Where do I begin?
There seems to be too much going on right now, amid falling markets, but these are some of the things that have been intriguing/horrifying me this week.
The UK currency collapse
The new UK administration led by 40-something Liz Truss had a frustrating 10 days to wait to get going during the period of mourning for the late Queen Elizabeth II. Once the Queen was buried the new government could make their big policy announcements, with flagship tax cuts at their center. Everyone was cautiously optimistic. On Friday the new Chancellor of the Exchequer, Kwasi Kwarteng, briefed Parliament on an eye-poppingly extensive list of personal and corporate tax cuts and the prospect of the UK government borrowing as much as £165billion over the next year (forecasts vary) to support them. He also admitted that - contrary to modern expectations - he had not has his homework checked by the UK’s internal audit function the Office for Budget Responsibility (OBR). The combined effect of throwing everything including “the kitchen sink” (as the British would say) at policies to drive growth and failing to have the math checked by the grownups at the OBR spooked international markets and caused the Great British Pound to collapse against the US Dollar: that after a long downward slide of the value of GBP all year. Aiming for growth is great as is cutting tax for working people and companies hard-pressed by 10%+ inflation, but by trying to be too radical too quickly Liz and Kwasi look like they may have overcooked it. The FX market certainly thinks so: as I write GBP is at 1.0651, and earlier hit 1.03 its lowest level against the USD ever (i.e. since GBP decimalised back in 1971). Usually only Emerging Markets currencies collapse this far and fast.
Italy’s New Right Wing
It now appears inevitable that a right wing coalition led by Georgia Meloni, the ironically female leader of the Brothers of Italy party will form the next government, following a general election at the weekend. Meloni and her party are accused by opponents of being neo-fascists, and are certainly likely to be more euro-skeptic and anti-immigration than the center-left government led former European Central Bank chief, Mario Draghi, which collapsed in the summer. The other irony is that Meloni’s main coalition partner, the re-branded League party (formerly the Northern League, which until recently did what it says on the tin and advocated autonomy for Northern Italy), led by Matteo Salvini, is more radical than Meloni and the Brothers: the third of the coalition triumvirate is none other than octogenarian Silvio Berlusconi and his Forza Italia party (yes, he of the orange spray-tan and notorious “bunga bunga” parties). Berlusconi - despite his advancing years - remains as controversial as ever: last week he told journalists that Russian President Vladimir Putin had been “pushed” by the Russian people in to invading Ukraine to install “a government of decent people”. Expect the new Italian administration to be another dissenting voice around the EU table, along with Hungary and increasingly Poland: the new Italian government will be less openly hostile to Russia, against further EU integration, anti-immigration and more fiscally loose; as I write the Italian 10yr bond yield is 4.7%, the highest in a decade, while the German 10yr - the Eurozone’s benchmark - is at just over 2%. That is a big credit spread for countries issuing debt in the same domestic currency.
Russia Mobilizes, and Threatens
Such is the attrition of the conflict in Ukraine, that Russia has found it necessary to mobilize - or conscript - former soldiers or those with relevant skills to back-fill its lost manpower. Western media reports that the mobilization has caused something of an exodus of people fearful of being called up. President Putin said that additional forces were needed to fight the “collective West”, which given the rhetoric of the G7 and equipment and training support of the US and UK in particular, one could have some sympathy with. This does indeed appear to be a conflict by proxy. In a thinly veiled threat to use nuclear weapons the President added that Russia retains “various means of destruction”, which are “more modern” than those of NATO, and that all necessary measures would be taken to defend Russia. Shortly after this speech the self-declared and Russian-backed People’s Republics of Donetsk and Luhansk said they would hold new referendums as to whether they become part of Russia. The result of these hastily arranged votes - however achieved - does not seem in doubt. It also means that any continued attempts by the Ukrainian military to retake land in those regions can be treated as an attack on Russia itself by Moscow. The G7 branded the referendums as sham and the US said that “catastrophic consequences for Russia” would ensue, if it resorts to nuclear weapons. This represents a serious escalation; ultimately caused by Ukraine’s recent success on the battlefield.
Iran and the Morality Police
Iranian state media reports that at least 41 people have been killed in a series of protests and demonstrations over 10 successive nights in nearly all corners of the country. Although the demonstrations have evolved to be against the hard-line Islamic regime in general, the original protests were triggered by the death in custody of a young woman arrested by the Morality Police for not wearing her hijab correctly. These violent events represent a significant enough challenge to the conservative Islamic government for the president, Ebrahim Raisi to say on Saturday that his government would crack down on the ongoing protests as a priority. Iran’s Islamic Republic is defended by a number of institutions created after the revolution that overthrew the last Shah in 1979, including the Moral Security Police and its “guidance patrols”, which are there to protect Islamic morals from inappropriate social behavior or clothing: the US Treasury added that agency and some of their leadership to the US sanctions list at the end of last week, more for symbolic reasons than anything else. It seems Iran is struggling with how to prevent people using social media to share ideas and arrange demonstrations; theocracies are designed with information control in mind. Let’s see how long that or the demonstrations last.
And finally - economic bright spots
In a world of inflation and recession fears, it is nice to see some positive analysis: first my colleague Rahul Shah at Tellimer Insights points to the companies with positive real yields even as interest rates rise; good news/bad news though, as most are related to the extraction and carbon fuel industries: just shows - regrettably - what we in human society all rely on when times get tough; energy and raw materials. Second is the analysis of Ruchir Sharma in the FT - Ruchir is Chair of Rockefeller International, and is an analyst by background (with all due respect to our journalistic friends and colleagues) - and gives the examples of seven countries that are bucking the inflation and recession trend: Vietnam, Indonesia, India, Greece, Portugal, Saudi Arabia and Japan. Some surprises in there!
Look after yourselves.
Yours
Duncan