Blain’s Morning Porridge, September 5th 2022 – Liz Truss has 5 days to avert a confidence crisis in the UK
“History is full of examples of high and persistent inflation causing social unrest. Sudden and large losses in purchasing power can test even stable democracies,”
This morning– The new UK Premier has 5 days – tops – to establish her new government and put in place the strategies and policies to restore confidence in the UK economy. If not, the Virtuous Sovereign Trinity will fracture. It needs sound communication and clear grasp of the problems behind the crisis. Truss hasn’t demonstrated either – yet.
New UK premier Lis Truss has, at most, 5 days to deliver a confidence turnaround in the UK economy. She has promised to deliver a plan – and we are all desperate to hear what it is. Expectations are not high.
It is not the Morning Porridge’s aim to comment directly on politics, but on how politics are likely to shift and nudge markets. It’s not my role to comment on the efficacy of policy proposals, like the ones she is apparently set to announce, but on whether the market will be convinced they are good and effective for the UK.
Simply put: If Truss fails to deliver a coherent strategy for the economy in the next few days – the UK risks an even steeper decline in sterling, an unravelling Gilts market (UK Government Bonds) and the undermining of the third leg of the Virtuous Sovereign Trinity; the political and economic strength that’s underlain the UK’s hard and soft power since the 17th Century.
The signs are not good. I suspect her goodie bag is empty.
Truss is not a communicator. Neither was Thatcher. Truss is not Thatcher.
Truss has refused to be interviewed one-on-one through the latter stages of the Tory leadership campaign. She finally had to face the music yesterday on the new Laura Kuenssberg BBC Sunday Morning Brekdrek Sunday Politics vehicle yesterday.
I have watched pine logs after a personality by-pass come out a difficult interview in better shape.
It was a train-wreck – she answered nothing. She looked tired and haggered. She was a rabbit caught in the headlights, which is not a good look ahead of the most difficult and critical week in UK politics.
One of Kuenssberg’s panel, comedian Joe Lycett – self-identified fanatical Right Wing supporter (ahem..) – was very supportive: Lycett “praised” Truss for her “clarity”. He added: ‘I think the haters will say that we’ve had 12 years of the Tories and that we’re sort of at the dregs of what they’ve got available and that Liz Truss is the backwash of the available MPs. I wouldn’t say that because I’m incredibly right wing, but some people might say that.”
Convincing sceptical markets the UK economy is in fine shape is going to require a gifted and trusted communicator. Yesterday, Rishi Sunak – the losing contender for the job – demonstrated he had it: an appealing mix of smarts and chutzpah to deliver the message. But, looking at the scale of the crisis and the impossibility of herding the fraxiously-riven Tory Party to deliver, Sunak must be delighted to have lost.
This morning, Truss’ Chancellor in Waiting, Kwasi Kwarteng gets the front page of the FT to explain what she was supposed to say yesterday: A Liz Truss Government would be unashamedly pro-growth.
As you would expect from a well-educated member of the Eton/Oxford Chumocracy, Kwarteng writes well and fluidly – explaining carefully the first challenge of helping households and businesses through the energy and inflationary price shocks brought on by “Putin’s War” in Ukraine. They will also address the second challenge of long-term issues, like taking “responsibility for the health and wealth of the economy and country”… which pretty much defines what we all expect our government to do… anyway.
Kwarteng will be the next Chancellor of the UK – the man pulling the purse strings, funding policies, and directing the spending on recovery. In his FT note this morning he lays out the bones of this plan to create confidence in the UK economy:
- Fiscal loosening to support “people” through the winter – which I assume not only means helping people to survive the cold, but also bringing down the massive fuel bills threatening to close businesses across the UK? (Not much point surviving winter if there are no jobs left.)
- Rowing back on Truss’s comments undermining the Bank of England’s independence – by confirming it will remain free. (Andrew Bailey resigning now would have strangled this new government’s credibility at birth. I hear it may have been on the cards unless a commitment was given. I guess he will stay now.)
- Sound public finances and a strong economy. (No Sh*t Sherlock)
- Pro-growth – conditions for investment and innovation to flourish. (NSS)
- Unlocking investment and growth, rather than how we tax and spend. (NSS + Deflection)
- Reversing stagnation and anaemic growth by improving productivity. (NSS)
- Being decisive and doing things differently. (Really… how refreshing.)
- Targeting 2.5% growth trend. (Achievable.)
- No mention of Brexit anywhere.
Etc, etc, etc… Sound bites are no substitute for action.
For readers unfamiliar with Mr Kwarteng, the UK business secretary was assuring us that high gas prices in 2021 were not a problem. After earlier overseeing the closure of the Rough gas storage facility (which he is now desperately rushing to reopen), and that the UK could access gas on global markets at better prices, he assured us that: “Energy security is an absolute priority” last year… So, how did that play out Kwasi?
I am not sure if Mr Kwarteng is aware, but his party have been in power since 2010, the effective end of the 2008 Global Financial Crisis, and the beginning of the strongest stock market boom in history – largely fuelled by Zero Interest Rate Policy and Quantitative Easing. Over the 12 years since, the Conservative party has delivered us an economy when the productivity gains he blithely expects to generate have been… 0.4% per annum. Not a staggering success after more than a decade in power.
I am delighted to note that Mr Kwarteng has spotted the importance of productivity. Is he aware of how to generate improvements? I doubt it. The default Tory perspective is its feckless lazy workers not working hard enough… pay them less and they will work harder. That’s a dunderhead approach – it’s management who need to lead and provide the wherewithal in terms of plant, machinery, stimulus, incentives and conditions to improve productivity. It can be done – take a look at cooperative Scandinavian economies.
Truss (a former member of the Hayek Society) has surrounded herself with a curious pack of economic advisors, including Patrick Minford (Thatcher’s favourite monetarist) as her economic guru. His basic prescription for the economy is to borrow more to fund tax cuts on the basis it will boost business.
Have the Conservatives actually been looking at the UK economy these last 12 years? The effect of ultra-loose monetary conditions, and the great fiscal giveaways during the pandemic, was not primarily to create economic growth, innovation, new plant and new jobs, but to focus management on maximising their returns from the financial asset market – it being better to do things like stock buybacks (with the incidental higher bonuses to management), than invest in growth and productivity. Let corporates pay less tax, and there is no guarantee it will flow to new jobs and productivity – more likely into the pockets of the owners and managers to invest in financial assets.
But such is the basis of the Truss plan. The plan such as it is.. Let’s wait and hear the details.
Around the globe investors will be looking at the new Truss government and making decisions about what it means for investment in the UK. Truss and her Chancellor can make all the noise they can about how it’s a great time to invest in the UK, but the reality is not what they say… it’s what investors conclude from what they hear and see.
Maybe I am guilty of high treason for being suspicious there is no real plan – just a series of hashed up compromises between the factions of the Conservative Party that got Truss her new job. The Brexiteers will be demanding greater Brexit, the debt-doubters will be demanding she reigns back on spending, the feee-marketeers will be demand tax-cuts for businesses, and a clamp down on wage-demands in the face of the inflation shock. The workers will be blamed, and nothing will get done.
Unless I am very much mistaken, Sterling is going to end the week an awful lot lower, and Gilts will be yielding more.
Five Things to Read This Morning
Shard Capital Podcast: Market Volatility, Liquidity and Alternative Investments
Bill Blain, speaks with Mike Hollings, CIO at LeifBridge, and Ernst Knacke, Head of Research. They discuss the current global economic conditions, as inflation continues to raise concerns, interest rate hikes push on, which isn’t looking good for “zombie” companies, and weather and energy shocks persist across the globe
Bit broken this morning after a long and stony charity walk round Stonehenge over the weekend, and preparing for a 4 miles swim down my River this coming Saturday…
This morning – out of time, and back to the day job..
Strategist – Shard Capital.