The UK crisis: Questions that Must be Asked: How was it allowed to happen?

Blain’s Morning Porridge EXTRA – September 27^th 2022 – The UK crisis: Questions that Must be Asked: How was it allowed to happen?

“I’m the king, I can do whatever I want…”

This morning:  The UK confidence crisis is not over yet. Chancellor Kwasi Kwarteng is saying nothing, hoping for stability. The Bank of England finds itself providing top cover by its willingness to hike rates. The Treasury Select Committee should be asking what advice the OBR, Treasury, The Bank of England and the Gilts Office gave Kwarteng.

I must be on to something.

Yesterday and this morning I have received a string of phone calls and missives from senior bankers, economists and political chums asking, in roundabout ways, that I lay off Chancellor Kwasi Kwarteng: “Bill, cut him some slack, he’s only been in position 19 days, and you were the one writing Truss and Kwarteng has limited time to save the UK economy.” I countered that with, “Kwarteng and Truss claim a mandate from the country, and their party has been in power 12 years.”

Sterling and Gilts remain in crisis – supported only by the expectation the Bank of England is set to intervene with an emergency rate hike, while Gilts remain at pain level 5.

How did it go so wrong? Questions need to be asked.

It will be up to the UK Parliament’s Treasury Select Committee to examine how, and to ask why Chancellor Kwasi Kwarteng’s infamous Special Financial Operation, the not-a-budget, managed to trigger a massive, unprecedented global collapse in sterling, the Gilts Market and confidence in the UK.

In terms of Policy Mistakes it scored 11.

If the Treasury Select Committee are asking the right questions, then the answer they may find is that Mr Kwarteng – who counts a few years working as a junior analyst at JP Morgan and for Crispin Odey of Odey Asset Management (currently sitting on massive gains from shorting gilts) – apparently ignored advice given to him by Treasury officials, The Office for Budget Responsibility, The Bank of England and the UK’s Debt Management Office that his not-a-budget (which was unsupported by any formal review or analysis of the numbers) could trigger a sterling crisis.

If that is true – it confirms deaf incompetency on a massive scale.

Yesterday I received an email from a total fictious invented email address – one of these to hide your real email. It was from someone who clearly knew me. It said: “This does not reflect the discussions held at this meeting.” It contained a single link to the Chancellor’s recent meeting with the Governor of the Bank of England, Andrew Bailey.

• The link says: “The Chancellor updated the Governor on his growth and fiscal strategies, noting that reforms which create the conditions for a high-growth economy can help to alleviate inflationary pressures. He outlined the government’s plans to act this week in response to high energy prices, and reiterated that such action requires fiscal loosening in the short-term. The Chancellor confirmed that over the medium-term, the government is committed to seeing debt falling.”

That is a very carefully written minute of the meeting. It records everything the Chancellor told the Governor. It does not record what the Governor said back.

My question is very simple. Did BoE governor Andrew Baily warn Kwasi Kwarteng the massive new debt load, cutting taxes while raising interest rates, and the pointless irrelevance of ending restrictions on banker bonuses, and cutting the 45% higher earner tax-rate,would create a crisis of confidence in markets?

If the Governor of the Bank of England did not advise the Chancellor about the dangers and likely outcome of such policies, then we should be asking some serious questions about The Bank’s leadership.

Or did, as my source suggests, the Chancellor ignore advice he was given? That would seem entirely possible. Kwasi Kwarteng’s first act as Chancellor was to sack the permanent secretary of the UK Treasury, Sir Tom Scholar, on the basis he would probably not be supportive. Kwarteng has previously been described as “a man so fond of the sound of his own voice that his ears have been given a redundancy notice.”

I would also like to know exactly what advice the Office for Budget Responsibility gave the Chancellor?

I would like to hear what his own officials within the Treasury he runs advised him on the not-a-budget?

I think the Treasury Select Committee should be asking the UK’s Debt Management Office, the department of government charged with funding the UK’s borrowings in the Gilts market told him about the likely risks of funding massive tax cuts for the wealthy while doubling the UK’s funding requirement and bond issuance programme?

Kwarteng is a very clever chap – he keeps telling us so. I am absolutely sure he will have done his due diligence thoroughly to ensure his radical mix of funding increases to fund tax reductions was fully scoped, tried and scenario tested – which of course would mean it was the OBR, the Treasury, the DMO and The Bank which were incompetent in advising him.

Or did he just tell them, and walk away deaf to their warnings?

I suspect the latter…

Now he is trying to cover his tracks. There is a massive spin campaign underway to un-tarnish Kwarteng by the Tory establishment that elected him – (a minority of 113 MPs and 81,000 party members.) I am frankly surprised by the number of articles in learned Right-leaning newspapers about what a jolly-good thing Kwasi Kwarteng’s not-a-budget was. They claim any tax-cuts are good tax cuts, and how he should be praised for being radical, and how his encouragement of entrepreneurship by cutting high taxes and ending Banker bonus restrictions will support the Tory ambition of the UK becoming Singapore-on-sea.

They say he is being brought down by a conspiracy of lefty newspaper and media types, and ill-informed commentators like myself.

Bollchocks – its not pinko journalists, it’s the market that has spoken. It’s the market, not commentators, that crashed sterling and pushed up bond yields.

And it could get worse.

What would really, really turn the current crisis from one of simple blind arrogance and incompetency into something much darker would be any substance to the rumours swirling around that the abolition of the 45% tax rate was leaked to some market participants ahead of the mini-budget. While Kwarteng certainly did not understand just how bad the optics looked and how that might crash sterling, any mildly competent greedy city-professional who came into such information ahead of the market would be front-running with privileged information and would have immediately understood its significance and shorted gilts and sterling.

So who did Kwasi and Truss tell?

I am tempted to suggest the Tories pull the plug early, and ask Truss and Kwarteng to do the honourable thing. As a stop gap they could put Rishi Sunak and Sajid Javid into the 1 and 2 slots to try to restore some common sense… but it would be madness to even think it. The UK is wobbly enough..

Out of time – and back to the day job.

Bill Blain

Strategist – Shard Capital