopolitical situation it found itself in 1948 – surrounded by hostile states. It pushes back US power in the region, opening the door to Iran and China. The likely outcome is greater instability, raised geopolitical stresses, and higher oil and energy prices – leading to long-term inflation and global recession.

All of which is why I advise Sir Keir Starmer to let Rishi Sunak cling to power – the next 9 months will see a confidence crisis in the UK as house prices in London tumble on the back of  City Retrenchment, a growing exhaustion of the economy as the lagging effects of rate rises and inflation pummel corporate earnings and credit, and consumer discretionary spending falls. We may even get a new banking crisis. The next 9 months is going to hurt – but that also means it’s a massive investment opportunity.

Five Things to Read this Weekend:

Bberg                          Early AT1 Champion Warns They Can Break Banks in Next Crisis

WSJ                            Sidney Powell Accepts Plea Deal in Trump’s Georgia Case

WSJ                            A Financial Crisis In China is No Longer Unthinkable

FT                               With Israeli normalisation talks stalled, what is Saudi Arabia’s next move?

Bberg                          Europe Gas Rises on Fears of Wider Middle East Conflict

Final comment:

This weekend sees the Rugby World Cup Semi-finals. England vs South Africa. Jim White in the Torygraph has argued Scots, Welsh and Irish fans should support England as “a good thing if England come out top!” to re-establish the epicentre of Rugby in the Northern Hemisphere. What? All I care about is fantastic Rugby – and that’s what we’ve been getting. England got to the semi’s courtesy of a “good draw”. They may be unbeaten, but they are also unconvincing.. The best Rugby is all that matters.

Scotland supporting England? C’mon.. ??

However, I might not wear my Bok’s top.. I am thinking of watching it in my Portugal shirt – because I love the country and its wine, and enjoyed watching them play!

Out of time, and have a great weekend..

Bill Blain

Strategist, Author of the Morning Porridge