Blain’s Morning Porridge 28th Oct 2024: Bonds Markets the ones to watch these coming days.
“It is essential to understand that the main challenge for our electoral democracy is not voter fraud, but voter participation.”
Bond markets depend on a consensus between governments and investors to maintain stability. When winning elections means trust, truth, and certainty are out the window, the bond compact will become increasingly vulnerable. Something wicked this way comes.
It’s another big week for bond markets. No S*** Sherlock.
Western economies are built on a foundation of debt. That is not a problem if the market believes a Nation’s debt is well managed, the risks minimised, and problems repaying that debt will simply not arise. Investors look for stability and competency in politics and the mechanisms of the state to ensure the value of their debt investment is maintained, and its’ timely and prompt repayment is respected. It is in the interest of the state to maintain its access to markets by being seen to respect bond holders.
The key risks investors expect the state to minimise are supply, inflation and the stability of the currency. Sovereign issuers do not default on their debt – they have the option to print money, but thereby raise the risk of rising inflation and the threat of currency debasement. (Nations that go bust, usually go bust because they borrowed in someone else’s currency.) My Virtuous Sovereign Trinity theory: that a nation with a stable currency, a sustainable bond market and competent politics will generally be successful, holds up pretty well.
Last week’s bond ructions – which saw rates rise around the globe – were triggered in part by expectations of slower than expected central bank eases, the threat of resumed inflationary pressures, but also rising political concerns – that fractured politics may lead to an unravelling in the bond compact between governments and investors.
This week: in the UK we have Rachel Reeves’ how-do-we-pay-for-it-all budget. Can the Labour Party nix the jinx that’s followed them since they won the UK election by a landslide by finally saying the right thing and doing something positive? The jury is out, and according the Torygraph so is every businessman in the country – moving their wealth elsewhere.
Last week I was talking to a journalist about the rumoured return of Bond Vigilantes in respect to the UK bond market. I told him not to worry – the risks were probably overblown I the light of the Labour majority. The Torygraph rails about Labour ministers being communist stooges, but they are clearly more competent than their discredited predecessors – which is why Labour won and the Tories lost. I added the one thing that worries me: increasing political negativity. It doesn’t require politicians to make a hash of a nations access to the bond markets – all it requires is for the electorate, and markets, to believe they have.
Which brings us to the US: we’ve got the quarterly refunding announcement, the October Jobs number on Friday, and the week after the Fed meets for the first time since September’s 50bp cut. And… the US the election is just over a week away. Don’t pretend the potential outcomes are not a concern.
The US and the US$ stand at the centre of the global economy and world trade, giving it enormous advantages in terms of the heft of US dollars which are homed in US Treasuries. That gives the US tremendous strength, but also makes it highly vulnerable if that relationship were ever to change. In the current domestically focused, highly polarised and fervid US campaign, politicians seem blind to the risk rising budget deficits might have on Treasury market sentiment in a changing geopolitical reality.
What are the risks of a shock outcome, for instance Trump losing and declaring insurrection is justified because of he claims massive electoral fraud? It is not a zero-sum possibility. From the slew of stories in the press, it looks like the Republicans are preparing to make similar claims at they did in 2020.
Through the first 25 years of my nearly 40 years in the bond markets, political risk was an exotic threat. It wasn’t in the same league as inflation, rates, supply or the currency. Politicians were expected to make mistakes and apologise for them. Markets were confident the central banks would wipe up the mess.
That is no longer the case. Political risk is front and centre as a debt market risk. If the debt quantum soars as politicians enact tax-cuts, introducing populist but growth slowing and inflation creating policies, then expect bond markets to get… difficult. I don’t believe modern politicians are entirely bond illiterate – but they do seem to underestimate the importance of the bond market.
Politics has always been a violent, cut and thrust game, but there were rules – chief of which was tell the truth, or at least don’t be caught telling lies. There were limits – undermine politicians, but not the state. These rules are now blurred and fractured, unleashing new uncertainty across markets. History is littered with paradigm shifting moments in politics – when the old rules were broken, and new norms emerged after a period of sustained political chaos: The Wars of the Republic, Julius Caesar and the rise of Imperial Rome, The English Civil War and the rise of Cromwell, the French Revolution and Napoleonic Empire…. Revolutions tend to consume their instigators.
Do not underestimate Donald Trump. He is not the problem. He is a symptom.
The Trump revolution is occurring because of 2 factors:
- The rise of Populism: Trump spotted the opportunity presented by unhappy “left-out” credulous voters around whom the MAGA revolution has been constructed.
- Trump has captured and turned around the Republican Party to enable his revolution.
Credit where credit’s due.
I find it extraordinary that lifetime Republicans whom I’ve known for decades have switched course to embrace Trump’s politics of denial, to support populist policies that would have made Regan flinch, and are willing to condone political behaviours that would be considered unacceptable and utterly career-ending just a few decades ago. So be it. Politicians will do anything to win elections. My Republican chums tell me they dislike Trump, but justify it because the Dems are worse. Of course they are…. (I will accept the Dems are not much obviously better.)
If you are worried about the consequences of US election, don’t worry about Donald Trump. He is not the problem. It will be what follows.
At the moment the polls are tied level pegging. A few put Trump ahead, others Harris. The momentum does seems to favour Trump who seems to be leading Pennsylvania.
If Trump triumphs, and thus avoids his multiple court cases for at least 4 years, he is unlikely to be much engaged in government. He will lounge in his office plotting revenge, but broadly disinterested and unengaged except to buff up his image. His “advisors” will tell him what he wants to hear, and get on with the project of Transforming America.
The first Trump White House was an ill-prepared amateur affair. This time the Trump administration comes with JD Vance representing the interests of his funders, Theil, Ackman, Founders Group et al. Musk will be representing Musk – until Trump inevitably falls out and dismisses him as court jester. Project 25 has a clear Christian Democrat list of right wing objectives to transform the USA into Gillead. No doubt the unelected Trump clan will be looking for preferment.
My second issue is how the election will have been won – it’s hardly a ringing endorsement of democracy, truth and justice. The most interesting thing about the election is how cleverly the Republicans have steered the narrative. Their strategists have run a superb campaign despite the clay they have to work with.
This morning my media streams, and particulary Elon Musk’s Truth Social, formerly known as Twitter, are stoked with “Jack’s Nappies”: unproveable allegations, opinions and suppositions presented as irrefutable truth. Apparently there is large scale electoral fraud in Pennsylvania, Michigan and other swing states on a monumental scale – according the Musk et al. Even though they don’t appear anywhere else, naturally that means the 2020 election was stolen…
Trump’s Madison Square Gardens rally last night was the biggest ever in history… apparently. Oh, I wonder… MSG has seen political demagogs before… they come and they go.
The narratives Trump’s campaigns have deployed trump (lol) facts every time – but they win votes. When it comes today’s political polarisation, I don’t suppose it really matters what the facts are: tell the story, tell it again, and again and again and tell it loudly till it acquires a certain truth all of its own. It’s called Reflexivity. It is being deliberately exploited by political strategists. Sling mud and it sticks. There are consequences and there is collateral damage. Mud has an effect on confidence. The FT this morning says the increasingly likelihood of a Trump victory and high tariffs on US imports means a basket of 28 European export driven stocks – including Diageo, LVMH and VW are down 2% as the rest of the market has climbed 8%.
Where does the end? Badly.
Politics is a game of trust – for it to work, you have to trust the vote. When the vote is no longer about the facts of the number, but who shouts loudest, then we really are into the Decline and Fall of Rome DC. Small wonder so many market watchers are disinvesting bonds and loading up Gold.
If government bond markets see a large scale backlash from the election and its consequenes, at a time when funding loads have never been higher, global trade less certain and geopolitics more fraxious… then… Things will get interesting….
I’ll leave you with that happy thought…
Out of time and back to the day job..
Bill Blain
Author of the Morning Porridge, founder of Wind Shift Capital
