Beginning to See the Light Financial Statement Special: A, B, C, D

 

‘You went to school to learn, girl 

Things you never, never knew before 

I before E except after C’ 

 
I have been extremely impressed by our new Health Secretary’s command of the English language; no use of the ‘Oxford Comma, no jargon, and concise memo’s.

Her proposal for yet more NHS reforms also showed her knowledge of the alphabet, or at least the first-4 letters. 

Other than being literate she also appears to be able to predict the future, as she reviewed her colleagues financial statement before it was announced  

A – Another 

B – Bloody 

C – Conservative 

D – Disaster 

One of the key tenets of neoliberalism is the focus on markets, everything is subservient to them. If so, the markets have spoken, ‘crazy’ Kwarteng and Truss will fail. 

It is estimated that the government will borrow C.£240 bn this year. In the time it took ‘crazy’ to announce his madness the cost of that increased by from 3.46% to 3.84% as measured by the 10-yrs Gilt. 

In their initial response the Institute of Fiscal Studies (‘IFS’) picked up on this saying that, ‘the interest rate on 10-year government bonds is currently running at 0.5 percentage points higher than on just Thursday morning. A sustained increase in the cost of government borrowing of this magnitude would add £5 billion a year to borrowing.’ 

They continued saying the chancellor was ‘betting the house’ by putting Government debt on an ‘unsustainable rising path’. 

The IFS also noted that ‘the government’s costing of the Energy Price Guarantee for households and non-domestic consumers – £60 billion over the next six months (1) – means that borrowing this year is now on course to climb to £190 billion. At 7.5% of national income this would make it the third-highest peak in borrowing since the Second World War, after the Global Financial Crisis and the COVID-19 pandemic.’ 

Notes 1. The guarantee is set for 24-months, this is only the cost for the first quarter. 

To fund this the government will have to issue an, as yet, unspecified amount of debt (Gilts), into a market that appears to have little appetite given the sell-off in recent days.  
 

‘During the course of the week an already weak pound fell from 1.14 against the US$ to 1.08’ 

 
In addition to this new debt, the Bank of England plans to start unwinding its QE programme. The BofE said: 

‘At its meeting ending on 21 September 2022, the MPC voted to reduce the stock of purchased UK government bonds (gilts) held in the Asset Purchase Facility (APF), financed by the issuance of central bank reserves, by £80 billion over the next twelve months, to a total of £758 billion, in line with the strategy set out in the minutes of the August MPC meeting.’ 

‘As set out in the Market Notice published on 1 September 2022, the Bank will set its gilt sale auction schedule on a quarterly basis. Accordingly, this Market Notice sets out the details and schedule for the Bank’s planned gilt sale operations in Q4 2022, starting from the week commencing 3 October 2022.’ 

It would seem that the left hand isn’t talking to the right one; trying to do both will simply give the market indigestion. 

The FX markets reacted little better, during the course of the week an already weak pound fell from 1.14 against the US$ to 1.08. 

Traders appeared to panic over the prospect of the U.K. increasing its already record-high debt-to-GDP ratio as it spends additional billions on economic support for households and businesses amid the European energy crisis, with government bond yields rising at the highest daily rate in over a decade. 

Citi’s Vasileios Gkionakis said he expected the pound to trade in a range of $1.05 to $1.10 over the next few months, but that the risks for a break lower, toward parity, had increased. 

‘We think the UK will find it increasingly difficult to finance this deficit amidst such as deteriorating economic backdrop; something has to give, and that something will eventually be a much lower exchange rate.’  

George Saravelos, global head of FX research at Deutsche Bank was equally bearish: ‘The market is giving very strong signals that it is no longer willing to fund the UK’s external deficit position at the current configuration of UK real yields and exchange rate.’  

‘The policy response required to what is going on is clear: a large, inter-meeting rate hike from the Bank of England as soon as next week to regain credibility with the market. And, a strong signal that it is willing to do ‘whatever it takes’ to bring inflation down quickly and real yield into positive territory.’  

For the sake of clarity, he is suggesting the BoE have an ’emergency’ meeting next week and further increase interest rates meaning that the majority of people will be even worse off. 
 

‘Suggesting the BoE have an ’emergency’ meeting next week and further increase interest rates meaning that the majority of people will be even worse off’

 
People say that ‘hope’ isn’t a strategy but its better than a gamble. This is a country not a casino, 60-million people are being sacrificed on the bonfire of the vanities of unelected egotists. 

The last word goes to former US Treasury Secretary, Larry Summers, who told Bloomberg that the pound may slip below parity with the dollar: ‘It makes me very sorry to say, but I think the UK is behaving a bit like an emerging market turning itself into a submerging market.’  

‘See a clinic full of cynics 

Who want to twist the peoples’ wrist 

They’re watching every move we make 

We’re all included on the list’ 

 
 

As politicians do the rounds this morning, I haven’t actually heard an interviewer yet say WTAF, but that’s the sentiment. 

It’s worth replaying that quote from US Treasury Secretary, Larry Summers: ‘It makes me very sorry to say, but I think the UK is behaving a bit like an emerging market turning itself into a submerging market.’ WTAF.

Just two weeks after being swept in on a tide of Sanatogen, Matalan Maggie and ‘Crazy’ Kwateng have bet the farm; growth or bust. 

Maybe we should have got an inkling when we learned that the real problem in this country was not that millions are being plunged into poverty and genuine physical and mental hardship, but it is that those rotters at the EU capped bankers bonuses.

So, fill your boots boys, and by way of a supportive gesture, Ms ‘Trussherasfarasyoucanthrowher’ will lift the ban on fois gras – as well as every other protection afforded animals or the environment. 

So what was Philip thinking?:

A quick, initial response to yesterday’s fiasco.

I have a suspicion that this will end in an unpredictable way. Typically, it’s binary; if it works happy days we are off to the races, if not we will technically be bankrupt.

N.B., practically this can’t happen as we are in control of our own currency and can simply print more money.

I suspect the markets will do for this mess. Sterling will continue to fall, below parity is simply unimaginable, and Gilt yields will continue to rise making the debt burden unsustainable and their proposals un-fundable.

If I am right, what are the odds on another leadership challenge before spring?

Some comments from Tory MPs follow:

John Glen; “clear concern in the markets about the irreconcilable realities of having monetary tightening at the same time as fiscal loosening”.

Sir Bob Neill; Conservatives “also believe in sound money and we must keep an eye on inflation”.

One senior Tory MP said it reminded them of the Barber budget, while one minister with a marginal seat described it as “a big gamble” that his constituents were not likely to appreciate at a time of economic instability.

Julian Smith; “The huge tax cut for the very rich at a time of national crisis and real fear and anxiety amongst low-income workers and citizens is wrong.”

Lyrically we pay tribute to the unhealthy Health Secretary with the Jackson 5’s “ABC”. Who would have thought she knew the beginning of the alphabet. We finish with the Funboy 3’s “The Lunatics Have Taken Over the Asylum”, how apt!

Me, I’m off to join “Crazy” at the casino, to see if we can gamble the rest away.

So, WTAF; this could end very badly. And there’s a freebie – ‘Crazy’ by Gnarls Barclay. Enjoy, if you can!
 
@coldwarsteve
 

 
 
 
Philip Gilbert is a city-based corporate financier, and former investment banker.

Philip is a great believer in meritocracy, and in the belief that if you want something enough you can make it happen. These beliefs were formed in his formative years, of the late 1970s and 80s

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