The UK’s Financial Sector is an industry – but is mired in the treacle of its’ past

Blain’s Morning Porridge – July 12^th 2023: The UK’s Financial Sector is an industry – but is mired in the treacle of its’ past

“The Road to Hell is paved with good intentions.”

The UK is focused on all the wrong things – as the economy stumbles towards disaster, we’re fixated on sleaze. The Chancellor thinks he can fix it by directing the financial sector, confirming how little he knows about the City.

Sorry for the lack of porridge yesterday, but an early train to London nearly did for me….. It was a nightmare as nothing went wrong. It left me tense, nervous and emotionally exhausted waiting for points failure, landslides or, maybe, a Zebra on the track. (Yes. It has happened.) It was even worse on the way home. A moment of relaxation as something broke at Waterloo bringing a familiar sense of tedious inevitability – but they fixed it! We were only 12 mins late. It left me shaking with train MTSD.

I am more and more concerned I am living in a mad house. 

We should, of course be discussing the long-term economic consequences of the UK’s empty piggy bank, and the limited policy options open fiscally and monetarily. The Government’s plan is to slash another £2 bln off spending, cut borrowing, hold pay rises below the 6% recommended by independent pay-review boards, and remind everyone of the need to suffer as “inflation is the number one priority.”

But, no sooner had UK Chancellor Jeremy Hunt called for wage restraint, before the numbers showed Public Sector wages rising at 6.5%, the fastest rate in 22 years (private sector wages are up 7.3%). UK insolvencies are at 10-year highs. Mortgages have risen to 6.66%. We have the highest taxes in recent history. Or maybe I should raise how UK pension savings underperform other nations? Ouch. Economically, the external verdict on the UK today is: cluster***k – but don’t worry.. the IMF thinks we can avoid recession… just.

Yet, the domestic UK news last night was dominated by the 5^th day of a 24 hours coverage of a non-story that an unnamed BBC personality is a bit of a nasty pervert. Surprise me. One might almost think the antics of the Sun, The BBC et al…. might just be covering up something else. What else has been happening in the background – what something much, much worse might we all be missing that’s hiding in plain sight?

Hmm..? What could it possibly be…? I await this week’s Private Eye with interest…

I can’t help but wonder if we’ve got our priorities wrong. The BBC personality story has been whipped into a frenzy about an empowered entertainer wrecking some young person’s life by paying them (a lot) for “explicit photos”, and reacting angrily to the threat of being exposed on a dating site by someone he never actually met. Sex has always sold well. If buying explicit photos is a crime – arrest everyone in the country who ever nicked a Girly Mag from the top shelf (I confess: John Menzies, Barnton Roundabout, Edinburgh about 12 years old), or opened YouPorn. Subscribing to Only Fans is not yet a crime. The whiff of money, entitlement, elite failure, and prurience pervades the whole thing. Even the young person at the centre of the allegation says it’s nonsense.

Yet, all around the country there are hundreds of thousands of honest, good people who have been genuinely bullied, sexually harassed, had their confidence gutted at work, by empowered over-promoted managers, many to the extent they can no longer function. We don’t see their ruined lives in the headlines. We don’t hear how company grievance procedures deliberately stretch out the pain and misery in the hope the victims will give up, resign and walk away. That’s what we should focus on – the G of good corporate Governance.

Enough about wrong priorities…

The UK’s political economy feels a bit like a nest of wasps at the end of summer.. directionless, bitter and angry. It’s not surprising – these are the end-days of the Cameron-Osborne promise of Britannia Resurgent that began with the 2010 election. That cycle is over. The last 13 years hasn’t quite been the idyll they expected. It gets worse by the day – it will continue to tatter and fray till the next general election. Premier Rishi Sunak has been smiling manically through meetings with President Biden and at Nato, but the look in his eyes says…. “please… make it stop..”

Although sterling is on a tear due to high interest rates, the UK’s stock market remains officially the least popular on the planet. And that’s a marvellous thing for insiders– it means the UK is cheap. Cheap means tawdry in the minds of most international investors. A glance at the UK’s decaying infrastructure, political embarrassment, the spiralling black hole of sunk hopes and ambitions that Brexit has become, and the general sense of doom and gloom, and who a buyer would be?  Again.. it keeps opportunities cheap, and keeps away the competition. (My point? The UK should be on buy lists!)

But what is the chancellor focusing on?

Plans to boost the nation’s fiscal credibility? A carefully costed public works programme to rebuild? Policies with the heft to restore our tarnished virtuous sovereign trinity of a stable currency, a sustainable bond market and political competency? Nope. The game is called clinging on.

Hunt wants to restore the Glory of The City Of London, and make the markets fit for purpose… a plan that fills me with dread because any attempt to make markets do what politicians want is a guaranteed fail. Hunt wants a strong City to keep the UK relevant, and for markets to bail out the government’s empty pockets by investing in Broken Britannia.

I suppose the £750mm Thames Waters’ disappointed owners have just poured into the leaking sieve of a firm sums it all up. You can imagine the sales pitch:

• For Sale at Auction: UK – a fixer-upper. A rare opportunity to acquire this grade 2 listed country requiring renovation. Comes compete with a couple of palaces and monarchy, but work needed on services, security and broken sewage systems. No Planning Permission. Priced to sell.

Chancellor Hunt’s Mansion House Speech on Monday night – the big set piece of financial intent and policy as the Chancellor regales City Bigwigs with his expectations – was a damp squib. Hunt sloughed out a slew of policy noise about making the City better, more accommodating and restoring the UK’s financial sector to its traditional place at the forefront of international finance. The flagship announcement was a voluntary agreement from big UK asset managers to put 5% of their investments into UK start-ups and SMEs. He made comments about the need for “evolution, not revolution” to avoid charges of telling the City what to do…

Hunt was listened to …. politely. The audience were not particularly engaged. They would much rather have been listening to Chancellor in-waiting, Rachel Reeves. No one has particular faith in the current policies – everyone knows Sunak and Hunk are straight-jacketed, entrapped and entangled in the aftermath of the Trusster***k.

Not, that Hunt was even addressing real financiers. Today’s City bosses are most likely to risen up the professional ladder through a career in business consulting, compliance, accounting or risk-management (aka risk prevention), than ever getting close to actually trading anything, designing a complex hedge strategy, dealing with clients, or actually doing any real finance. The smart “leaders” in the City today are unlikely to be financial entrepreneurs, but are experts in the arts of bureaucracy, regulation and efficient form filling – their careers have been about polishing the handles of the big brass door.

When I was a lad I served a term
As office boy to an Attorney’s firm.
I cleaned the windows and I swept the floor,
And I polished up the handle of the big front door.
I polished up that handle so carefully
That now I am the Ruler of the Queen’s Navy!

Meanwhile Mad Lizzie is in the headlines herself – launching a commission of 13 tame economists to back up her pro-growth, pro-competition reform of the UK economy. And the absolutely crazy thing about it is….. Lizzie was right. The UK needs a low tax, high growth, innovative, entrepreneurial economy to restore itself. The remarkable success (sarcasm alert) of her unfunded tax cuts, money printing, tax-give-aways-to-the-rich, trade surrenders, and planning-to-the-highest-bidder policies means that in a nation of some 60 million people, she would be 60,000,001st person you’d ask.

Hunts plans, the Edinburgh Reforms et al, and all the other recent noise about restoring the City at the pinnacle of global finance miss some pretty key points. You can’t just talk the financial sector back into life. It needs a vibrant economy and a steller investment community to function well.

The multiple problems of UK finance: the declining heft and significance of the FTSE, the dearth of IPOs, the dimming of underwriting, and the treacle like bureaucracy the City now swims in, have made the Square Mile a dull place in recent years. The solution – ripping up decades of Brussels rules may make a minor difference, but will effectively confirm the UK wishes to remain outside Europe’s capital markets – which we once dominated. It could backfire – putting the UK down a very limited domestic future financial path.

The reality is you can’t regulate, speech-ify or talk financial services into success!

Finance is an industry – to thrive it needs to be smart, clever, and inventive to meet its objectives of providing good returns. It needs skill to innovate and develop exciting and effective new products and demonstrate their success. For centuries the UK achieved most of these things, sitting at the centre of global trade fuelled by the largest and most diverse empire. Yet, its greatest moment came after the era of empire – around Big Bang, Yuppies and Big Hair – when offshore dollars allowed London’s financial district, the City of London to dominate global financing.

What have we got today? A financial sector that underperforms relative to global peers? Dominated by big firms that are only getting bigger and more and more bureaucratic? And an arthritic economy? Ouch.

Five Things To Read This Morning

WSJ                              Is China Mired in a “Balance Sheet Recession”?

BBerg                           China Regulator Asked Banks to Respond to Bearish Goldman Report

FT                                 The Future of UK Pensions: delayed and confused

FT                                 The new era of big government: Biden rewrites the rules of economic policy

Torygraph                     Inside the murky world accelerating Russia’s economic meltdown

Out of time, and back to the day job

Bill Blain

Strategist – Shard Capital