Blain’s Morning Porridge, May 23rd 2024: Things Can Only Get Wetter….
“And if you want these kind of dreams, it’s Californication.”
The UK’s snap General Election will be one of the most significant on record. At stake is restoring the UK’s reputation for political competency. It will be required to address the massive challenge on the economic horizon: the threat of galloping wage demands and stagflation while trying to repair Broken Britain.
Poor Rishi Sunak… announcing the political equivalent of a banzai-charge into a General Election while a diuretically-challenged pachydermic sky unbladdered itself upon him. In the background Labour’s triumphant 1997 “Things can only get better” anthem blared out, obscuring much of what he said. As the opening salvo of Sunak’s fightback from the bunker… it was a very, very damp squib.
History may judge Sunak with some sympathy: he was a political naïf parachuted into leadership on the hope he would bring some technocratic competency. A competent Chancellor perhaps, but not the lateral-thinking leader with the vision required to change the UK. He looked little-more than a temporary stop-gap till someone better arrived. He never had the opportunity to rise into political greatness as he scrabbled in the post-Brexit chaos of the impossibly riven Conservative party. He got to choose the moment of his passing, yet looked like a little lost boy in a soaking ill-fitting shiny suit, talking big but empty defiance. His wife and daughters will be delighted the nightmare is over. “California here I come…”
What does it mean for markets?
The UK does seem to be coming off the bottom of the post-pandemic dip; inflation looks manageable, growth – though anaemic – is returning. Sterling is stable-ish. Interest in UK stocks is rising. However, the reality is economic crisis this way comes for the nation. The challenge facing the next government is going to be immense – and you can bet the next Tory leader will be blaming it all on Sir Keir Starmer.
UK disposable income and discretionary spending are set to crash:
- Interest rates will remain high meaning further pain for mortgage holders as they come off fixed rates, savings are spent, while consumer and credit card debt is rising to pay immediate bills at increasingly less affordable levels.
- Taxes will remain high and will rise further as the next govt tries to balance the books. Nothing; stealth taxes, VAT or rising income tax, is off the table.
- Austerity spending and further benefit cuts look inevitable – a new government will have a very, very short honeymoon period.
- Consumer utility bills are set to balloon higher as the degree of mismanagement in under-regulated privatised utilities become increasingly evident – witness water companies continuing to pay their owners dividends while demanding household bills more than double in the next few years.
- The consequences of 14 years of housing policy being relegated to an SEP (a Someone Else’s Problem) has metastasized into a catastrophe with affordable rented accommodation in cities out of reach for many young workers.
- Young workers have given up on ever being able to afford their own homes – making them more cynical about what the UK’s economy offers them (outsider syndrome) while the likelihood of a very deep correction in home prices is rising. A housing crash is the single event most likely to crush the UK’s national confidence.
- The costs of the blob: government pensions, bureaucracy, ineffective planning laws, and the threat the NHS will consume us all, etc, are all rising.
- Inflation remains a crisis – much to the surprise of BBC correspondents a falling rate of inflation means prices are still rising… less quickly, but still faster than wages.
- Inflation is always a regressive tax that hurts the poorest in society most.
A crash in consumption spells disaster for producers, yet the factors above all lead to one inevitable outcome; demands for higher wages are bound to follow. Wage inflation will become a massive theme in coming months.
The first part of Sunak’s electoral strategy will be to persuade voters that Labour will cave into Trade Unions (the great bogeymen of 1970’s Stagflation), who will demand unrealistic and unaffordable settlements. The Tories will, correctly, argue wages can only rise in line with productivity, and since productivity growth has flatlined over the last 14 years… (Hmm… why was that then Rishi?) wages can’t rise.
The second part of Tory strategy will be to paint Labour as dangerous, unpredictable radicals, correctly observing that to solve the consequences of the above pay/prices gap, then Labour will need to be much more than just better Tories in terms of tinkering with taxes and austerity. They will need to actually change the way the UK works, and address issues with radical new policies – thus scaring the horses as Jacob Rees-Mogg will scream to the high heavens.
- The Tory argument is Labour can’t be trusted with wages, the unions, or spending.
- Labour will argue the last 14 years of Tory Chaos will not change if Sunak is relected, and only new Labour’s promised political competency can reverse the damage done since 2010.
To be fair, if Sunak did achieve an unlikely win, his popularity in the party would be unassailable, making him able to clean out the stables of all the muck that has accumulated on the right-wing fringe. Sunak’s problem would be putting together a new government and cabinet of moderates since so many decent competent Tory MPs will leave parliament for the very last time next week.
Calling the election the week before the Euro 2024 football final may be a winner. While I will take any money that Scotland exit in the first round, England are expected to do well. Success could rub off on both parties – it rather depends on who the players take photo-ops with. (Starmer will be furious Marcus Rashford is not on the team sheet) Labour need to win Scotland – but the Scottish Schools break in June, meaning many voters will be away on holiday.
What does it all mean for the UK in global markets?
Nations thrive when they are stable and exhibit the Virtuous Sovereign Trinity of a Stable Currency to trade with, a Sustainable Bond Market though with global investors show their confidence, and Political Competency tying the economics, infrastructure and productivity of an effective nation together. The doubts about the political competency of the Conservative Party since Brexit, most vividly illustrated in the defenestration of Boris and madness of Liz Truss, is the reality the UK needs to address.
In the same way all political lives are doomed to failure – the Tories had their chance, and blew it. In many ways that was Labour’s fault: by failing to provide an effective parliamentary opposition and a credible alternative government under Jeremy Corbin. Now Labour look… Dull, Boring and Predictable.. exactly the key factors bond investors always seek. Since the Bond market is a key leg of the Virtuous Sovereign Trinity – then I suspect that’s as good a reason as any to Vote Red on July 4th.
However, I would rather Labour give us positive, and where necessary, radical policies to fix broken Britain. I think we are past just wanting better, but more of the same. We have a very short-time left to refit our economy to retain its relevance.
Out of time and back to the day job…
Bill Blain
Author of The Morning Porridge
Wind Shift Capital
NB – Thank you to the Daily Mirror for this Morning’s Photo of a Soggy Sunak…
