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:
BBerg – Kwarteng Warns BOE to Blame if UK Markets Slide Next Week
FT – BoE governor gambles by insisting bond-buyng operation will end
Torygraph – Blame Game erupts over Pensions fiasco
Garuniad – Liz Truss in Fresh Peril as senior Tory MPs round on her over economy
Thunderer – Rip up your tax plans, top officials urge Liz Truss
Part 2 – Where are markets heading, will follow as soon as I find time to actually write it!
Bill Blain
Strategist – Shard Capital
Good piece. The only problem with the analysis is that Bailey is an easy and convenient target simply because he is not really up to the job. I suffered with him as ultimate boss when he was in charge of the FCA and it was hardly a success. Doesn’t truly understand markets and your point about ignorance of his statements’ effect on markets is bang on. If Mark Carney was still in charge, the governor would not be such an easy scapegoat.
Andrew
I have heard others say similar things – and, as you say, that makes him an easy target. But I also believe him to be an honourable man.
THe key issue is the role of The Bank of England Governor needs to be above mere politics. He needs to be seen to be independent – a sage, wise and prudent financial leader. And he needs the loyalty of his team – which is undermined. I suspect they’ve been promised promotions and his job for undermining him.
So, depressing
Bill – I get the impression listening to both Times Radio and BBC4 that most experts they are interviewing agree that cutting taxes a la Milton F is the only way forward but that it needs to be done in a way that doesn’t surprise the markets. Would Labour or an alternative Tory team be likely to simply continue with the Truss plan, albeit in a more market friendly way?
Hi David
Nothing wrong with cutting taxes – that is a good.
But it was badly comminicated, ill-advised, and not backed up. It should have been phased – the energy bailout first, the annoucement of a full growth strategy costed, detailed and with progressive tax cuts (rather than regressive) to come. Instead the market got headline and irrelevant banker bonuses and the 45% rate – and saw through it as shallow and foolish.
I think there was a much better solution than just cutting taxes. A mix of progressive tax cuts for the poor, windfall taxes on energy (with the incentive of new gas licences) and focusing the possibilities of QE to finance the energy bailout with Energy Bonds to be funded by The Bank. Consequences, yes, but better than funding short-term handouts to the wealthy with long-term debt to be borne by the poor (in terms of higher future taxes).
Rishi Sunak had market credibility – which would have helped.
Kwarteng is now a joke.
Bill, Your friend David Murrin has been loudly calling for a transition from linear thinking to lateral thinking within our government for a while now, and one of his associated pillars is lowering taxes substantially. It looks like Truss and Kwarteng listened and acted, and are now being punished by the market. How do you square the diverging views? Bad luck, ham-fisted approach, misguided policy, or all of the above?
Generally I agree with David Murrin. What we actually need is pragmatism in the institutions of state – I don’t hold with full-on disruption – that would too disruptive. We need institutions aligned with achieving the targets of their elected ministers, not blocking them. But their experience and expertise needs consideration. Its a balance.
As I’ve said below, I am all in favour of lower progressive taxes – but this was an utterly ham-fisted approach baked in ignorance and arrogance. Kwarteng refused to listen or to take advice.
Now its backfired on him badly.
Bill,
While I share your feelings of angst the situation in the UK is not so dire if viewed in a global context. We live in strange times which have given rise to stranger leaders.
In my country a blithering idiot was, and likely will again become, our president. He is aided and abetted by a morally corrupt Republican party. In the interim our country is led by a gentleman with dementia, surrounded by sycophants. Russia and China are ruled by megalomanics and the EU by self serving bureaucrats.
The UK is blessed with a Parliamentary form of government which facilities defenestration of failed leadership.
As for Truss and Kwarteng, it brings to mind the words of Winston Churchill:
“Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.”
Trump v2.2 is tomorrows problem. Kwarteng is todays!
Bill – are you building up the suspense for part two here or did your hangover get the better of you?
Part 2 got overtaken by events and leaks about the U-Turn… so I went for a swim instead to see what pans out!
The UK certainly looks to be headed for terrible economic times. Perhaps the only consolation could be that this might usher in an opportunity to improve the UK’s democracy.
The Tories look to have wrecked the economy, imposed horrid social conditions and inequality together with unbelievable environmental damage. This might encourage voters to bring in a new government, perhaps even a Labour majority at the next election. The new government could theoretically change the First Past the Post (FPP) voting system to allow better representation in the Parliament.
The current UK Parliament is clearly unrepresentative. In the last election the Conservative Party gained 43.6% of the vote but was allocated 365 seats. On a proportional basis they would have only been allocated 283 seats. Clearly there is an underlying bias (gerrymander) resulting from the FPP voting system. If a new Labour Government changes the voting system it could create the conditions to allow better government to arrive. The underlying assumption of Tory government would be broken.
It would still be necessary to find and promote capable and practical politicians who are prepared to repair the economy, general society and the environment – but at least the environment would be there to allow better government if such politicians could be found.
Paraphrasing Bill, one might say “The UK political system has but one objective ….”.
How come we’re all feigning shock and horror now when we went, eyes wide open (or should that be shut?), into electing Liz Truss as the new leader of the Conservatives? Now, who is to blame?
Great question to be directed to the 81,326 members of the Conservative Party who voted her into the Prime Minister’s office.
I certainly never voted for her.. although I do have one chum who admits he did… and is profoundly sorry.
These people decided she offered stronger leadership and credibility than Rishi Sunak – on what basis we simply don’t know.
I think we now need to seriously question how that was allowed to occurr in our parlimentary democracy. These 81,326 generally older, wealthier, white men are not representative of the nation of a whole. She did not even have the majority of her own parlimentary party behind her.
I guess they voted for what they wanted. What they got was a whole new level of incompetence. A lesson we should never forget.
Bill
Didn’t Bailey get the job originally because he was amenable to Boris Johnson, and his Brexit desires? Possible I am mis-remembering.
The past is darkly remembered. It may be Bailey got the job because Boris was concerned a charasmatic leader like Carney would make him look a bumptious fool in matters financial…
It matters not who the governor is, but that he is the governor.
Bill