It’s not over till it’s over, and it’s not over yet…

Blain’s Morning Porridge 2^nd June 2023: It’s not over till it’s over, and it’s not over yet…

“If we all want to live somewhere better, then we all need to pay.”

The immediate debt ceiling crisis has passed, but it’s not the end of the rolling uncertainty that characterises current markets. The pressures and tensions fuelling political division and driving maket uncertainty are set to increase rather than moderate.

Apologies for the lack of a comment yesterday, but it was a fraught morning juggling a trim for the dog, a broken alarm clock, waking up directly into a scheduled client call, and then a lovely nurse draining my body of the red stuff in order to tell me my cholesterol is ok – which surprised no one more so than myself.

Back to the Porridge…..

As is my want on a Friday, I am going off-piste again… but of course, let’s start with the US debt ceiling thingymaboab… Done, dusted and on to the next thing, another example of how the world really works; panicking about one absurdity of this modern age before going on the next uncertainty crisis for investment choices.

The upside is the immediate daftness of a deliberate default (“cutting of your nose to spite yer face” as Granny would say), is out the way so we can get to back to worrying about the really worrying stuff, like the multiple uncertainty engines of inflation, jobs, growth, prosperity, and conflict.

The 2023 Debt Ceiling Crisis that never was will become a footnote in history. US politics will revert back to its fundamentals: each side sanctimoniously screaming how much damage the other guys are doing while being just as bad themselves. Nothing really changes – except that what it represents: the rising degree of polarisation within the US has already become the new normal.

Ken Rogoff, IMF and Harvard, sums up a dystopian future for US politics in Project Syndicate: “The US Debt Ceiling Debacle Is Not Over.” Far from resolution, he sees a future of further conflict, a rising risk of more frequent shutdowns plus interference and restrictions on the Fed’s independence as becoming ingrained in what laughingly passes for US political process.

The mechanics of what would happen if/when the next US debt ceiling crisis happens, the effects of a government shutdown, and the confidence crisis that would follow a US default are complex, but wholly and utterly irrelevant. It is nothing to do with how much money the US borrows. (Clue – the very last thing investors will stop buying is US Treasuries). The amount of debt the US is raising is the MacGuffin of the saga.

Rogoff points about its all about POWER. He is right, our politics have evolved into a battle to control the system through the power of staying in power so you can do more things to stay in power. I think that’s a pretty good description of how politics has evolved across the democratic West in recent decades.

The debt ceiling agreement won’t change anything about slowing the rising quantum of US debt. If the Republicans win in 2024 they will slash taxes and increase the debt load. If the Democrats win they will hike spending to subside renewables and increase the debt load. Same as, same as..

Although its framed as a battle for the soul of freedom, capitalism and the American Way… Left vs Right, it’s not really a left vs right argument. Although many Republicans believe low taxes will spur wealth creation, so do most Democrats but with a little more emphasis on the rich paying their share within society. They all fund themselves from rich folk donating. Rogoff warns that “with the country on track for a Biden-Trump rematch next year – a contest Trump might just win – any truce is likely to be short-lived.”

Concurrent with reading Rogoff, I found a great article in the FT yesterday by Gillian Tett: “Trump or not, US Meltdown could be inevitable”. Wowser, I thought, even Gillian has gone dystopian end-of-the-world WEF conspiracist on us? Nope.. But what an illuminating read it was… She analysed the work of Peter Turchin, a biologist and “complexity scientist” who uses big-data to understand ecosystems…

Turchin is the left’s current “thinker” of the moment – his work melds sociology, culture, economics, evolution, demographics, growth, income inequality, and wealth to explain history as a dynamic science. He calls it “Clio-dynamics” (combining the muse of history and the science of change), predicting the inevitability of trends around the rise and fall of the elites that run societies… The fall of elites.. I like the sound of that..

Turchin concludes the incompetency of elites is a fundamental thread running through the course of history: an elite grabs power, protects itself by grabbing more and more power and authority, makes the poor people poorer, while becoming themselves an ever greater burden on the poor, leading to extreme frustration, instability and even revolution. If that doesn’t ring bells about Brexit, Trump, China, Turkey, Putin and half a dozen other scenarios, then what rock are you hiding under?

And… at that point everything went Isaac Asimov on me…..

I devour science fiction. Can’t help myself. Every day I am beholden to read Bloomberg, The FT, the WSJ and much, much worse… nonsense called research written by investment bank analysts (primarily to be read and approved by compliance officers to make sure a) it says nothing interesting and b) is essentially unreadable). As a result, Sci-Fi provides welcome relief.. Don’t get me wrong – I love economics, markets, the intersection between politics and prices, and the business of business, but Sci-Fi is fun, interesting, fascinating, exciting, and stimulating in a way that the Morning Porridge just never will be..

Among my favourite writers has always been Asimov. I’ve proposed his Three Laws of Robotics as key to the future nexus between AI, Robotics and Automation. (In case your wondering; Joe Haldeman’s Forever War and HG Wells’ War of the Worlds top my list of classic Sci-Fi, but there is so much more..)

Asimov’s great works includes the 5-part Foundation trilogy. (I know.) Its protagonist is Hari Seldon; an economic historian/sociologist/statistical genius whose study of “psychohistory” is banished from the empire because it predicts exactly how socio-economic factors will cause the empire to collapse – driven by tensions the inequalities between the tiers of society. Foundation was published over 70 years ago. It’s recently been made into a rather good series on Apple TV.

Turchin is writing about exactly the same trends today.. Psychohistory and Cliodynamics are essentially from the same stock. They have resonance. His new book, The End Times: Elites, Counter-Elites and the Path of Political Disintegration comes out the week after next.

Like Seldon, Turchin also predicts rising inequalities across society – not just of incomes, but opportunities – and the undeserved entitlement of the elites have already spawned a steepening radicalisation curve. Its likely to lead to increasing political conflict and violence in coming years.

[Before you read the next part, bear in mind I voted Tory in 2019.]

Polarisation and radicalisation is everywhere. I can’t help but laugh at the hypocrisy of the Tories (who take money from all kinds of tax-dodgers), calling out the UK Labour Party receiving donations from an entrepreneur who also supports Just Stop Oil. Green politics has become a battleground of right/left conflict – witness right-wing climate change deniers forcing insurance companies out of climate change alliances versus the sheer annoyingness of the climate protesters. Serious issues need serious discussion and pragmatic solutions rather than pointless gestures. Yet now the argument is framed in Left vs Right terms.

The UK is a fantastic example of how elites, entitlement and incompetence collide. With all the best intentions, the comical government of a self-imagined elite that has been in power for 14 years has delivered the square root of didley-squat in terms of anything tangible, significant or that significantly improved the happiness quotient of the nation … Instead they have provided moments of absolute “triumph” like Brexit (US readers: sarcasm alert), put the UK top of the Inflation Super-league, while granting us political geniuses unabashed to have been caught out as the most micro-corrupt in British Political History. (By micro-corrupt, I mean entitled, everything from claiming for duck-houses, nicking the bathrobes, asking for £10k an hour lobbying costs, etc.. So far none of them has tried to pawn the crown-jewels.. as far as we know..)

The degree of political foolishness has been unprecedented: to whit I cite as evidence: Dominic Rabb, Kwasi Kwarteng, Liz Truss, World King Boris Johnson, David Cameron, Theresa May, Priti Patel, Damien Green, Gavin Williamson, Matt Hancock (took incompetence to new improbable levels), Nadhim Zahawi, Cruella Braverman and we should really add the chap from the BBC…. What they all have in common is a sense of their entitlement as members of an elite rather than any real concept of saving the nation. Never Forget: All Political Lives End in Failure… the list above proves it.

I am quite sure, that given time and imagination, the next government will prove just as disappointing in its own ways..

An interesting UK crisis point is coming up. The Tory Far Right want the Prime Minister to abolish Inheritance Tax. They seek to protect The Blue Bastion – Tory Seats in the wealthy South East with an policy popular with elderly middle class voters sitting on £2mm homes they want to give to their kids. But its divisive as it will benefit the rich more than the poor, and will further widen wealth and opportunity inequality. In coming weeks it will become a topic of irrational, screaming argument. It will further polarise the haves and have-nots. More Jacob Rees-Hatstand on the TV might be a good thing – it will ensure a change of government.

On the other side of the power elite are the people… They are not happy. Even in the tranquil, docile UK, the people are increasingly miffed.

A rising number of Brits live in poverty and are genuinely poor – but have little time to be concerned with issues like the justice of political power and entitlement. As someone else said – the French revolution was not started by the peasants, but by the upper middle classes excluded from government – the class that then guillotined its own and everyone above.

The crisis classes in the UK are part of the expanding demographic of “relatively poor” and this now includes the vast majority of the Gen X, Millennial and Gen Z cohorts who find themselves with jobs that dominate their lives through fear, trapped with crashing incomes in the face of inflation, unable to get on the property ladder, unable to start families as renting property is increasingly insecure, and increasingly resentful of the elites.

They are the first generations who have not become progressively more conservative as they age, becoming more left-leaning instead. They are the generation who will inevitably kick the Tories out… No matter how competent the immensely likable Rishi Sunak is.

Come the next election the UK will swing to the left. If Sir Keir Starmer and the Labour party are smart they will remain centrist and deliver genuine growth policies, jobs and solve the nations many crisis points from infrastructure, transport, the NHS, etc. The reality is they will be distracted fighting left-leaning cause likes Just Stop Oil, Wokism, Gender Politics and such which will create internal conflict and turn voters swifty against them. Britain will further cement itself on the list of underperforming nations in decline.

Meanwhile, in a galaxy far, far away…

I found myself in a moment of clarity yesterday reading, of all things, the Sveriges Riksbank (writing in English on its excellent website), warning of growing vulnerabilities across the financial system in Sweden – particularly highly indebted property companies and banks’ large exposures to the sector. It argues for strong balance sheets in times of stress, and proposes property companies reduce their financial risks while banks maintain the supply of credit to viable companies.

In order to mitigate the risks of significant withdrawals and maintain confidence in the banking sector, they advise banks to maintain additional margins above their capital and liquidity requirements, and one way to do that is to show restraint on dividends and share buy backs.

Sometimes stating the downright bleeding obvious is the best way to move things forward.

Five Things to Read This Weekend

FT                    UK’s Pension lifeboat fund slashes equity allocation

WSJ                 California Spent $17 Billion on Homelessness. It’s Not Working

Guardian         Elon Musk accused of insider trading in Dogecoin lawsuit

Bloomberg      UK House Prices are Falling Again – And There’s More Pain Ahead

Torygraph        South West Water Pays £122mm to Shareholders amid sewage leak backlash

Out of time, back to the day job, and have a great weekend..

Bill Blain

Strategist – Shard Capital