Blain’s Morning Porridge, October 6 2020: Either side of the Pond

“I love England because it’s what America will be like when it grows up..”

It’s a two-part story this morning – what’s happening on each side of the Pond.

It’s all going on in America!

The Election is a total hoot! Trump turns Covid into theatre, but markets prefer certainty – stronger prices are being driven by US polls predicting the increasing likelihood of a Biden landslide being the only US election result under which Trump will exit the White House graciously.  It’s an interesting swing from the conventional narrative that Republicans are market-good while Democrats are negative.

You can take the US election polls at face value or conclude they are as likely to be wrong as the 2016 polls – but the one thing no one is predicting is Trump to win large.  The betting site Oddschecker gives Trump just a 29.4% change of winning.

But, let’s just assume for a moment the polls are wrong and Trump scrapes in – even holds the senate.  What’s the upside for the US then?  Domestic polarisation will increase. It’s easy to imagine just how hostile European media will be. How much could it shake the dollar?  Whatever my Republican chums believe, the perception from abroad is likely to be for 4 more years of American exceptionalism being broken on the wheel of a divisive president, a cabinet of yes-men and family, and escalating crisis with China.

As we approach the European election cycle, that’s a problem. It’s the potential fracturing of the Western Alliance that could prove the most important long-term Trump legacy. To retain global hegemony the US has to demonstrate leadership and its attractions in terms of global trade and prosperity.  But links with key allies have been sorely tested these past 4 years.  Few western nations are willing to jump into bed with China – yet. Their perceptions of the US have changed as a result of Trump. Young European voters no longer equate the US with justice, liberty and other long-held US “virtues”.

Trump was right to call out China – but he has failed to maintain and strengthen ties with allies. That’s a long-term issue.

And, there is still a whole month of fascinating US electioneering still to go…

Back in the UK

Let’s not worry too much about the US – we might have bigger problems here in Blighty…

Since UK Chancellor Rishi Sunak stepped into the suddenly vacant seat back in February, I’ve been impressed. (Initially… I was extremely sceptical of how a newbie with limited political background would fill the seat as anything but a Boris/Cummings yes-man.) He’s had a good crisis – acting swiftly and coming across well. Despite exploding on the political scene just months ago – he’s now being talked of as Boris’ successor

In recent weeks I’ve had a number of clients raise doubts on his longevity – arguing his success is simply down to being able to spend unlimited amounts on furloughs and support to see through the pandemic. His test will come when he has to pay for it.

Sure enough, he played to that vibe in his speech to the Conservative virtual conference yesterday. It was long on back-peddling – a “sacred responsibility” to strengthen public finances, talk of “hard choices”, and coded messages that sounded like warnings about spending cuts and tax hikes.

Nothing will wreck the anaemic UK economy as much as talk about renewed Austerity. (Boris says there won’t be Austerity – which means it must be pretty much nailed on…)

Cosmetically there isn’t much appealing about the UK at present. Our economy has been thwacked into the long-grass by the Virus. Its over 80% service based, thus the depth of damage from lockdown. We’ve got the final accord on Brexit still in negotiation – and lots of warnings on how the economy won’t be ready for a no-deal. And then there is the UK stock market, the FTSE languishing below levels achieved last century… and now worth less than the market cap of Apple. Nothing says irrelevancy more than a stock market that looks less interesting than European indices. Employment could soar to 7% according to recent down-side scenarios at the Bank.

Whoa… We worry too much. We always muddle through. Brexit will be sorted. Insiders say there is upwards of 60% chance a deal gets done. Even if there isn’t agreement, the effects will prove less destabilising than doubters suggest. Maybe…

Even our miserable stock market might be a good thing. UK Stocks have recently been described as “approaching Pariah status”. Some of the biggest names, like HSBC, Shell and Rolls Royce have disaster stamped across them. There isn’t a single tech company likely to compete at the level of innumerable jumbo US firms. The UK discount to global stocks is has never been so wide these past 50 years.  That’s the bad news – the good news is the UK looks cheap – buying boots on at some point soon.

There is lots of other positive stuff – like a UK scientist winning another Nobel prize yesterday. (OK – he won it working in Bio-Tech in California for the past 30 years… but hey-ho..)

The virus is what the virus is.  It’s a leveller. Although I’m not quite in the Bank of England’s economist Andy Haldane’ “nothing to worry about” camp, the potential for the economy to recover remains strong.  The danger is not so much long-term the fabric of the economy – but the repeated delays in re-opening damaging confidence, deferring income and increasing debt loads.

Months ago I wrote about swiftly recovering 95% of capacity, but the last 5% proving more “sticky”. For every day we delay, that stickiness increases. I reckon we are at 10% Sticky now. Yesterday it was cinema chain shuttering because of the lack of big films to pull in audiences. The news that only 12% of UK retail are up to date on their high street leases is a sign of fundamental change as short-term virus impacts become permanent. The longer we dither, the deeper and more scarring the damage becomes.

And this is the opportunity for Chancellor Sunak.

Extraordinary times require extraordinary measures. Yesterday the chancellor talked in conventional terms about traditional balanced budgets. This is not a conventional time.  Convention will not provide solutions for this very real economic crisis. He should be planning not just how to maintain the pandemic battered economy, but how to improve it. He’s been very clear he can’t save every job and every industry – nor should he – but he does hold the fiscal levers to move the economy forward.

We’ve just seen a Conservative government throw the kitchen-sink of monetary and fiscal spending into addressing the virus. History is littered with tales of government and central banks mis-timing rate hikes causing economic mayhem. This is the time to continue the Conservative’s new found fondness for spending to fiscally reflate our way out of recession.

Tax hikes, spending cuts and austerity under any other name will significantly damage the already struggling economy. It would be a massive mistake. Instead, let’s go further – let’s spend more not only maintain but improve the economy. Let unravel the Gordian knots holding back the economy – including the NHS and Education.

Where does the money come from?

The evidence shows little negative market reaction from the Government’s debt binge. Sure, the Debt Management Office has worked hard to shovel all these gilts out the door – but gilts yields are effectively managed close to zero through Quantitative Easing.  For the government to maintain Covid support packages and reframe the whole economy we will be talking about significantly increasing notional government debt – because it is just notional. The Bank of England “owns” a considerable chunk of Gilt issuance through QE. As I’ve said before – it’s one side of a matching item on the UK’s balance sheet.

Despite massive QE money creation since 2010, inflation remained stubbornly invisible – because that new money remained invested in financial assets. The government creating cash to invest in the real economy will put money into circulation – and that could be inflationary once we get past the maintaining the economy stage. But inflation is a risk worth taking – if it means getting economy working again and avoiding a deeper crash.

The real question is can it be done? Can the government spend its way out a pandemic recession without deeper consequences? Does the magic money tree of Modern Monetary Theory exist? (My opinion – a measured yes!) I guess we have to hope it does work.. because closing off recovery spending now really would be economic suicide – and a massive sell UK signal.

Be brave Mr Sunak…

Five Things Too Read This Morning

FT – A new cold war: Trump, Xi and the escalating US-China confrontation

BBerg – Trump’s Health is Another Mystery We Don’t Need

WSJ – The Covid Economy Carves Deep Divide Between Haves and Have-Nots

Guardian – Covid highlights America’s flaws says Jamie Dimon

FT  – London considers hopping on SPACs bandwagon

Out of time and back to the day job…

Bill Blain

Shard Capital