Blain’s Morning Porridge May 13^th 2024: Political Sludge and How Fighting Inflation Drives Populism

“A system is corrupt when it is strictly profit-driven, not driven to serve the best interests of its people, but those of multinational corporations.”

Politics and Corporate Greed are close bedfellows. This week’s market will be driven by the US inflation number and what it means for rate cut timing, but the costs of inflation fall hardest upon the poor. Political populism is driven by inequality and corporate greed, and underlies market instability.

This morning large bold letters on the front page of the Torygraph gleefully shout a politician will be interviewed by the police under caution – clearly de-facto guilty in the Torygraph’s eyes – about which of her two homes was her main residence; her own one, or her boyfriend/then husband’s one, raising the possibility that she may have avoided capital gains tax of over £3000 when she sold her home in 2015. She says took legal and tax advice on the sale – which has been offered to the authorities – and believes she did nothing wrong. A police inquiry has been very publicly reopened at the request of James Daly, a Tory MP.

Curiously, the other UK papers lead with Nadhim Zahawi, short-lived UK Chancellor, who, despite earlier saying allegations regarding tax discrepancies on the sale of his business were “rubbish”, “untrue”, “lies”, and dismissing “journalistic smears”, has admitted he paid £5mm to HMRC in a private settlement after an investigation to settle his complex tax affairs. He paid a fine of over £1mm, according to the Guardian. In 2023 Zahawi’s spokesperson said these amounts were not “recognised”. They are now. Yesterday, Zahawi, who is leaving parliament at the next election said he was “sorry” on live TV. That’s ok then.

Compare and contrast.

Back in the real world….. 

I listened to a famous economist on a podcast over the weekend arguing corporate taxes have to fall, budgets must be balanced, while wage rises must be constrained in order to protect the economy. If only it were so simple.. I thought, while wondering how people so fundamentally unaware of the current economic imbalances get airtime.

Are we missing the Forest for the trees? Are we looking at all the wrong things when we consider inflation, economic effects and market consequences? Perhaps we need to think about more fundamental issues of economic balance.

The big number and event for markets this week will be the US CPI – on Wednesday. It’s expected the April number will be around 3.4%, marginally lower than the 3.5% March number, but very much still in stickflation territory, and well about the Fed’s determination to wait for clear signs of a sustainable 2% inflation rate. If it remains strong, investors will continue to fret about the effect on higher rates for longer on squeezed corporate earnings, and the unsustainability of highly indebted corporates and consumers.

One factor that may bring down the inflation number is the falling price of second hand cars in the US, which is a function of many factors, not the least of which is the still falling discretionary spending of the bottom 50% of the economy – the people who buy second hand cars because they can’t get credit for new ones… and pay over the odds around 30% on auto-loans for second hand bangers.

The bottom 2/3 of society have less money in their pockets today than ever, services don’t work and cost more, their ever-spiralling credit card debt is crushing them while inflation is very, very clearly hitting their wallets…  In the US a car is a necessity, but “new” used cars have to wait. A broken-down car is not the economic inconvenience it once was for 60% of American’s – it’s now an economic disaster likely to completely empty any person or family of their remaining savings, and without a car a worker could well be tipped out of a job, and a family find themselves homeless.

As a result, second hand car prices are falling…

Yay! It’s a clear win for the central bank… hard interest policies are achieving the desired effect, taking the steam out the economy. Except… it isn’t. Witness the ongoing strength and resilience of the US economy, despite the bleating in the middle-class papers about how difficult it all is…

Higher prices? Rising Taxes? These are all utterly insignificant to the top 15-20% of the global economy who did exceedingly well out of the QE economy. The values of their homes have soared, their stock portfolios are worth multiples of economic growth, and in many cases their gold and diamond stuffed pension plans leave them thoroughly immunised against inflation, or any downturn in the economy. Their bond portfolios pay interest at a comfortable buffer over inflation. Yet, suggest a wealth tax and their tax-advisors and publicists will be all over you like particularly angry wasps intent on staying angry.

The reality for the wealthy is economic hardship is what happens to other people. The rich are left unfettered to spend… and they do… Smart money follows them, aware they are taking luxury cruises, flights and spend, spend, spending… Do the rich notice the price of bread and milk?

While you may be dismissing this as the meaningless rant of a deranged socialist… this is the crisis at the heart of economic instability across the West. It is the core economic problem that doesn’t get enough significant airtime – The Economic Consequences of Inequality.

We know that cutting interest rates will not in fact help the struggling 60%. (For a fuller analysis see my essay: The Economic Consequences of QE) The QE era showed that lower rates simply boost the prices of Financial Assets already owned by the rich. Who would build more plant or factories when the jobs market is so tight for unskilled jobs, and you can’t get the skilled technicians, engineers and IT staff required for higher value businesses….? (Clue: these are all supply side problems, not demand!)

I suspect the reality Central Banks are failing to account for is Income Skew across households. We know the bottom quartile are struggling – “there will be poor always, pathetically struggling”, but now the steepness of the inequality curve is such that only a small increase in prices moves the relative poverty line much higher, placing more households in crisis. The spending power of the bottom 50% of the economy is a fraction of the spending power of the top 10%.

Economists and central bankers mistakenly phrase this in terms of: “There are a lot of households in the middle and upper part of the distribution that still have a lot of wherewithal to spend”. That was Karen Dynan, Harvard and ex Chief Economist at the US Treasury. They are correct these are households that matter when addressing inflation by conventional means.

But, maybe the starting point to think about economic stability is to reverse the thinking: “There are an increasing number of households in the middle and lower part of the income and wealth distribution who are increasingly unable to spend.”

Inflation hurts hardest on the poor. Higher interest rate hit them hardest. But to change the inflation-driving consumption habits of the rich, the only way to do it has been hiking rates – which hit the poor first. They already have little. But, what these people do have are their votes and their anger. In the US, that’s why a vast number of concerned older Americans, worried about jobs, wealth and the apparently inequality of the have and have-nots, are MAGA voting Trump supporters. In the UK, Reform will do much better than the pollsters believe because voters distrust both established parties.

I have a big week – On Wednesday I will be with most of the rest of my village of Hamble-le-Rice in Winchester, lobbying Hampshire Country Council against the efforts of greedy corporates to ruin our lives. It’s illustrative of how unfair society and the economy has become.

Despite the fact they have long been among the largest firms donating to the UK Conservative Party, a few years UK Homebuilder Persimmon reluctantly “sacked” their CEO after he awarded himself a £75mm bonus – which came from the way his package exploited Persimmon’s profits from the Tory government’s “Help to buy” programme. Effectively UK government subsidies went – pretty much – direct into his pocket.

Now Persimmon wants to dig a gravel quarry right in the heart of our village. It will cause property blight to the homes of 22,000 local residents, its right next to three schools, raises multiple health issues, will cause flooding, and destroy local wildlife and the river ecosystem. It threatens the £750mm marine industry in the area, and thousands of local tech job will become unsustainable as 150 lorry movements per day block the only road. The quarry is wholly unnecessary – there are 12 years gravel already stockpiled in the county, and the construction industry is transitioning to reclaimed materials!

Hampshire needs housing – but not the £1mm Mac-mansions Persimmon wants to build. We need social and affordable housing in cities and towns close to work.

Persimmon want to dig the quarry, via their intermediary Cemex, with one purpose in mind. To make bigger profits by building more houses on land they have been told repeatedly they can’t build on for environmental, ecological and infrastructure reasons. But if they turn the land into brownfield.. they can. They are arbitraging the rules for corporate greed.

Compare and contrast:

• Persimmon’s directors and shareholders will get a bit richer.
• They will do so by destroying thousands of local jobs, the value of locals’ properties and ruining the complex village-river ecosystem. Locals will see their lives massively impacted and their quality of living destroyed.

Is that fair?

On Wednesday I will be in Winchester with thousands of other angry villagers. Should we lose… and corporate greed triumphs over social justice… then maybe it will prove a cause worth going to war over.

Nemo me impune lacessit.

Out of time, and off to the day job…

Bill Blain

Author of The Morning Porridge

Wind Shift Capital

www.windshift.capital