Blain’s Morning Porridge, September 20h 2022: Welcome to the New Age – Same Old, Same Old.. But Different!
“She visited the places that needed visiting and thanked the people that needed thanking….”
This morning– The Old Age is over, and its welcome to the new, which is going to be little different – just a lot more complex. Thriving in a confused new economy of energy scarcity, inflation, recession and geopolitical threat isn’t easy – as the UK is about to discover.
It was the lone piper playing from the gallery above the congregation that broke me. I’d watched in sorrowful pride as the massed pipe and drums marched the Queen to the Abbey, maintained my composure through the readings and hymns, but the Queen’s Personal Piper, Pipe Major Paul Burns, playing Sleep Dearie, Sleep at the end was just heart-breaking.
It was all magnificent. It was extraordinary. London was lined with troops in the uniforms of a bygone age – today, they will be back at work defending the nation. “Who dare meddle with me!” as the motto of the Highland Regiments has it.
The World changed yesterday. It was the end of an era – not just for the UK, but for the globe. The Queen was the last of her generation at the highest level of power linking the entire global community of nations to the World Wars of the last Century.
Time to move on – into a new age.
Geopolitics remains the Great Game, but its far more nuanced and complex. The challenges for today’s statesmen and women are proving very different than 150 years ago. Empires will continue to rise and fall, but large armies are no longer the critical aspect. Its economic strength, literacy and power that will win future conflicts – in terms of power projection, influence and the skills to combine innovation, logistics, training and motivation necessary to prevail.
As always we need the other side to drive ourselves. The world is quickly realigning into two camps, the coming struggle of the age: Capitalism vs Autocracy.
Which system is likely to perform better in the long-run? The West is waking up to the new reality from a position of weakness. Europe is paying the costs of allowing Russia to capture its energy security. The UK is still riven by the insane politics of Brexit – the Jacob-Rees-Moggs of the Brexiteer 1940’s world-perspective are unable to fathom out the need for reproachment with Europe. The US is in danger of being consumed by populism and political rancour.
I’m therefore highly confident it will all sort of come together. It will take time, effort and many more mistakes, but the West is more likely to prevail on the back of Demographics and Governance – which is a story for another day….
Support for Russia at this week’s UN meeting in New York will be interesting. China and India left Putin flailing last week in Samarkand in the wake of his Ukraine embarrassment. How many other of the 35 nations that abstained from comment or protest when Putin invaded Ukraine will waver? No nation, especially in the Gulf, want to be on the sharp end of US Sanctions for laundering Russian money when Putin is looking increasingly weak.
Of course, the West is hardly a united front. All eyes on the Italy’s election on Sunday, where we will get the 68th government in 76 years! The Centre Right coalition headed by Giorgia Meloni (who confusingly leads the Brothers of Italy party) could make the EU’s problems with Hungary look a mere trifle. The new Italian coalition is taking the view “sanctions hurt Italy more than they hurt Russia.” Italy is Europe’s weak link, and a potential crisis for Europe’s cobbled together energy strategy.
For the rest of the world picking sides will be the issue.
There is a global recession just around the corner – and nations understand what’s triggered it; China growth and Russian’s war. Around the globe Emerging Nations are likely to suffer deepening economic hardship, and while many are likely to try to blame the West for the pain, (dollar strength will cripple EM), to cut ties would be economic suicide. How many nations will want to take the Russian option –effectively cornered within the walled-in China Co-Prosperity Sphere, where China is the sole price setter?
Back to current markets – the world opens this morning on a new post-Elizabethan age.
The key events will be the Fed and Bank of England hiking rates this week, dollar strength, and what the bond market is telling us about recession. Inverse yield curves, and rising rates. Treasury yields hitting new highs, and junk bonds finding limited demand even at double digit yields. In bonds there is truth. The truth is pain is coming, and a shake out. It’s happened before, and it will happen again.
It’s a critical week for the UK. There are so many contradictions apparent:
- The Bank of England wants to start quantitative tightening – selling down its gilts book. If the aim is price stability, then selling bonds into a market about to face an unknown new quantity of new gilts to finance is counter-intuitive – if you assume the Treasury and the Bank of England are both playing for the same team.
- If global investors don’t turn up for gilt auctions, the Bank of England may be forced to restart quantitative easing – by buying up the new supply of gilts to finance the Energy Bailout. Without knowledge of the new financing need, it may become necessary. Cutting interest rates with QE while raising interest rates. Nice.
- Until Friday’s “Fiscal Event” – Kwasi Kwarteng’s much anticipated mini-budget of tax cuts and spending promises – neither the Gilts market nor the UK’s Debt Management Agency knows what the new UK borrowing requirement is likely to be. The market, being the market, will usually Assume the worst – and sell Gilts.
- And since we’re flogging gilts, and no one wants to buy them, the currency will collapse a little more, meaning we’re even less likely to want to own GBP denominated bonds – and the ECB and Fed are both hiking rates, while the Bank of Japan is getting ready to support the Yen, meaning the UK heads towards a full scale currency and bond crisis..
Or, maybe, our new Chancellor is going to pull some rabbit from his hat that will persuade global markets this fourth attempt at a credible UK government since 2010 has got something new to offer?
I can’t wait…
Five Things to Read Today
Out of time, and back to the day job…
Strategist – Shard Capital