Of Foxes, BM and Sh*t – why Economies don’t work.

Blain’s Morning Porridge – 5^th September 2023: Of Foxes, BM and Sh*t – why economies don’t work.

“Questions would be asked. Answers would be ignored.”

Up in London this morning I had a chat with a Fox. He smiled as we chatted about Davos on Drugs, but wasn’t interested in the appalling state of UK water infrastructure – but we should be! How has it happened – political failure writ large.

This morning I was up in London and found myself trying to explain markets to a curious Fox as I walked to the office. I kid you not. London’s urban foxes are not in the least afraid of humans. They tolerate us on their space. They would make excellent police informers: see the fantastic Rivers of London series of novels by Ben Aaronovitch. They watch and know everything – especially who might feed them. So, why not I thought. The fox seemed interested in my thoughts on why markets might be due a correction, but wandered off when I failed to offer him some breakfast.

Back in the real world.

Oh, the horror, the horror. Davos on Drugs and Dust has turned into a quagmire, and desperate tech-lords were forced to hike nearly 5 whole miles to escape the mud apocalypse. Some of them found their private jets had been cancelled – what could be worse? Of course, its not just billionaires who attend Burning Man – recent numbers show the bottom 20% of attendees earn less than 4 times the US average wage.

Some poor benighted attendees were left stranded when their cheap-as-Nvidia-chips $250k motor homes failed to deal with the mud – if only they could afford their own helicopters. None of these foolish Americans were wearing Wellington Boots -did their mothers teach them nothing? For those who did stay – what’s not to like about naked mud sliding in a gloop of human poo? Elon – you should try it.

I know what you are thinking. So am I. Will there be a benefit concert for Burning Man refugees? (And can we fire-bomb it?)

Meanwhile, and speaking of poo…

Hat’s off to BBC Breakfast for reporting from Langstone Harbour near Portsmouth this morning on the revelation the UK’s privatised Water Utilities have been illegally pumping untreated sewage into rivers and the sea out-with their permitted sewage discharge rights. Even when its not raining – they pump sh*t into our waterways. As a result of chronic underinvestment by the water utilities (which have prioritised dividends to their owners ) – nearly all UK rivers are polluted. Last week I had a horrible stomach bug I think I picked up swimming.

Who is to blame? Shareholder greed? Perhaps.

Or politics? The reality is these privatised public utilities get away with repeated polluting discharges because of chronically weak and ineffective regulation. Ofwat, the UK water industry regulator, has proved itself as much use as a chocolate tea pot in ensuring the UK’s multiple privatised water utilities deliver stakeholder value in terms of an improved environment, efficient infrastructure and customer satisfaction. The firms were allowed to debt load and strip the utilities. Now they have apologised and contritely offered to spend more on infrastructure repair – but charging consumers more!

How do they get away with it? It would be interesting to see a report compiled over 20-years ago for the Competition Commission warning ministers of the dangers of private equity asset stripping and debt-loading public utilities. The report is being kept confidential by government, despite the 20-year rule (whereby it should be released to the public). What does it hide?

The Guardian carried the story a while ago. The chap who wrote the report for the Competition Commission said:

“My real concern was about the financial structure of the proposed deal. In my view the transaction created an entity which would prove impossible to regulate. Large external private equity shareholders would load the company with debt and Ofwat inevitably would lose any regulatory control. For example, it would prove extremely difficult to ensure that water companies invested enough in sewage control. This report should be published in full now because it helps to show why the last 20 years of increasing private equity dominance of the water industry has proved so disastrous.”

The real issue is a failure by politicians. For the last 13 years we’ve had a Conservative government. (Other governments are available.) 13 years is more than sufficient time to turn an ailing economy into something strong and vibrant. Or, as we have seen, to preside over deepening wrack and ruin. Critical to the success of any democracy is effective oversight of the mechanisms of state by the elected representatives of the electorate. If politicians are not trying to make it work, what are they doing? (Oh, milking it for personal gain?)

During the past 13 years we’ve had 9 Secretaries of State for The Environment. None of them has lasted more than a couple of years. They are mostly famous for other things. They include such political paragons as Liz Truss, the disgraced Owen Patterson, Andrea Leadsom and even Michael Gove. The Water Minister is Rebecca Pow (Who? Not a question really worth asking.) She distinguished herself recently in Parliament when replying to a question about underinvestment when she suggested things couldn’t all be bad because the water have borrowed more than £60 bln from markets – which is about what they paid out in dividends to PE shareholders.

And that is as good an illustration of the problem as any..

Ministers are unqualified and/or disinterested to manage their departments or grasp their briefs because; 1) they are too busy pursuing their rise up the greasy pole of political preferment, 2) not intellectually up to the challenge, 3) lazy and/or 4) they lack skills or the sympatico to understand the motivations of the civil servants and regulators under their control. That’s basically the problem of why UK rivers are running awash in sh*t. Politicians failed to direct and empower the bureaucrates/regulators/civil servants to stop it.

At the next election – be sure to ask your MP about Water and how they are going to sort it. Ask how much the PE shareholders received in dividends and why you should be paying increased water rates.

What should we do? Renationalisation? Oh, we don’t want to scare off international investors – says Rishi. Why not? Its not like there is a single substantial state assets, company or business that hasn’t already been sold to overseas bidders in the UK – which is why the UK Stock Market has become such a ghost of a joke.

Much better might be some aggressive regulation and huge punitive fines and confiscations for failing privatised utilities. Time to go scare the fat cats.

Meanwhile, after being enthused and distracted by the BBC this morning, I shall return to the theme I was going to pursue this morning – Bad is Good, and Good is Bad – at a later date. Sounds perverse, but that’s the way the market plays these days. Some of it makes some kind of sense – we’re all aware that if a data release is stronger than expected, hinting at stronger corporate performance ahead, that’s probably a sell signal as it means higher rates. But, it gets complex when a collapse in corporate incomes, crashing consumer spending, and multiple bankruptcy events trigger a stock market rally – on the basis things are so bad, part of the market expects Central Banks to mount a 2008 style bailout.

What are markets really telling us about the economy? Consumer spending is weakening in the face of inflation, the rising cost of living and the surging cost of credit. Forget 5% bond rates – go figure what 30% interest on a credit card does. Corporate earnings and profits (different things) are under pressure. Lurking out there the perceptible threat of further bank weakness in the US.

My chum Julian Wheeler, our US stock picking expert, summed it up very well: “The US economy is the US consumer”.  I shall think about that….

Out of time, and back to the day job…

Bill Blain

Strategist – Shard Capital