Blain’s Morning Porridge, September 28th 2022: Blame the Media and Remoaners – What next in the UK’s economic saga?
“The body in the Vestry officer? Not me, I’ve been shooting Grouse all afternoon…”
This morning – It wasn’t Kwasi’s fault. It was the pinko Media that crushed sterling, The Bank of England and these nasty Remoaners murdered Gilts – says the man shorting sterling… If it wasn’t so serious it would make a brilliant comedy. Perhaps it will.
Well, that was me put in my place yesterday…
I am, apparently, utterly wrong on the Sterling/Gilts Crash. It wasn’t the market. It was the Pinko Tory hating media who are responsible. Here was me thinking it was the market that set prices, and it was the market that collectively reacted with stinging rejection of the Chancellors not-a-budget last week. Nope. It was the Lefty-woke-hugging work-shy socialists at the FT that crushed Sterling and Gilts..
Silly me. I thought it was the market that set prices…
A senior Tory told me – in polite but direct terms – how Chancellor of the Exchequer Kwasi Kwarteng met a bunch of the great and the good of the City yesterday, who were very supportive of his radical tax cutting budget, and look forward to working with Government to deliver the Growth Plan that is going to stimulate a high growth, high wage UK economy. (How?) Likewise, a meeting with Tory MPs went “swimmingly” well for the Chancellor.
Am I sitting on a record turntable?
Call me suspicious, call me a conspiracy theorist, or call me naïve, but does anyone else think there is a massive spin campaign underway to shift the narrative away from Kwarteng’s not-a-budget on Friday for the crash in Sterling, Gilts and Confidence in the UK?
It’s all the fault of the Bank of England and these pesky Remainers – apparently.
Crispin Odey, the hedge fund boss (a damn good one), and £1.7mm contributor to tory causes (including Brexit), is on the front pages of the Times, the FT, and the Telegraph fulminating about how the rout on the pound has been caused by “Remainers” who “hate the Government”. He told the Telegraph: “I never felt the kind of hate that Friday stirred up for a long time.”
Odey Asset Management has a massive-short position on Sterling and Gilts. Crispin made the point his positions for further sterling falls are investment based, and have been in place for months because of the Bank of England’s failure to contain inflation. Shorting the UK has seen Odey’s fund up 140% this year. He utterly dismissed “conspiracy theories” that Kwarteng’s brief period in his firm is any grounds to suspect collusion between them.
I firmly believe sterling will rebound at some stage, and will be a massive sell Dollars buy Gilts moment. I suspect the trigger will be change in the likelihood of administration change rather than Kwarteng’s plan coming to fruition. (Let’s say we get a snap election – sterling rises on the prospect for change, and Kwarteng will claim its due to his policies..)
The Telegraph article is delightful. Odey added, hinting he was busy, “my love is grouse shooting, and we are in the middle of the season right now.” He still found time to give the same interview to the FT, The Times and others.
Meanwhile, the Torygraph also unleashed the Liverpool Beast – Prof Patrick Minford with his “There is no sterling crisis, except in the minds of idiots” opinion piece this morning. It dismisses the threats and consequences of a sterling tumble, rising gilt yields (and how that impacts the cost of funding the increased Gilts issuance), and a potential mortgage crisis crashing the housing market, and characterises the problem as The UK’s Balance of Payments deficit, which he says will be corrected when energy prices normalise and we make more of it ourselves. It’s an interesting perspective – but still does not explain how the not-a-budget is going to create growth.
What is fascinating is how Kwarteng apologists are now changing the debate. By grabbing airtime, and filling the media, they are establishing a new narrative based around four themes:
- Its Remainers that are talking down the Chancellors excellent, well considered and radical plan to boost the UK economy – High Wage High Growth.
- The Trump approach – it’s the fault of the lefty media. They crashed Sterling, not us. They hate us.
- The Bank of England’s failure to address inflation early on, and its insistence the threat was transitory, is the real establishment failure… and it will be “addressed”.
- The UK is actually doing fine – our debt GDP ratio is ok. Deflect by noting things are going to be much, much, much worse in Europe – giving the Kwarteng supporter the opportunity to vent about the lack of democracy in the EU, the Italian election, how it’s all the German’s fault, etc, etc.
Get used to these sound bites. It’s all you are going to hear from Government in coming months.
Oh.. and did I mention…
The Housing Market about to crash by 15-20% as banks pull mortgage offers, raise rates, cut the amounts they are prepared to lend, and seek to pull back on LTVs lending ratios.
Or the IMF – who they, and how very dare they – suggesting the UK should “re-evaluate tax cuts in a biting attack on fiscal plan”.
If there is substance to defending Kwasi Kwarteng, it’s the question: What else could he have done?
The key issues facing the UK short-term were inflation, the energy crisis and its catastrophic effect on small business and consumers, and political distrust. Medium to Long-term the global competitiveness of the UK is under pressure from Brexit consequences, but also chronic underinvestment and stalled productivity gains. The challenge was to solve for all of these, while retaining confidence in sterling and gilts and not triggering a housing meltdown.
It could have been done. A less bombastic and nuanced not-a-budget focused on helping the low paid, no mention of bonuses and higher tax rates, and keeping the borrowing requirement as low as possible through windfall taxes – which would have consequences all of their own. It could have been done.
The fact is the UK is in awful mess. Much of that is due to the consequences of 12 years of monetary experimentation by the Bank of England, alongside every other Central Bank, supporting Ultra Low Interest Rate Policy (NIRP and ZIRP) and Quantitative Easing which taught the trick that Central Banks funding Government Borrowing was possible without upsetting the market.
The result was massive market dislocation and distortion. As Government Bond yields fell it forced investors to seek elsewhere for returns, fuelling a massive rally in corporate bonds which in turn fed the demand for junk bonds. It fed into stocks, fuelling the demand for speculative stocks that rose and rose and rose on fantabulous and utterly non-sensical predictions of future worth. It fuelled the rise of crypto-shysterism, SPACS and NFTs.. Such days of market valuation madness will never be repeated… until they are, because the market has no memory.
However, ultra-low interest rates also changed entrepreneurial behaviours – the same behaviours that create growth and high paid employment.
Back in the days of market distortion it made more sense for firms to invest profits in stock-buy backs to push up their price (incidently, causing senior executives bonuses to explode higher, and their stock options to go stratospheric) instead of investing in new productive capacity (plant, factories, logistics) and creating new jobs. The result was abysmally low productivity gains and worker wages stagnated for the decade – as income inequality widened as company bosses saw their pay and rewards rise on basically doing nothing except follow markets higher. Not the fault of workers – so why punish them with higher taxes (regressive taxes) for decades to pay for these mistakes?
By cutting taxes on the wealthy managerial classes what confidence do you have it will trickle down to create jobs? Investment will go where its likely to garner the biggest returns and meet the objectives of the managers – where their personal returns are also a goal.
Today the UK is suffering after 12 years of massive underinvestment through the QE period. Through that period we have been “blessed” with the stability of 4 Tory Governments of progressive less and less effectiveness.
Mea Culpa time: I voted for Brexit. I did so because I sincerely believed that getting rid of the dead hand of Brussels Regulations would free up the UK for a big bang of new company formation, new markets and trade deals, and an invigorated mercantile UK returning to the world stage to exploit our inventiveness, soft-power and financial expertise.
What was I smoking? What we got was 6 years of dither and gridlock as Remoaners and HardLine Brexit Taliban failed to move forward.
Brexit happened. It has not been done. Getting past Brexit dominating Tory politics and holding back the nation is critical. We need to accept the collateral damage, repair our relationship with Europe and quantify the olive branch recently offered by the EU to solve the Irish problem. Restoring trade, and recognising what we do with Europe will colour how the rest of the world deals with us (Biden being a case in point), should be an immediate priority of the new Government. It’s not even on the agenda.
No time for five things..
Out of time, and back to the day job.
Strategist – Shard Capital
Re the Greek Chorus spinning for all its worth:
“It is difficult to get a man to understand something, when his salary depends on his not understanding it.”
The Bank of England on Wednesday said it would buy U.K. government bonds with long maturities “on whatever scale is necessary” in an effort to restore order to the market for gilts, whose prices have plummeted and yields have soared since the government announced a large set of tax cuts.
BUY GILTS, BUY STERLING
Not certain but from what I can comprehend multiple UK pension funds risked being hit with debilitating margin calls as their hedges turned toxic. The BOE had no choice but to intervene.
Obviously the Chancellor is totally out of his depth.
THe Bank of England felt forced to intervene to stop systemic risk across the UK real money fund management sector – the guys that run our pensions. Their stock prices are all massively down. They faced margin calls as the result on higher Gilt Yields caused by trades they’d done to match liabilities.. LDIs. The upshot was they needed to cash to meet these calls, meaning they were being forced to sell assets. Guess what were the only assets they could quickly realise? Yep, selling gilts (because in crisis you sell what you can) to meet margin calls on Gilts.
There is no way to explain the sheer clusterfuck that is the UK market at the moment because some Tory supporter will immediately deny it.
This is… ahem.. “not good”.
I guess this is what you might call, a no see um?
Bond markets like Dull Boring and Predictable – KamiKwasi did not communicate well, and they hate being asked to fund regressive tax cuts with long-term borrowing. It is not sustainable.
Re the Pension guys and margin calls – wasn’t this a ticking bomb waiting to explode? They’re attempting to match liabilities to reduce one set of risks by adding more, potentially unmanageable, risks via swaps and derivatives. No doubt their risk management systems deemed them square and matched. Not sure whose watch this falls under but it’s a pretty big failing.
Not really – its a bit of a technical issues.
Pension funds do the right thing by hedging their liabilities so that as markets shift they don’t suffer catastrophic shifts in what they can pay out – so they match liabilities – liability driven investment.
But when you get a sudden unexpected shock, the underlying hedges trigger missmatches. As the price of gilts tumbles, it leaves a risk to be covered by a margin call.. which will be matched by a gain on the other side of being able to meet the liability. But that risk premium needs to be coverered, by selling assets.
In a sudden crisis you can only sell what you can sell – which is the good most liquid assets. In other words to cover losses caused by volatile gilts, they have to sell gilts, making gilts even worse. Doh.
This all happened as a consequence of the market being shocked by something unexpected. No one thought the government would fund short tax-cuts with long-term borrowing… and with such clear deaf regressive policies.
It crushed confidence in our virtuous sovereign trinity – that a competent goverment would keep the currency stable and the bond market sustainable. THe gilts market wants dull boring predictable – they were suprised by the not-a-budget was tone deaf and shocking mis-communicated.
Read this and weep: https://obr.uk/box/debt-maturity-quantitative-easing-and-interest-rate-sensitivity/
Hat-tip to Alastair Nairn’s The End of the Everything Bubble for pointing out this unintended consequence of QE.
Wasn’t it Bill Gross who said that the gilts market was resting on a bed of nitro-glycerine?
Some chap called Phil Sabin emailed me. I have no idea who he is, but some bloke by same name does something in Seattle.
You really are out of your depth aren’t you.
Kwarteng got punished for daring to try to save the UK – when all the big powers want it to crash….without it looking like it’s their fault.
Lets not mention the BofEtrash bonds they are sitting on with no way to get rid easily. Oh but a systemic crash would help.
Next you’ll be telling me putin blew up Nordstream 1 and 2
Ah.. the power of narrative..
A very entertaining and horrifying read. My only edit would be Mr Kwarteng’s first name should read Kamikwasi.
Perkins/Krugman – ‘ an economy run by morons has to pay a risk premium.’
The only surprising thing about this crisis is that people are surprised by it. After decades in the market, you see the same old circles and abject surprise by those who weren’t around for the last cycle.
Capricious printing of money never goes well in the long term. It is not the real assets (real estate or stocks) that have risen over the past decade, but the devaluation of a currency, (through increasing currency not backed by reality) which means you need more currency to purchase the same asset. (Which then looks like an asset price rise).
Successive governments around the world have played this trick for the last decade, kicking the responsibility further down the road. It seems some governments just wish to keep “tar papering” over the problem, rather that dealing with the hard reality; that you can’t just keep printing money (borrowing by the government at high interest rates).
England is a nice country, so I wish you well in your experiment in terror. Good Luck!
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