Common Cents & London Calling

This past week was another one for the books, that is if your book is the “Doomsday Book.” Before anyone corrects me, I know what the purpose of the latter was. However, the name is just so appropriate for what is happening right now. Frankly, all of the angst is beyond tiresome, and I am sure you will agree.

The headlines place much of the blame for the recent unpleasantness on persist inflation, higher inflation rates, and continued deficit spending. To be sure, that is a potent blend of bad stuff. However, in my opinion, that tells really only part of the story.

I submit some of our discomfort comes from the sneaky suspicion the world is uncoupling. If not that, let’s just we aren’t rowing in the same direction with the same sense of gusto we previously had. Recent shifts in the political status quo in places like the UK and Italy would seem to bear this out. Shoot, even the French confounded the world with their most recent elections.

If you could choose one word to describe the current zeitgeist, which might not be the best word choice, it would discontent. To be sure, there is always a measure of it floating about. However, it is hard to read the headlines, watch the news, listen to the radio, and scroll through your Twitter feed and think: “you know, we seem to be hitting on all cylinders right now. What a good time to be alive.”

Far from trying to be cynical, although I am admittedly being so, I would further submit the world is suffering from a profound lack of leadership. It seems those in a position of power are either insular in their thinking or too ‘intellectual’ to understand the common man/woman. To that end, there is a difference between insular and stupid, just as there is one between intellectual and smart.

John Q. Public take your pick between the two. By the way, in case you were wondering, I will discuss predestination and transubstantiation in a little bit.

Contrary to the headlines, I would argue there was more to this week’s market woes than simply inflation and recession worries. After all, we should all have furrows in our brow from worrying about those things. Nothing new there. So, why did they seem so pronounced this week?

They weren’t, really. The British were a much bigger problem. More specifically, the British bond market and monetary policy were.

Recently, new UK Prime Minister Liz Truss announced a convoluted package of spending increases, tax cuts and increased borrowing in order to stimulate economic growth. Given the relatively moribund performance of the British economy, something had to be done. Unfortunately, this wasn’t it. After all, borrowing vast sums of money in the face of persnickety inflation (9.9%) and higher interest rates goes against common sense.

In truth, it would have been an awesome plan at 0.0% inflation and 0.50% 10-year money. Not so much at present. Blowing up the deficit at the higher interest rates in years? Good grief.

Not surprisingly, investors took the UK bond market behind the woodshed and gave it a whooping. I mean a bad one. Let’s put it this way, the 10-year UK Treasury (4.25% due 6/7/32) cost £112.325 and had a yield to maturity of 2.798% at the end of August 2022. This past Tuesday, 9/27, these had fallen to £98.033 and  4.502%.

Trust me, that type of action isn’t usual for a developed, liquid market in such a short period of time. In fact, it is downright alarming. It makes the bloodbath we have had in the domestic bond markets look like a walk in the park.

I go through this for a simple reason: Great Britain is not an economic backwater. It is a member of the G-7, and London has historically been a dominant financial center. So, what happens if its bond market falls apart, like it was showing signs of doing at the start of the week?

That’s right, the Bank of England (BoE) had to sweep in and backstop the market. This was precisely what it did NOT want to do at this point, as is trying to curtail inflation…not embark on a new quantitative easing program. In so many ways and words, the Exchequer and the BoE  are not on the same page, and seem to be working at cross purposes.

The right hand doesn’t know what the left hand is doing and all of that. Shoot, if they don’t know that in London, how is Washington supposed to know just what in the [heck] is going on with its closest ally?

That isn’t leadership. In fact, it is quite possibly the antithesis of it.

Of course, you could argue the British are just doing what everyone else is doing, so why pick on them? To this, I would counter they are, indeed, but as though on steroids. Further, the global financial markets are anxiously anticipating some good news about inflation and interest rates from somewhere…anywhere. Unfortunately, the UK gave the world exactly what it didn’t want, bad news, at a very bad time.

After all, investor psyche has been awful this whole calendar year. However, it has been even worse this month. My goodness, wake me up when September ends.

This takes me back to my initial contention about the lack of leadership around the world. Currently, the US dollar is as strong as it has been in two decades. Seriously, with all of our financial imprudence and runaway inflation, foreigners have been lining up to buy our currency. Why? Because we are the least bad of all the bad options.

But is that truly leadership? To be the least bad? I will let you answer that for yourself.

When I think of leadership, I think of two quotes from Dwight D. Eisenhower. The first is more famous than the other:

“Leadership is the art of getting someone else to do something you want done because he wants to do it.”

The second is:

“The supreme quality for leadership is unquestionably integrity. Without I, no real success is possible…”

When you combine the two, you come up with:

“Without integrity, it is impossible to lead. Without leadership, nothing gets done.”

Huh…I just made that last one up, and I kind of like it. Of course, I have to give Ike some of the credit. Still, if that statement is accurate, you can reasonably intuit there is always a lack of leadership when everything is falling apart.

With that being said, at every point throughout our nation’s history, when all the chips seem down, a leader always seems to arise. There is no reason to think this time will be any different. However, like everyone, I am getting a little impatient for them to show up.

Thank you for your continued support. As always, I hope this newsletter finds you and your family well. May your blessings outweigh your sorrows on this any every day. Also, please be sure to tune into our podcast, Trading Perspectives, which is available on every platform.

John Norris
Chief Economist



Please note, nothing in this newsletter should be considered or otherwise construed as an offer to buy or sell investment services or securities of any type. Any individual action you might take from reading this newsletter is at your own risk. My opinion, as those of our investment committee Investment Committee, is subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the rest of the associates and/or shareholders of Oakworth Capital Bank or the official position of the company itself.