Blain’s Morning Porridge Oct 13th 2022 – Part 1 – UK Riven by Internal Dissent – How Close to Dysfuntional is it?
“Macbeth shall never vanquished be, until Great Birnam wood to high Dunsinane hill shall come against him.”
This Morning: The headlines could not be bleaker in terms of open political plots within Government and The Bank of England undermined internally and externally. This is how nations fall – this is not what the UK deserves.
Apologies for the lack of Morning Porridge yesterday. There will be a two Porridges this morning:
- Part 1 – What’s happening in London..
- Part 2 – What’s going to happen next in markets… (which will cover the LDI pensions crisis and how to solve it, the coming crisis in ETFs, and the next apples to tumble… It should hit your mailbox later today… markets willing.)
(But first, I’d like to thank Paul and all his team for my monumental hangover this morning…!)
As we watched Gilts spin and the levels of disbelief spiral higher yesterday, I spent time listening to many very concerned folk. I drank a lot of coffees in the morning, and then a deal of wines into the evening. I consider myself relatively well connected with the market and the institutions of market stability – and, more than a few MPs read the Porridge.
I will write about Gilts, the UK and the wider markets – and how the UK is likely just the first domino to fall in this new financial crisis – in Part 2.
But first…. Here are my thoughts on UK politics.
The UK should be one of the most successful nations on Earth. We have a millennia of stability behind us, a rich history of success, a proud story of inventive and innovative entrepreneurial success, a sense of shared national identity the rest of the World envies, and we possess soft-power in excess. Yet we appear to be squandering it all.
Political competency is a key ingredient of a successful economy. Alongside a stable currency and a sustainable bond market, it’s the third leg of the Virtuous Sovereign Trinity that underlies all successful nations. There is a lack of clear vision in broken Britain.
Sometimes it takes weeks to learn the truth of what’s going on. Sometimes it takes moments for the whole story to become obvious. Yesterday left me convinced the new Tory government has lost the plot and is breaking the nation’s finances and future prosperity in pursuit naked political ambition survival.
There is no realistic growth plan. (The OBR is set to confirm that.) There is no plan but to cling on. Tory MPs are concerned it may cost their jobs. I care more about the millions facing penury, poverty and the loss of their livelihoods. Its frankly shocking.
I’m told the mood is something out the last days of the Bunker in Berlin. No 10 is playing with imaginary policies and unrealistic forecasts, undermining The Bank of England, and generally blaming anyone but themselves. Accountability and responsibility have flown out the window.
The consequences for the UK economy and our future place in the world in terms of trade, influence and soft-power will be enormous and very long lasting. More damage has been done to our national image than at any time in our long history. Once credibility in a nation’s political structures has gone – it could take decades to repair.
Consider this morning’s porridge a plea to put the UK back on track before irreversible damage is done to the economy.
Here’s what I learnt:
- Premier Liz Truss is utterly out of her depth and one of the Walking Dead. “Emotionally AWOL” I was told.
- Kwasi Kwarteng has become “toxicity squared”, furious the institutions of state and the imaginary “anti-growth” coalition of intelligencia, lefties and re-moaners have undermined him and briefed the markets against him. He’s gone a little bit Dominic Cummings; determined to pull down the whole edifice of UK financial stability to replace it with supporters more amenable to his “truths”. (He can’t accept his blithe assumptions about taxes and growth, taken straight out of Economics 101, have not been greeted with universal joyful acceptance.)
- Core support for the couple is diminishing daily – even supportive hedge fund managers can read the writing on the wall and are disassociating themselves.
- Despite the rising crises in Gilts, mortgage rates and the tumbling polls the Truss/Kwarteng axis will not listen, they will not turn again (lest it make them look even weaker), they will not reverse course.
- Their key “survival” ploy is to deflect blame. The Bank of England is the main target. They intend to force Governor Andrew Bailey to carry the can for their errors.
- The Tory hard-core have been briefed to blame The Bank at every opportunity.
- BOE Governor Bailey is also being undermined internally by disloyal lieutenants within The Bank. They have set out to contradict and confuse The Bank’s communications and policies to up the pressure on Bailey. (Hence yesterday’s Gilts confusion.)
- Kwarteng’s tactical objective is to sack Bailey, pin the blame on The Bank, and replace him with a supporter.
In short.. politics are rotten to the core. (I won’t even mention the number of times I was fed the rumour a national newspaper has a nuclear bomb of a story to release on the couple…..)
And just in case the mole hunters are wondering… my local MP isn’t on my list. I’ve advised our local Anti-Planning Group to vote Liberal if they want to stop number 1 Tory donor Persimmon turning our village into one of their bland housing estates. I hear he’s looking for a new job.
As for the Bank of England….
The Bank is not perfect. But it is solid. But it is being diminished – and that is a major risk to our future.
The Bank’s handling of crisis back in 2007 was flawed, its subsequent regulation has not been entirely wise or focused. It is less aware of the consequences of its actions on markets than it should be. It was slow to identify and address the real long-term inflationary threat – but who could have foreseen the Energy shock and invasion of Ukraine.
The distortions to market resulting from Central Bank monetary experimentation since the Global Financial Crisis in 2008 have been enormous – and although the Bank clearly understands the need to unravel the consequences and make sure they don’t happen again, I question their market “savvy” to fully comprehend how the market plays their decisions and pronouncements. I short, The Bank is orthodox, conservative (small c) and institutionalised. (Basically… the Bank needs traders and experienced financiers, not PPE graduates, on its markets desk. It has to lead.)
The Bank’s objective is financial stability – which by and large it has achieved. When the politicians of the day decide to destabilise markets – then The Bank’s job is to sort it. But when The Bank and panicked politicians are in direct conflict – there will be no winners.
Andrew Bailey may not be the most charismatic Governor of the Bank and there are flaws. No one is perfect.
However, I am absolutely convinced Bailey is a decent, honourable man in the very best sense of the word. Sadly he is being undermined from within and without.
If Bailey is pushed, it will be another massive Sell UK signal.
Five Things to Read:
Torygraph – Blame Game erupts over Pensions fiasco
Part 2 – Where are markets heading, will follow as soon as I find time to actually write it!
Strategist – Shard Capital