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Can Truss Make the Shorts Look Silly? Just Maybe

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Greetings from the UK, where Liz Truss is now prime minister. The cabinet will be composed largely of her closest allies. For a sign that the country is definitely changing, note that for the first time ever, none of the top four positions — prime minister, home secretary, foreign secretary and chancellor of the exchequer — will be held by a white man.

As a sign that things still haven’t changed all that much, however, the changeover in power could only happen after first Boris Johnson and then Ms. Truss had emitted any amount of carbon to fly to the Queen’s estate in the Highlands of Scotland and back.

The market reaction said everything we need to know about the task facing her or the odds that many put on success. Ten-year gilt yields have touched their highest in nine years, while sterling is back to its Covid-shutdown lows against the dollar. Before the spring of 2020, you have to go back to 1985 to find a time when the pound was so weak:

Why the concern? The past inconsistency of Truss’s political stances means that her election does nothing to relieve uncertainty. As has now been widely recapped, she started life as an enthusiastic left-winger and peace campaigner, then switched to the centrist Liberal Democrats as a student (and gave a speech calling for the abolition of the monarchy), then became a Conservative. On the crucial issue of Brexit, she campaigned in 2016 for the UK to remain in the European Union, and then became one of her party’s most aggressive advocates of leaving. Her current libertarian economic rhetoric might be a good idea for the future, but it’s not going to deliver results swiftly and is out of touch with a country where the Labour opposition looks its most convincing since losing power in 2010.

Some of Truss’s arguments during the leadership campaign were downright scary. Her suggestion that the Bank of England’s mandate should be re-examined, with a look to the positive example of the Bank of Japan and its fight against inflation, was frighteningly misguided. Having lambasted “handouts” as a response to the energy price crunch in midsummer, she now appears ready to hand out many billions of pounds to deal with a crisis that has deepened since then. So what confidence can anyone have in what she’s going to do next?

Then there is the weakness of her mandate. Only about a sixth of Conservative MPs voted for her as their first-choice candidate. After scraping into the final two names (against former chancellor Rishi Sunak) that were put before the Conservative membership, her thin majority of 57% of those who voted was unimpressive. Less than half of the Conservatives’ members actively voted for her. Despite the difficult times and the need for unity, she has made what seems to me the mistake of sheltering behind a narrow faction of her own party.

And the position on entering could scarcely be tougher. Britain is resigned to enduring a recession over the next year; the surge in natural gas prices has created a crisis in the cost of living to match the 1970s; the issue of Northern Ireland’s post-Brexit status remains unresolved; and the war in Ukraine drags on in a way that will test the UK’s resolve to continue as one of Kyiv’s most enthusiastic allies.

For a blisteringly negative take, try reading a former colleague, Andrew Adonis in Prospect. A former history professor who went on to be chief of Tony Blair’s policy unit, it’s not surprising that he is negative about her, but the first historical parallel he offers is alarming:

I can’t think of a weaker prime minister facing problems of such magnitude since Lord North was charged by King George III with saving the American colonies and pleaded — rightly — that he was simply not up to the task. 

But is it possible some of this could rebound to her advantage? Truss’s well-established ability to U-turn at speed could stand her in good stead during a complicated time when the government will have to be nimble and prepared to improvise — a point made by Adonis, and by Simon Jenkins, a former editor of The Times, in this piece for the Guardian.

There are also some fascinating parallels with Britain’s first female prime minister. As Therese Raphael writes in Bloomberg Opinion, Thatcher was unimpressive and nearly fired as a minister but ultimately asserted herself over her party. It’s notable that Thatcher also presided over the only previous crisis for the pound that was even worse than the current one. Yet it didn’t doom her. She had some massive strokes of political luck during her contentious first term — Argentina’s invasion of the Falkland Islands united the country behind her, while the split of the Labour Party made it far easier for her to prevail. It’s unlikely that Truss will be so blessed.

Sebastian Mallaby in the Washington Post draws a parallel with Europe’s other great female politician, Angela Merkel:

Truss has one important strength. She is driven rather than lazy, a fighter rather than a narcissistic prince. And this is where the Merkel model may be relevant. The former German chancellor was neither charismatic nor particularly principled. Yet she dominated German politics for 15 years. Her achievement shows how hard work and pragmatism can generate enduring political success.

It’s important to note that Truss is not a fool. My former colleague Tim Harford revealed in a tweet that he shared tutorials in mathematical logic with her at Oxford in 1994-95. One of the most fiendishly difficult courses the university offers, this required them to master such terrifyingly abstract notions such as Cantor’s diagonalization proof and Turing machines. So she’s easily underestimated, and that could be an advantage.

From an investment point of view, this might imply that there’s a UK buying opportunity. The country has been underperforming horribly for years, and its stock market is loaded down with global resources companies. But short of a sudden and complete resolution of the Ukraine conflict that in turn ends the energy crisis, it’s hard to see a catalyst for a rebound. The pound is about to drop into territory where there is no obvious technical support until it hits parity with the dollar. With the Fed in the US seemingly set on hiking rates more aggressively than the Bank of England, it’s hard to see a point where the line can be drawn. It looks like there’s little to dissuade speculators from shorting the pound or — as Chris Watling of Longview Economics rather subversively suggests in the Financial Times — betting against the UK’s credit in the credit default swap market. The point is not to bet on a default, but rather to bet that the combination of a prime minister wedded to tax cuts and a pressing need to spend huge amounts of state money on the energy crisis will cause the perceived odds of a default to rise quite a lot before the Truss premiership is over. Sadly, this does look like a decent bet.

Now to see if Truss, who amazed many by attaining this job in the first place, can make the shorts look silly. It’s a long shot, but it could happen.

After spending two weeks trying my hardest not to take notice of the markets, what’s changed? The rally in stocks that lightened spirits in July and August has ended. The S&P 500 is still a way from setting a new low for this cycle, but it looks much more as though that rally was indeed a bear market rally. Meanwhile, the economic data in the US continue to be tantalizingly consistent with a “soft landing” for the economy, or even a Goldilocks (not too hot, not too cold) scenario that is so beloved by markets. The latest employment numbers, showing non-farm payrolls increasing but also seeing a slightly rising unemployment rate, were almost perfect for the Federal Reserve. 

But the two most important events are away from the standard economic data. Possibly the single most important chart at present, which recurs seemingly everywhere in some format or another, is this measure of the benchmark natural gas contract for Europe:

At this point, nothing matters more than the price of wholesale natural gas in Europe. This is less because it contributes to inflation (although it does), but more because energy prices at these levels are a lead weight on the economy, the equivalent of a massive tax hike. The bills consumers face are already intolerable. Governments will have no choice but to do something to alleviate the suffering. That will inevitably mean diverting taxpayers’ money from something else, or taking on more debt at a time when the cost of borrowing is rising. The latest news that Russia has found a reason to shut down the Nord Stream 1 pipeline until further notice has prompted yet another escalation.

Gauging future gas prices grows all the harder because it ultimately depends on imponderable questions of geopolitics. Vladimir Putin stands to lose a lot of cash by cutting off gas exports; how long can either side endure this dose of economic warfare?

The continuing crisis over gas does, however, increase the reasons to predict a recession for the eurozone. As the following charts, from the Institute of International Finance, demonstrate clearly, Europe’s economic growth has already been painfully weak compared to that of the US since the Global Financial Crisis. ISM manufacturing surveys suggest that the region is heading for recession again:

This is very much a specific issue for the EU. In the US, not dependent on Russian gas but still very dependent on gasoline for driving cars, falling oil prices have eased economic conditions somewhat and also raised the political spirits of the Democrats. The likely consequences include an ever weaker euro, and the kind of hit to global demand that will hurt everyone, including the US.

The other critical development was Jerome Powell’s speech at Jackson Hole on Aug. 26, when he conspicuously declined to signal that a Fed pivot toward easier monetary policy would soon be under way. Instead, we witnessed a pivot by markets. The following chart shows how the implicit projections for the fed funds rate from now until January 2024, as calculated by the Bloomberg World Interest Rate Probabilities, have changed over the last month. Rosy expectations for a swift move to cut rates that would bring fed funds back to 3% by the end of next year have been replaced by a newfound belief of a rate of almost 3.5% by then:

The outbreak of decent economic data is counterproductive for those who want rates to stay low. The stronger the economy, the greater the inflationary pressure, and the less need for the Fed to reverse course. That means more problems for equity valuations, as higher rates will mean lower price/earnings multiples, all else equal. It also likely means continuing strength for the dollar, which could lead to problems down the road.

And that all creates a monumental dilemma for the governors of the European Central Bank ahead of their Thursday meeting. There’s hushed speculation that a 75-basis-points rate hike is in the offing — even though the European economy is slowing down sharply. Would they really do it? And would such an increase even help the euro that much? With so much bearishness around Europe at present, it might be perceived as a final nail in the continent’s economic coffin. 

I think that’s covered it. Now, as more or less everyone is back from vacation, even if they’re not back in the office, brace for a few volatile and uncertain months. 

OK, Arcade Fire. As regular readers might remember, I announced before going on vacation that I would be seeing the mighty Canadian rock group at the start of their global tour while I was in the UK. That was before Pitchfork reported that lead singer Win Butler, who has now turned 40 and is married to one of his colleagues in the band and has a son with her, is in the habit of texting photos of his genitals to 18-year-old female fans he finds on social media. (His response to this and other allegations are included in the article.)

The news broke five days before their show in Birmingham, for which I had tickets. Somehow, the tour continues despite the decision of the support act, Leslie Feist, to go home, and demands for its cancellation by many aggrieved fans. Refunds were not on offer for those who decided they no longer wanted to go. What to do? The bottom line is that with much money already spent, and little sense that not going would achieve anything, I did go to the concert. It was a difficult call. The whole sordid issue has provoked intense moral debate among the coterie of those of us who find the band irresistible, particularly in Montreal, their hometown.

So, how was the concert, Mrs. Lincoln? They were brilliant, as they always are in my opinion, and they played several of my favorite songs that they don’t usually perform live. But the mood in the hall was subdued. Butler himself played with an often desperate intensity, as did the rest of the band, but he was also subdued and repeatedly thanked the audience for showing up. At the end, he said, “Thanks guys that was a lot of fun!” “No it wasn’t, Win,” intoned my 12-year-old son. He had it right; this was not a man who had appeared to enjoy himself performing to thousands.

In all, I liked it far less than previous outings to see them. I found it impossible to let go and enjoy the music. The mood of rapturous positivity that the band normally engenders just wasn’t present. (That’s my opinion: I’ve had social media responses from others who were there, some of whom thought it was as great as ever, and some of whom were considerably more negative than I was.) So I suppose one good tip is that if you’re not sure whether you even respect the performer you’re going to see, the chances are you won’t have a good time at the concert.

Listening to their records, however, that’s different. The music is unchanged by the revelations. The connection between the artist and the art grows far more important at a live concert when there is a sense of personal interaction with the performer. For comparison, I went 30 years ago to see Michael Jackson at Wembley Stadium, in what turned out to be his last concert before the first allegations of child abuse were revealed. My main sense at the time was that we were watching a deeply sick man. He had already mutilated his face, and his every utterance seemed forced and unnatural. I didn’t enjoy the concert, despite his brilliant performance. None of this stops me and many others from listening to “Billie Jean” or “Beat It.” 

Or for another example, I also on this holiday dragged my kids to see a performance of Bruckner’s Seventh Symphony. Anton Bruckner was a sadly repressed man, who spent his life — until his 70th birthday — proposing marriage to teenage girls, always to be rejected, and reputedly died a virgin. One probably wouldn’t want to have a drink with him. But despite or perhaps because of his shyness and sexual hangups, his music is glorious — as rich, powerful and potent a brew as any Romantic composer ever created. Sadly for him, it was only through music that he appeared able to communicate. Bruckner was also unlucky to have Adolf Hitler as a fan. Does all of this add up to a reason not to listen to his music now? Of course it doesn’t. By the same token, I’d still recommend listening to Win Butler’s songs — but if you don’t already have tickets for this tour, it’s probably best to keep it that way.

More From Other Writers at Bloomberg Opinion:

• Noah Feldman: Do  “Trump Judges” Exist? We’re About to Find Out

• Stephen L. Carter: Closing Schools Should Be the Last Option in a Pandemic

• Jonathan Levin: A Raise for Seniors Won’t Do Inflation Fight Any Favors

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

John Authers is a senior editor for markets and Bloomberg Opinion columnist. A former chief markets commentator and editor of the Lex column at the Financial Times, he is author of “The Fearful Rise of Markets.”

More stories like this are available on bloomberg.com/opinion

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