The Times They Are A-Changin’: Life in the Slow Lane

“They knew all the right people, they took all the right pills They threw outrageous parties, they paid heavenly bills”

One of the costs of Trumps Iran war, and Iran’s blockade of the strait of Hormuz is inflation, which is already causing rising government bond yields across leading economies

Much has been made of the impact on Gilt yields, but, perhaps the most insightful observation came from Mohamed El-Erian, the ex-Pimco bond guru, who told the FT that Gilts have become “temperamental, overreacting to the slightest provocation.”

As inflation devalues the future value of longer dated bonds, rising yields shouldn’t be a surprise

One of markets pet hates in uncertainty, and what might be described as less disastrous local election results than predicted, PM Keir Starmer vowed to fight on. Markets reacted positively, with the yield on the 30-year gilt down 11bps to 5.54%, with 10-year gilts down 8bps at 4.88%,

What is often overlooked is that we have the benefit of a a longer dated repayment schedule, C.13yrs, compared to our peers. The US has an average maturity of C.5-years, and they need to refinance $10 trillion of their $38 trillion borrowings this year.

The right-wing media have been quick to print “we’re going bust” stories, forgetting that any nation holding the keys to the monetary printing presses can’t go bust. Of course, this isn’t a get out of jail free card.

Despite this, UK Gilts market has fared worse than our contemporaries; the 10-year yield has widened by C.15 bp, whereas the US has widened by 10bp, Germany by 6 bp and France by 11 bp.

This differential can be explained by the reports suggesting we will be hit harder by Trump’s foolish war and the ongoing impact of Brexit on trade. There is also the negative perception Chancellor Reeves creates when she talks about “a lack of funding headroom” and the importance of “borrowing rules.”

Sanjay Raja, chief UK economist at Deutsche Bank, said that half of the £24bn margin for error Reeves created by raising taxes in last autumn’s budget may already have disappeared due to a combination of higher gilt yields and declining growth.

‘half of the £24bn margin for error Reeves created by raising taxes in last autumn’s budget may already have disappeared due to a combination of higher gilt yields and declining growth’

There is also the political cost-factor created by the possibility of PM Starmer being replaced by someone such as Angela Rayner or Andy Burnham, both of whom favour higher public spending.

Burnham has suggested that defense could be excluded from the government’s fiscal rules, and last year said that Britain was too “in hock to the bond markets”. His comments triggered a rise in Gilt yields, but resonated with labor voters frustrated by our current lack of growth, which appears to restrained by Messrs Starmer and Reeves tight-adherence to fiscal orthodoxy.

Burnham has since softened his stance, with one analyst saying: “There’s been a realisation [in his camp] that there’s only so much talk you can give without being quite measured.”

Nonetheless, there is still a fear of a more leftwing agenda. Mark Dowding, the chief investment officer at the hedge fund RBC BlueBay, said: “It’s tax and spend. The concern in the market is, look, the tax take is already at a historic high level, government spending is very elevated – you don’t have room to push further in that direction.”

How we dealt with spending priorities and markets is crucial as the demise of Pax Americana and the rise of unpredictable autocrats increases the need for greater defense spending. There is an argument that borrowing to fund defense spending could help to revive our moribund economy.

‘tax take is already at a historic high level, government spending is very elevated – you don’t have room to push further in that direction’

‘

The caveat is; how do we pay for it?

As we reintegrate with Europe there will be an emphasis on defensive alignment. Germany are the likely leaders of this, as their debt headroom provides the scope to rebuild of their armed forces as part of a move towards a new common European defense platform. With their contribution to the €90bn Ukraine loan, their defense spending is set to overtake France and the UK combined.

Thomas Pugh, the chief economist at the consultancy RSM UK said that the prospect of looser fiscal policy is “one reason” gilt yields have risen sharply. “Granted, more debt-funded government spending would, in theory, provide a near-term boost to growth, but it would also boost inflation.”

We are, once again, deciding between “guns or butter”. The electorate wants support to help with the cost of living crisis, whilst the Treasury says we can’t afford it.

‘We are, once again, deciding between “guns or butter”’

Any attempt to increase borrowings to fund this will put the government on a collision course with financial markets. Inflation aside, bond markets biggest fear is spendthrift governments.

It might not just be the government that collides with financial markets. A report from UCL’s Policy Lab, using research from pollster Stan Greenberg, found that Andy Burnham had the best ratings, viewed positively by a third of voters.

In addition, 13% to 15% of progressive voters were open to voting labor, compared with only 2% of Reform voters. LibDem voters were more likely to consider voting for labor than the Greens. The researched also suggested Reform was reaching its ceiling, with few Conservative voters willing to consider voting for them.

The local election results confirmed that support for Reform may have peaked.

The elections expert Peter Kellner points out that in last year’s local elections, Reform won 41% of all seats contested across England, whereas, based on overnight figures, this year’s tally is about 33%.

‘Another option would be a 100% tax on oil companies hugely increased profits derived from Trump’s illegal war’

labor’s results are bad, but perhaps not as disastrous as might have been expected, however, the party fared badly in its traditional heartlands, losing control of Hartlepool, Tameside, Redditch and Tamworth to Reform.

Overall, Reforms gains are roughly equal to the combined losses of labor and Conservative.

The Green wave seems somewhat stillborn with less gains than the LibDems.

There is however, a cold, hard reality. No matter who is in government we need to increase spending on defense, we have an ageing population that will need to be cared for and ambitious plans to decarbonise.

What we need is a return to pre-GFC growth levels, unfortunately, this looks increasingly unlikely. The alternative is increased borrowing, which they might have expected from labor, who instead painted themselves into a corner with Tory-lite fiscal orthodoxy. This might explain the end of the two-party duopoly, with some voters looking to the Greens who they believe might take back control from the bond markets to raise funds for long-term investment.

Another option would be a 100% tax on oil companies hugely increased profits derived from Trump’s illegal war.

Clearly I am being naïve; we can’t expect shareholders interest to come before helping the majority!

For the minority, society’s rentiers, it’s always life in the fast lane!

“(Life in the fast lane) everything all the time”

This article could have been entitled “Who Runs the Country,” as there is a school of thought that suggests the bond market runs it.

That wouldn’t be an unreasonable conclusion, but it seems too simple.

I think the market would support more spending, of the right sort. Not Truss-style lunacy or HS2, but well-thought-out projects such as defense. Increased spending here would create jobs which is the beginning of the economic cycle.

We need to ensure that Trump’s hordes are kept out; otherwise, the benefits will all go to stateside defense contractors.

The local elections threw up few surprises.

labor did a little better than expected, Reform made gains but appears to be losing momentum, the Green surge didn’t really happen, and the LibDems continue to make inroads in the blue wall.

Which brings me to the Tories, and their leader Kemi Badenoch

I love Kemi, she always has a stupid claim to shoot down.

Despite losing C.170 seats already, Kemi has claimed that the Conservatives are “coming back”.

Sure, they regained Westminster and Wandsworth, but both are, or should be, Tory strongholds. The same might be said of retaining Fareham and Bexley

They saw off Reform in Harlow, which does surprise me.

What this does suggest is that Reform has peaked.

Another Kemi classic was her argument that pro-Palestine marches should be banned because they platform antisemitism, but that marches organized by the far-right activist Tommy Robinson should be allowed.

Kemi doesn’t see Robinson’s marches as a platform for anti-Muslim hate, she says they are “different.”

She said that criticism of religion is allowed in this country, but that attacks on Jews are not; it’s the people being attacked, not the faith.

She is typical of the hard-right, Muslims have become the Jews of the 21^st century. 

Lyrically, it‘s “Life in the Fast Lane” by The Eagles, 1970’s cocaine-rock at its best, perhaps!

Philip.

@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

Click on the link to see all Brexit Bulletins:

The post The Times They Are A-Changin’: Life in the Slow Lane appeared first on USNewsRank.