Blain’s Morning Porridge July 4^th 2024: A Tale of Two Cities; Washington and London

“It was the best of times… no it wasn’t…”

The UK election will contain few surprises but leaves the new government massive problems to solve. Biden’s inevitable withdrawal from the US Presidential race adds new uncertainty to the political mix – and may obscure some the critical economic issues.

A two part Porridge this morning:

Let me start with Happy Birthday ‘Merica, before final comments on the UK election..

“Oh hey can you see, if you can then my hair’s too short…”

On Monday I wrote Joe Biden was headed towards the exit. As our American Cousins will all be on holiday celebrating Independence Day, it’s possible I might be able to comment without the usual tirade of abuse I get from across the pond whenever I have the temerity to write about US politics. (Some of it is hilarious… some, less so..)

The tectonic plates of political fortune have clearly shifted against Biden. In the face of the noise and mounting pressure, it’s just a matter of when, not if he goes. The US electorate will get something they want – a candidate that isn’t Trump or Biden. It will still be a tough fight – the polls show Trump leads Biden by some 6-8%. In 2020, Biden won with a 4.6% lead in the total votes, but only some 60,000 votes ahead in the 6 critical battleground states.

The numbers mean Biden’s successor will have to turn some 10-12% of US voters in their favour – that is an enormous ask. They also have to appeal to the key demographics that have been trickling towards Trump in the key states; Black Men, Hispanics and Soccer Mums. Again, each is a big ask. It means the Democrat candidate has to not only appeal to broad America but also specific America.

The choices boil down a straight succession for Kamala Harris – the VP would have the advantage of being able to take on Biden’s election warchest, or the prospect of a messy campaign between her, Gavin Newsom of California and Gretchen Whitmer of Michigan. Maybe others will emerge. I reckon it will be Harris – although she singularly failed to impress as VP and has dismal approval ratings, she has the advantage of being more likely to appeal to minorities and women. Can she win the whole Nation, and can she take on Trump on the stump?

However, the debate has taken a dark turn – the big question is no longer is Biden fit to stand, but did the Democrat inner circle conspire to hide Biden’s incapacity from the American People? Can the Dems be trusted? Whomever succeeds to the Democrat nomination the Republicans are going to make a mountain over the trust and hidden incapacity issue. It will keep the Democrats on the defensive. Trump will use it to deflect any criticism of his own posturing. I suspect Biden’s incapacity and how it was stage-managed could become a dominant issue on the election trail.

All of which will obscure the real issue – what will happen to the US economy when Trump is re-elected?

Republicans will tell you its great news. He will keep the tax cuts he introduced in his last term in place, he will seek new ways to encourage entrepreneurs and growth, and Trump v2.0 will be far more organised and effective in the White House. Under Trump the US economy will thrive with GDP growth at the forefront of G7 nations. Nothing to worry about, and the fact he’ll be even older than Joe Biden was 4 years ago is a complete red-herring… er, really?

The slide in Treasuries this week reflects the reality is markets fear unfunded tax cuts, higher budget deficits, and a rising national debt. They fear for the dollar if Trump remains as divisive. They fear for global supply chains and trade if he carries out tariff warfare. They fear rising inflation on Trump’s growth agenda and plans to “reform and remould” the Fed with doves bounden to Trump’s White House. They fear for the Western Alliance and further geopolitical instability.

The fact is Trump is very much a known market threat. I’m pretty sure these are all issues Trump’s team – and its increasingly likely he will attract very, very bigger Wall Street hitters on to Team Trump – will be clearly briefing to reassure on these issues in the coming months. I suspect these will be the key topics driving the Morning Porridge ahead of November.

Watch the price of Treasuries. In US bonds there is truth even Trump’s Supreme Court can’t bury.

Meanwhile, on a small Island at the unfashionable end of Yoorp…

“Rejoice…”, as a conservative Prime Minister once famously said, election day has finally arrived.

UK Exit Polls are pretty reliable. At 10 pm this evening the result will be known with a high degree of confidence. Early tomorrow morning the UK should be confirmed as the most politically stable Western Capitalist Economy – although there may be some noise about missed postal ballots to squabble over. Let’s just assume to happens as the polls predict – a substantial Labour majority and Sir Keir Starmer in Downing Street. The markets won’t bat an eyelid. No worries. Try as they might, the Tory project fear strategy “we’re crap but Labour might be worse” has not resonated with voters.

I suspect today’s plebiscite won’t be the political wipe-out the Tories fear. Labour will win a large enough majority to comfortably govern. If the current polls are wrong and the majority is thin – then the world gets very messy indeed. What we will get is Political Stability.

What happens after that will be interesting.

The consensus is Labour will struggle to make meaningful inroads into the economic omnishambles once known as the UK economy. There isn’t the money for even the basic maintenance of national infrastructure, welfare, law & order, and defence. The National Health Service is broken and needs a complete rethink before it consumes the entire national product. Housing is in crisis. As the scale of unfunded problems becomes increasingly apparent over the next few years, expect cracks to appear in the party’s façade as the economy shifts from being the mess they inherited from the Tories tomorrow, to becoming something Labour owns. Starmer’s key test will be keeping his own party in order as the next election approaches and the economy is only partially fixed.

On the other side of the Woolsack the Tories will be busy reinventing themselves. Their duty is to be a credible opposition – the check and balance – to the Labour majority. Do they swing right or do they seek their traditional role as the voice of reason back towards the centre? I fear we may be in for years of leadership infighting, with the possibility Farage captures the party in the same way Trump has captured the Republicans in the USA.

The Tories have a problem. What do they stand for? They talk about “Conservative Values” – but what are these?

• Labour stands for the notion of equality of opportunity (great idea, but difficult to deliver).
• The Liberals stand for fairness – basically whinging about the unfairness of the first past the post electoral system.
• What do the Conservatives stand for? Too many times over the last 14 years entitled Tories in power behaved as if they had an inherited right to be better than those less fortunate.

What are Tory Values? Everyone agrees a low tax, high growth economy is a good thing. No one wants to much regulation and bureaucracy. We are all proud of our nations – I am a Scot first, but British second. The Conservatives can’t claim any of these as their IP. They will need new branding to recover from the last 14 years. I have many good friends in the Conservative party – at least one of whom will probably be seeking a new job tomorrow – and I wish them every success in rediscovering themselves.

Labour face an even bigger problem.

As noted, the nation is at its overdraft limit with massive repair bills due for payment on infrastructure, security, health and welfare. The challenge is simple – the answers are very limited: For the economy to grow, the government needs to spend, not to indulge in destructive austerity. For every pound the govt spends, multipliers will create growth. Growth raises productivity which means wages will rise. Growth means higher tax receipts. Yay!

History has shown government spending on infrastructure or housing creates a boom. Yet, the current economic orthodoxy says there is no economic headroom to borrow more to start the process of making the economic repair that will drive growth. To create growth the government needs to kick start the economy with spending. That means raising taxes – which they have promised not to do.

Therein is the first challenge for Labour. How do they create debt headroom to start up the starter engine of economic recovery? They can try to persuade the market that their political competency means they can be trusted to borrow more, or we could fiddle the numbers….

My favoured idea is to replace the £695 bln of Gilts sitting on the Bank of England’s balance sheet with a Zonk – a single coin representing the same amount; the ultimate perpetual zero coupon security. As liquid as basalt. It will immediately drop the nation’s GDP to debt ratio to around 70%! Why not? Oh, because the Treasury (debtor) and Bank (creditor) don’t see it that way. Never the twain shall meet. Over the millennia they’ve been competing for the ultimate power in the UK – the Civil Servant who gets to say: “No Minister.”

Let us put politics behind us, start to build our long awaited Jerusalem, restore our green and pleasant land, and look forwards to the bright sunny uplands of growth and prosperity under our new government. Political stability in an uncertain world should not be underestimated – a Labour win tonight will be great news for sterling, gilts and inwards investment into the UK. For how long?

Out of time, and back to the day job… I am going to the polling station early this morning.

Bill Blain

Author of the Morning Porridge

Wind Shift Capital

www.windshift.capital