The Political Threat Board Flashes Red

Blain’s Morning Porridge, April 11 2022 – The Political Threat Board Flashes Red

“I don’t expect to be buried in the UK, so can I have a tax-rebate please?”

This morning: Populism is a massive threat to markets. Inflation, tax-hikes, petrol costs, poverty, political mismanagement and a host of other failings could further destabilise the West, while markets seem determined to stay euphoric whatever the evidence to the contrary.  

After a week out of markets, I’m back at my desk trying to make sense of it all – it’s not a pretty picture. There are reasons to be concerned, but as ever, remember: “Things are never as bad as you fear, but seldom as good as you hope.”

First up, last week I did a podcast with Macrovoices from my cabin going up the River Nile. I was honoured to contribute! It’s a great programme; smart and interesting market practitioners interviewed by Erik Townsend covering critical issues across the Macro spectrum. Give it a listen on – https://macrovoices.podbean.com/e/macrovoices-318-bill-blain-inflation-bond-yields-esg/

Back in the real world, my Threat Board is flashing multiple red danger signs – but we can’t worry about everything. We need a triage process to strip out what will be painfully real as opposed to simply real. As I spent today catching up on an improbable number of emails… I’m thinking about the following priorities likely to swing  market sentiment:

• European politics and populism
• Energy and Food Inflation
• China Covid Lockdowns and Supply Chains
• Euphoric markets

European Elections:

Don’t discount European Populism. European Energy inflation, (especially the critical signal to be given by the German inflation number), food insecurity, rising poverty and a looming recessionary threat will be a fertile breeding ground for populism this summer. In 2 weeks we will likely experience the European equivalent of a political meteor near-miss.

The timing of the French elections has been stupendously lucky for Emmanuel Macron. He will likely beat Marine Le Pen by a slim 3-4% margin.

Had the election been just a month later, soaring food costs, rising petrol prices, and domestic inflation (despite the French government is wisely absorbing much of the consumer home energy price shock), will be dominating the front pages, and could have rewarded Le Pen’s focus on the “people” and found winning resonance across the French electorate.

A Le Pen populist victory in France now looks unlikely, but the vote will demonstrate just how scarily close it could be to happening. If it can happen in France, it can happen elsewhere. (As it did in the UK over Brexit, and Johnson’s Red Wall win in 2019.) I predict a a tidal wave of political strife this summer will make Europe’s resolve to face down Russia look questionable.. dragging on the current uncertainty.

Yesterday, the French left-wing took some 22% of the vote. In the past that vote has invariably supported whomever the Anti-Le-Pen, Anti-National Front candidate is – systematically crushing the Le Pen’s every five years. But the numbers are rolling Le Pen’s way – reflecting their/her moderated populist message. Polls now say a significant part of the left-wing vote will go Marine Le Pen’s way this time.

Back in the UK…

The UK faces an equally painful battle with inflation, collapsing consumer discretionary spending, rising regressive taxes and a growing sense of political wobble. I’m not the only soft Brexiteer wondering WTF went wrong. I chatted with a very senior Tory last night seething about the current crisis – describing his colleagues as economic illiterates and little more than thieving carpet baggers. Harsh… but fair.

 As the country staggers towards multiple crises, I wasn’t particularly surprised to read last week’s tale of how the Chancellor’s wife was Non-Dom tax-registered. She’s not broken any laws. But the optics are shocking.

Mr Sunak wants a formal inquiry to uncover the leak. We want the truth. His demands simply exacerbate how his profound political misjudgement is mired in entitlement and inexperience. On the basis there is no decency in politics anymore, he seems to think it’s perfectly normal for a politician to propose crippling tax-hikes and consign hundreds of thousands of kids to poverty while bleating about how unfair it is his wife is being criticised for dodging £4 million of taxes while living in Yorkshire, but not being domiciled there…. ?

Sunak did a fine job during the pandemic. But that was then. This is now. The game has changed. I got into to terrible trouble a few years ago Sunak was suddenly appointed Chancellor by Boris – who sacked previous chancellor Sajid Javid because he had the temerity to stand up to him and Cummings.

Back then I raised questions as to how an unknown political arriviste could rise so invisibly to the very top of Treasury and Politics in just 5-years. I was suspicious because his father-in-law is an Indian billionaire oligarch with multiple fingers in multiple pies, and that Tory MP William Hague suddenly resigned the safest seat in the land which was then gifted to Sunak. I was accused of everything from racism to envy.

Something is not right.

Sadly, I guess this will all blow over. We will be assured Dishy-Rishi’s blind trust in his former hedge fund, Theleme Partners, is properly blind, and that we should not worry how its windfall profits from the Ukraine influenced rise in Aluminium prices have influenced his wealth – because it’s got nothing to do with his incompetency to run the country’s finances. And if he failed to mention his wife’s holding or status on his register of interests… well… that’s all forgiveable…

On what basis?

This UK scandal will simply fester, and further reduce trust in politics. In a better world there would be a competent opposition tearing the strips off them and getting ready to govern. Instead the UK has the toothless, moth-eaten Labour party….  Just think what could happen if the Labour Party was even moderately competent.. They have 2 years to make their point.

Meanwhile.. Recession or Stagflation?

Omicron is now rife across China. China lockdowns will not only impact domestic consumption, but also global supply. It’s a given. Despite 22 million truck drivers, China is about to suffer something akin to what hit the west last-year – diver scarcity caused by aging truckers retiring, the swift spread of Omicron and absolute lockdowns meaning drivers can’t work, and the time it takes to train new drivers. Increasing domestic Chinese friction is bound to roil global markets.

Interestingly, I read Walmart is now proposing to pay its’ lorry drivers in the US a $100k base wage – reflecting their understanding of how the economy really works, and at a stroke imposing further wage inflation across the US retail industry. It’s another clear signal of how non-transitory the consequences of rising inflation will be.

The likelihood of recession and/or stagflation is rising…

But you would not know that talking to euphoria-snorting Equity analysts.. I was reading an investment bank reort setting a new $1200 target on Tesla because of its global leadership EV status being “unassailable”. It references self-driving taxis… sure.. yawn… They aren’t commenting on the rising price of lithium, or the problems highlighted in weekend papers of getting a phone signal to activate mobile charging stations – you need to use the APP.

At some point… reality is going catch up and eat expectations…

Finally…

Many readers will be familiar with my “Ukrainian Chicken Farm Moment” story. It’s an anecdote about how a single moment can represent the cusp between bull and bear markets. In the case of UCFM it was a bond issue for the said Ukrainian Chicken farm that was massively oversubscribed with the roadshow packed out. Investors were furious to be scaled backed massively when the bonds were allocated at launch. Yet, just a few weeks later the deal price collapsed when Avian Bird Flu/Sars was announced in Asia, and it turned out to be an uninsurable risk.

Thanks to my chum Mark for spotting a modern UCFM in the Wall Street Journal last week… Four Million Dead Chickens tell a grim story.

Five More Things To Read This Morning:

WSJ – Why Stocks are Rallying in the Midst of a War and Soaring Inflation

FT – Rishi Sunak has mishandled the controversy over his spouse’s tax-affairs

FT – Global regulatory body warns on liquidity risks in corporate debt

BBerg – ECB Discord on War Impact Masks Consensus on Need for Rate Hikes

BBerg – China Food Security at Risk From Growing List of Farming Issues

Out of time, and delighted to be back at the day job..

Bill Blain

Strategist – Shard Capital