Blain’s Morning Porridge – August 19 2022:
“Tell them the North remembers. Tell them Winter is Coming.”
This morning. The outlook for the UK looks increasingly grim. There are few reasons to hope a new government can reverse the mounting consumer fears, stagflation and the growing sense of decline.
Yesterday was cold, wet and grey. The sudden end of the glorious summer highlights how dark and bleak the mood in the UK has become. UK Consumer confidence has collapsed to levels not seen since the 1970s. London has ground to a halt with tube and rail strikes. Its not just the cost of living crisis – which, to be blunt, has only just begun and will get much, much worse as winter deepens– but folk are losing confidence in the broken mechanics of the economy, the absence of leadership and a growing sense things won’t get any better.
The country feels like its sinking into a treacle of energy-sucking, suffocating despond. Everything in Britain feels broken: the NHS is too crowded to treat patients, excess death rates show untreated cancers, heart-disease and stokes from lockdown now far outnumber Covid deaths, the police are so overloaded they have stopped even bothering to investigate crime, while airports are blocked, trains don’t work, and it really doesn’t matter because you can’t get a passport or driving licence renewed. As the rains come down, we’re under threat of dire authoritarian punishment if we dare use a garden hose – although to be fair, who is going to arrest you?
Thank heaven we’re about to get a new prime minister – SARCASM ALERT.
Do you really expect a bright Sun of Economic Hope to suddenly come up on Sept 5th? If so, go see a shrink – if you can get an appointment.
Liz Truss – nailed on as the winner and next Prime Minister- will be taking office early next month, and the expectations could not be lower. She’s being painted as lacklustre at best – and I fear that’s a severe overestimate, but please surprise me! I still have little idea what she stands for – but the folk backing her, and setting her narrative might. I have no clue what her secret sauce to reanimate the UK is. Thus far, all the noise of has been about playing to the 160,000 wealthy, elderly white Tory men who have the vote in the leadership contest, rather than the 60 million Brits she will notionally represent.
Her announced policies, like merging banking regulator, the PRA, into the FCA, are pointless tinkering at best. But it makes a point – her overriding concern in office will be ensuring others carry the can for the crisis, so first up against the wall will likely be Andrew Bailey, Governor of the Bank of England, and the Bank’s notional independence.
If what we remember about the great recession of 2022-2025 is it was Bailey’s fault – then the history books will need rewritten.
What the nation needs as we sink into the deepest recession in living memory is a Government of Talents – not a bunch of middling political hacks, or a fourth somewhat pointless Prime Minister in a row.
Maybe Liz Truss will surprise us – but it feels unlikely. Still, we live in hope. UK Politics will remain in thrall to Brexit (the dark, malign canker festering at the heart of the UK), which will continue to dominate the agenda and eat away the nation’s trade and export position – to engage with Europe to find a mutually beneficial compromise is utterly unacceptable to the TRG Taliban. Expect lots of union bashing for their temerity asking for pay rises as inflation remains stubbornly strong. Little will be done to reinvent, innovate and rebuild the broken institutions of State.
The core goals of the new government will be short-term survival and looking a little bit better than the opposition Labour party – because all that matters is winning the next election in just a few years time.
The next two years will not be a time of economic innovation. In Germany, the government recently slashed the price of rail travel, and it had an enormous positive effect in terms of long distance travel with multiplier effects from domestic tourism and work. In Germany a monthly railpass anywhere costs 9 Euros. In the UK it costs me nearly £100 every time I go to London.
I said it was bleak.
A fund manager asked me for my views on UK Bonds yesterday – my answer was relatively less bad than the outlook for UK stocks. At least with Gilts you are likely to get your money back – albeit Sterling will probably be much, much lower. As for UK mid-caps and SMEs, which have been on a run, it’s likely the coming recession will see them suffer. Time to go defensive in UK stocks. The UK’s Virtuous Sovereign Trinity may be tested – the mechanism whereby the political stability and effectiveness of a nation, its bond market and currency form a strong tripod. If any leg breaks – then it spells deep, deep trouble.
But, not for me the misery of UK politics… last night I snuck off to Salcombe, the jewel of the Devon Riviera where I inadvertently came close to triggering a civil war. The greatest divide in UK society is the Cream Tea. Does the Jam go on top or the Clotted Cream, or the other way round? Cornwall and Devon have been in state of cold war over this critical distinction for decades. I did the Cornish thing – Cream on top of the Jam. It makes perfect sense. Devon folk were horrified. Jam goes on top of the crème in Devon. I had to pay a considerable forfeit, hence this morning I am struggling with a H2O/C2H5OH electrolyte imbalance. Ouch. If anyone ever offers you Devon Rum – run.
However, I did find myself sitting with some very interesting people. To dine with one economist could be considered a misfortune. To sit with two looks downright careless, but to sit with three – well that’s asking for confusion. 3 economists – and at least 5 contradictory perspectives on where the UK economy is likely going, with myself throwing in some random distractions.
Surprisingly, the most right-wing inclined member of our informal brains trust was of the opinion the correct UK policy now is no intertest rate hikes at all – they are the wrong response to the wrong signals – but a massive economic stimulus to avoid a devastating and deep recession. “Ride inflation, because you can’t control it”, he said. Inflation has been triggered by an exogenous energy shock, but to try to cool the economy by inflicting monetary pain to stem demand will simply exacerbate real inflation in the form of wage demands and perceived shortages driving up prices – he also sagely noted how the big supermarkets have quietly withdrawn their cheapest economy brands, taking advantage of inflation to boost their margins.
The second economist took a very different view: speed is of the essence, the BOE has moved too slowly, policy mistakes make things worse, and now we need immediate austerity, tax neutrality, and interest hikes to swiftly re-balance the economy and impose control. Inflation must be brought down swiftly, or it will become entrenched, and have massive long-term consequences. Wages must be constrained – frankly the best way to calm inflation is an old-fashioned scare-the-bejesus out of workers sense of job security to undermine wage demands. She balanced her draconian measures with serious tax hikes on the uber-wealthy, proposing new property taxes on anyone with second homes or leaving the country to escape punitive taxation.
The third economist was looking at the long-term decline in UK productivity and wondering what policies are possible now to put the UK back on track for a prosperous economic future – but concluded we will remain in fight/flight mode with short-term fire-fighting on recession, wage inflation, consumer crisis and election cycles, means it’s all going to be about satisficing and short-term policies with damaging long-term consequences.
In short.. its messy out there..
Out of time, and have a great weekend..
Bill Blain
Strategist – Shard Capital
22 Comments
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Once it was QE, now it is constrain wages. No wonder no one wants to work anymore.
People want to work, but they want a fair wage and to feel valued by their employer. This was always going to come to a head when firms are posting increased profits and giving their executives double digit pay rises year on year (whether they performed well or not), whilst the average worker saw their pay fall in real terms. Inequality has been underestimated as a major cultural and social issue, and now the chickens are coming home to roost.
I find myself astonished to agree with your ‘right wing’ economist. To increase interest rates to deal with exogenous shocks is misguided, will misfire and bring misery, to employ all the ‘misses.’ Labour seems to lack an ambitious vision but at least may introduce competence and integrity in two years time.
Yep – i though he is probably on the ball.. and folk are listening…
We now even have record breaking gloom! (Although it doesn’t mention when records started)
https://www.telegraph.co.uk/business/2022/08/19/record-breaking-gloom-grips-britain-ahead-nightmare-winter/
Early 1970s I think…
The clotted cream replaces the butter, therefore it clearly goes on before the jam. I am a Devonian (or should be).
Wrong and wrong… you, dear Julian, are a Londoner..
I don’t at all disagree with much of the above, except that reading it in isolation, like listening to the BBC News, gives the impression that we are quite alone at the bottom of this deep dark hole. Which is simply not the case since the strains on the Euro caused by the extra borrowing needed for example to subsidise electricity prices in France are going to be enormous.
Also Starmer’s proposal to freeze the price cap for just 6 months at enormous expense just doesn’t make sense since it would tend to shield consumers from the real cost of gas and electricity. What would he proposed for the following 6 months and beyond when he has then already used up his proposed one-off windfall profits tax.
We once thought that Brexit would free the U.K. from the EU’s dictatorial stranglehold but alas we are still being ‘ruled’ by the same Davos commies. What’s needed is a ‘great reset’ of the whole damn system.
We are rapidly approaching (may have already reached?) a point where a substantial proportion of the workforce can barely afford to eat, heat or travel to work and certainly not all three at once. The minimum wage is not enough for an even half decent standard of living. The causes are many, various and well-aired both here and elsewhere. There is no solution other than an increase in wealth generation and an equitable distribution of that wealth. Reshoring of productive industries, nationalisation of utility companies, windfall energy taxes would be a start followed by a long term plan to build a (smaller) sustainable economy than the QE fuelled illusion of prosperity we have had since the GFC. None of our present crop of policy makers look remotely capable of understanding the problems let alone building a political consensus and then implementing effective long term measures. These are bleak times.
In one of his final speeches to the Reichstag, the German statesman Otto von Bismarck compared Europe to a powder keg. He declared that what would set it off was ‘some damn fool thing in the Balkans’.
The continent is still a powder keg but now it is the Italian peninsula that is poised to set it off. The Brothers of Italy look to get 50% of the vote on 29 September. Giorgia Meloni is Roman by birth, there will be no need march on Rome, Italian voters will bring Rome to her.
It will be fascinating to witness the reaction of Germany and the ECB to the voice of the Italian people.
Ugh, Sounds positively dreadful across the pond. You could always move to the U.S.? In my upscale community I golf, laugh at Politicians and Economists and complain about the price of Tequila at the Country Club. In short a positively delightful retirement. While most of my friends still work, I have decided at the tender age of 60, that life is too short and I am happier worrying about my golf handicap than ESG and DEI.
Dinner with three economists reminds me of Winnie Churchill’s remark concerning economists. Ask any economist a policy prescription you receive two. Ask Lord Keynes and you receive three.
Interest rates are still historically very low, as are bond yields after being manipulated by the BOE via QE. Pressure on Sterling would probably force the BOE to raise them anyway.
Regarding energy prices I think we should introduce rationing (somehow) to reduce demand, preferably together with the EU. Hopefully prices would then drop and take the heat out of inflation.
When you pick a side you have to stick with it. Brexit. England had an incredible opportunity. Be the new Switzerland. Actual banking secrecy instead of how the Swiss now throw open their books to the CIA/NSA. Absolute neutrality. Do not engage in any more of the USA’s forever wars. And capitol would have flowed in. From all over the world. Maybe enough to even finance the Green boondoggle. But instead, Brexit for the size of beer pours, but in bed with the globalist warmongers and sanction shills on everything else. What I find difficult to understand is how Britain and the EU does not understand this was a plan of my country. The US did not only want to destroy Russia, they also set up the UK’s financial destruction. Notice the Federal Reserve who has been printing money for decades all of a sudden acting with the virtue of a touched virgin. When the Fed raises rates, it destroys countries running negative interest rates. A direct assault on the ECB and Britain. The US gets ahead by destroying everyone else. The fact they cooperate in their destruction amazes me.
yeah.. right.. whateva…
Brilliant article, thanks.
I left the UK twenty years ago, to make my life in Australia with my Australian wife, but I have great attachment to my homeland, your blog is always a well balanced and informative read to help be prepare for the changes I see each time I return to visit my family. The first time I return, I wondered if I had made a mistake leaving, that was not been the case the other visits.
After reading the article, my wife dragged me off food shopping, noticed the economy supermarket lines were less full and lower down the shelving than last month when we went. Australian supermarkets are also quietly withdrawing the super economy lines here, too.
Is it the supermarkets or higher demand from customers and stock outs.
Maybe I missed the sarcasm alert. Praise the Lord for the Aldi and Lidl family
Salcolme is really not the sort of place you should be relecting on the future of Britain: why not try somewhere that normal people live rather than just another extension of London on sea.
Completely agree… it is Islington on sea.. but I also read the Torygraph every morning: “to understand what the enemy is thinking…”
(Its also a rather lovely place…)
I voted Brexit so Britain could be free to forge closer relationships with Eurasia, purely and simply. My reasons: Russia controls about a third of the World’s resources while China, India provides a huge trading bloc.
Disclosure: I come from a Labour voting background. I’m just amazed how Britain has followed a diametrically opposite course to the one I wanted, supported by all political parties and media. Labour, as usual, found missing in action.
I don’t think the situation is retrievable now. A pro-Russian government will be installed in Ukraine eventually. When that happens, Ukraine will be forgotten in the blink of the eye and the British public will begin to ask whether the huge energy bills and declining standard of living was worth the price, as well as the opportunity loss of making Eurasia our enemy.