Blain’s Morning Porridge – July 8h 2022: What a week – recession threats and political instability causes markets to rally!
“Never confuse a tactical victory with strategic defeat…”
This morning: The world is watching for signs confirming global recession, so naturally markets have rallied (!). Political instability is resolved to be replaced with some bleak truths and spending choices. So.. steady at the wheel, nothing to worry about then?
Well… that was a week that was… I thought a nice summery photo, morning walk with dog, to relax us all…
But what, if anything, is actually resolved? What did we learn? That stock markets go up as recession risks rise? That bond yields could look relatively more attractive in a stagflationary environment? That China is headed for a massive recession, and is trying to pump up its’ economy? Or, that populism doesn’t triumph?
Boris resigned – but he’s still there.. (Apparently he’s clinging on so he and Carrie can celebrate their wedding at Chequers – the prime minister’s grace’n’favor pad in the country. That may explain his gaffe during the resignation speech: thanking the staff at the weekend pile before remembering those working at Downing Street.)
Or, how about the short-tenured UK Education Minister, Michelle Donelan, who will pick up a £17,000 government severance package after serving in office for about a day – appointed on Tuesday night, and resigned Thursday. Great work if you can get it.
It’s a funny old world.
The market is betting Central Banks will be less than relentless against inflation in order to avoid recession, and may even stumble back into massaging markets to avoid damaging sentiment as the world tries to recover from pandemic, supply chain dislocation and energy shocks. These threats remain very current, present and ongoing problems – likely to dominate the market through this year. (And longer!) But it feels the pace of interest rate rises has slowed, so the market put its buying boots on.
Mistake. The curvy girl has not yet sung.
Things could get worse… the energy crisis could tip Europe into chaos, and break the sanctions alliance against Russia. German and Italian politics are worth watching very carefully in coming months – the pressure will grow as the winter approaches and gas prices become increasingly frenetic!
Or China might take the opportunity of deflect from internal recession and stagnation, and exploit political impasses in London and Washington, and a renewed Russian offensive in Ukraine, to go outward bound on Taiwan – that really would trigger global instability.
More than one commentator asks this morning – in the face of so many clear risks, if market sentiment is more important than inflation, why bother hiking rates today if the central banks are just going cut them tomorrow?
Meanwhile, my eye was caught by a headline in the FT – UK public finances on “unsustainable path”, says OBR. The Office for Budget Responsibility is “mostly harmless”, but prone to small “c” conservative hyperbole. Yesterday, it was warning the multiple Tory leadership candidates about the dangers of tax-cut promises putting the UK on “an unsustainable path”. Lower taxes, including cuts to fuel duty, and high borrowing is a popular recipe, but unlikely to resolve the UK’s 96% Debt/GDP ratio.
I’m not sure how the OBR has factored inflation into its equations, but perversely its normally good for the national debt – inflation whittles it away. GDP rises faster. To get the numbers right we just need to ensure GDP grows, and grows fast. The problem for the UK is much of the income from taxes has been allocated into paying government pensions – which rise in line with inflation. A few years ago I came across a well argued comment that the Final Salary Pension schemes given to government employees will soon consume more than 100% of the total tax revenue of the nation.
Basically, all my pensions savings are paying those of government employees – which makes me less than happy. That is definitionally unsustainable. But, when did you last hear a politician admit Government has to close down the pensions jamboree that government jobs have become?
We need something new from the next UK prime minister. A little honesty perhaps? And even courageous decisions? (‘Courageous” means a suicidal career ending but necessary decision in UK civil service speak – from Yes Minister.)
It’s easy for government to talk about balancing budgets by cutting costs, but there are things they simply won’t address. But no politician will stand on a platform that would be as dangerous as suggesting the following are critical for the UK economy to come out the likely stagflationary recession intact:
- The desperate need to reform the NHS, and its cost base to stop it sucking every single penny of state revenue and borrowing into its insatiable maw.
- Reforming education to make it fit for purpose – teaching kids useful skills, putting apprenticeships on par with degrees, and mercy killing loads of useless universities and courses.
- Cutting Government Pension Obligations.
- Making society fair and equal.
- Re-armament and allocating sufficient resources to defence to fight the next war – rather than the last one; expanding and re-equipping all three services.
- Taking the tax burden off the middle classes, and taxing the rich to a far greater degree – and if the threaten to leave, well, shake then down and there is a plane to Rwanda sitting on the tarmac.
- Redirecting revenues and government away from London into a proper, focused national infrastructure plan that prioritises the regions. (Oh, it’s being done, except that it wasn’t.)
In short, the UK, like every other nation needs a complete overhaul. The good news is it could probably be done. We just need to bite the bullet and elect some honest politicians willing to make tough decisions – do such entities exist?
My very old Landrover needs a refit; a rejuvenation that will not only make it work better, but look less scruffy, more vintage, and fix some serious denting. Every time I look at it I shudder. There is a scratch and ching on one fender and a lump out the other, the ding out the boot, the rubber seals rotted on the port windows, the running board hanging off, the rear-view mirror hanging by a wire (don’t ask, but a spinnaker pole was involved), broken mirrors, a busted sidelight, and the pigeon shaped hole in the front grill…. The Kamikaze flying rat busted the Aircon! The seats are beginning to fray. It’s getting close to undrivable.
Why do I keep it? Because it’s got a fantastic engine, it stows loads of gear, stuff and the dog, its comfortable for long trips to Scotland and Wales, and great for doing the local shop! And a new one just ain’t worth six digits… especially when the Beast can be fixed… (The current choice is it or She-who-is-Mrs-Blain’s soft-top Fiat 500 known as the roller-skate.)
My Landrover is much like the UK economy. Battered and bruised. But repairable. Some harsh decisions are required like a big spend on the body work, repairs, new tyres and reallocation of Blain revenues. No new yacht sails this year. But, at the end of the day, my rejuvenated car will save me spending over 6 digits on a new one! And then… maybe I buy a hydrogen car to retire with?
Five things to read this morning
Finance Monthly – Politics and Markets – The World Ahead
Finews.Asia – Stuart Kirk: “Most of what’s out there is Bonkers”
Out of time, back to the day job, and have a great weekend
Strategist – Shard Capital