Cometh the hour, but will the right man or woman emerge?

Blain’s Morning Porridge October 4th 2022 – Cometh the hour, but will the right man or woman emerge?

There is only one quote that really works this morning. Many of you will get it straight away:

“Curiously, the only thing that went through the mind of the bowl of petunias, as it fell, was, “Oh no, not again!” Many people have speculated that if we knew exactly *why* the bowl of petunias had thought that we would know a lot more about the nature of the universe than we do now.“

This morning: There are lessons from the public humiliation of Kwasi Kwarteng for governments and corporates around the globe. If we are going to address the looming economic crises – then governments, central banks and financial instutions need to be on the same page. 

What interesting times we live in.

Through my career I’ve seen some full-on crises – but this feels different in terms of just how chaotic events could become. It feels more unstable – why? We have market peril coming at is from all directions. Apparently unconnected events seem headed towards a cataclysm of crisis cliches – all with the potential of making a bad situation much, much worse.

Yawn.. seen it all before. Bring It On. False bravado – this is likely to hurt.

The market sages will tell you in crisis the critical market factor is liquidity – which is true to a large extent. Liquidity may be plentiful in conceptual terms when markets are strong, but when it comes to crisis liquidity always becomes scarce. But.. I’ve observed over many years of crisis the other key variable is people. Some people make things better. Many people make things worse. Solving crises requires an alignment of purpose – which is conspicuously absent from today’s markets.

Often all it really takes is for people to say stupid things, or more often for other smarter people to point out just how stupid the stupid things they are saying are, for markets to be beset by doubt and tumble. Throw in seeds of doubt and nervous markets will wobble badly

Stock markets may rustle up some good days – as they did yesterday – but the downward pressure and sentiment remains profoundly negative on the back of expectations recession/stagflation and still higher rates will collapse corporate earnings. In bonds there is truth, but the world’s largest market – US Treasuries is under close watch; if the dollar’s ongoing strength was to unravel, then who is going to keep buying US bonds? A lurch higher in US yields would really set off catastrophe.

What might set it off? People.

Just a few weeks ago the UK gave the global economy a masterclass in how to do things proper and right. The Royal Funeral was perfect in every respect. Pomp and Circumstance. Majesty and Pageantry. Who would not be a buyer of the UK’s unchallenged soft-power and global influence?

How quickly gold and flags tarnish.

Liz Truss and Kwasi Kwarteng gave us a master class on how to unwind 500 years of fiscal and monetary stability in a single morning of arrogant ideological economic dumb*****ry. It’s a lesson that should not be lost on other nations, nor the markets. It’s becoming increasingly clear how it happened, and how thin the controls to avoid it were.

This week opened with the potential collapse of one of the grand investment banking firms, Credit Suisse. It’s problems; investment banking losses, squandered credibility after innumerable fines, and its business mix are all collectively solvable, but not in a period of market crisis. Even the stratospheric trajectory of the bank’s Credit Default Swap price should not be terminal – in normal markets.

When a CEO has to write to staff the bank’s capital position is “fine”, (as any husband will tell you, “fine” is the most dangerous word in the English language), and it has plenty of liquidity – that’s a good moment to sell.

Credit Suisse has been unlucky. Its moment has come at a bad time for markets, meaning it is more susceptible to the oldest banking plague: a short-term liquidity crisis. Who wants to lend to a bank in trouble on the cusp of a financial meltdown? When confidence in a bank evaporates it runs out of funding options. (The value of its Swiss bank makes it a game for the distressed players.)

Ultimately, it’s the failure of management (people) to have addressed the problems of the bank in the past, and a lack of confidence in the turn-around abilities of the current incumbents that’s brought us to the likely end for Switzerland’s second bank. Other banks have dug themselves out of worse holes, but when markets were stronger and more amenable to taking bank risk in stronger markets

Personally… I am highly peeved at Credit Suisse’s likely quietus. It will cost me a lunch with a well-respected City financial analyst. I predicted Deutsche Bank would collapse first. Who knows.. from the way it wobbled yesterday…. I might still be right. It won’t be far behind – a systemic banking crisis this way comes…

As this multiple crisis continues to unfold, I am more and more convinced we get what we deserve when it comes to the people at the top. And I reckon that’s why the current crisis could be much, much more destructive than what we’ve seen before.

Let me illustrate the people problem using the Trusster***k in the UK as an example.

Yesterday, Chancellor Kwasi Kwarteng tried to row back on his mini-budget plans, admitting the decision to abolish the 45% higher tax rate had become a “distraction”. To have tried to force it through would have seen the Government unravel and self-destruct. Both he and Liz Truss know they fatally wounded their credibility in the first 4 weeks of their administration. They are now in cling on mood – which makes their effectiveness negligible.

(Things could have been much worse – Liz Truss had the good sense to stop Jacob Rees-Mogg, minister for business and the 17^th Century from a massive scrapping of worker rights, the reintroduction of poor houses in place of benefits, and the imposition of serfdom for manual labour.)

The reason Tory MPs are so upset is because they are the guys who are going to lose their jobs. They see the consequences. They’ve seen the government’s financial credibility sunk. They hear Truss and Kwarteng brag about a Growth Plan – which, lest we forget is currently nothing more than vague comments about bonfires of regulations, investment, private partnerships, childcare and multiple other concepts pulled from the ether of political bullsh*t. MPs will oppose anything likely to cost votes. There is no desire for bravery on their part. Truss’ growth plans are therefore nothing more than hopes expressed as gospel facts.

However, the real issue was not bad policies, but the way these policies were arrived at.

We now know Truss and Kwarteng reached the decision to fund tax cuts for the wealthy with long-term borrowing all on their own – convinced by their ideological beliefs in the sad-sack myth of Trickle-Down economics. The Cabinet of Tory Ministers were never offered an opportunity to critique or approve it. The minutes of meetings say the policies were discussed with the Bank of England – although I’ve been quietly told advice was given they would be a mistake. It was not costed or tested by the Office for Budget Responsibility, and never discussed with the Debt Management Office – who are responsible for raising UK debt. The Treasury was taken out of the equation by a chicken-strike – Kwarteng removing possible dissent by sacking its head as his very first move.

When the Global Financial Crisis 2007-2032 kicked off, it was noticeable and effective how 2008 Central Bankers and the Political Authorities (Treasury ministers and policy experts) combined magnificently to engineer swift solutions and responses to stem systemic collapse. (The Bank of England did not do so well stopping the Northern Rock run in 2007 – missing the key signals on liquidity. It learnt.)

That is unlikely to happen this time. Kwarteng is determined to politicise the Treasury. Truss has compromised The Bank’s independence. Politics has become too divisive, policy experts and civil servants are no longer aligned, and – let’s be blunt – our politicians are not what they once were. Many of my readers will hate me for saying this, but give me Alistair Darling and Gordon Brown over Truss and Kwarteng any day.

When this financial crisis deepens it will take the combined efforts of Central Banks, Governments and financial institutions to address and contain the consequences. At the moment, I have limited confidence in the new UK government being able to acknowledge or cooperate. Which is one reason I am going contrarian on Europe – yes, Europe faces mighty economic problems (as will the USA), but there is more chance the ECB will hold on to its credibility and maintain the confidence of the markets, than the busted flush of the current Tory lame ducks.

Meanwhile…

I don’t usually comment on Crypto, but I was amused to read the great Ethereum “Merge”, the effort to slash the cryptocurrencies 83 Terra-watt energy bill by replacing proof-of-work with a proof-of-stake model has done absolutely zero to reduce power consumption or greed the Cryptocurrency scam. Ethereum miners have simply reprogrammed their machines to go mine other crypto-currencies, including the obsolete (or so we are told) Ethereaum Classic.

This illustrates a classic causal loop in Crypto: they exist not because they have any utility, but because the technology exists to create them. If miners had stopped mining their very powerful and expensive machines would be worth nothing. By mining any crypto junk they marginally achieve some value!

And finally…

Congratulations to the team who have won this year’s IgNobel prize for economics – a paper explaining mathematically why success goes not to the most talented people, but to the luckiest. It is actually the team’s second IgNoble – they previously won in 2010 for mathematically proving organisation would improve efficiency by promoting people at random. Guess that explains Kwarteng and Credit Suisse.

Five Things To Read This Morning

FT – Is a US recession the best thing that can happen to emerging economies?

Torygraph – The alarm over Credit Suisse signals a financial system losing its grip

Wall Street Journal – More cars hit Dealerships, Buyers Feel Pinch of Rising Interest Rates

BBerg – Credit Suisse’s Options Worsen as Market Mayhem Takes a Toll

Guardian – Tory MPs plot to avert welfare squeeze after humiliating U-Turn

Out of time, and back to the day job..

Bill Blain

Strategist – Shard Capital