A Complete Britshow

Three PMs in as many months, a bond market meltdown, trouble at the Bank of England and plenty more...

(Source: Getty Images)

Joel Bowman, checking in this weekend from Buenos Aires, Argentina...

“The English and Americans are two peoples divided by a common language.”
~ (Attributed to) George Bernard Shaw

The death of a monarch... three prime ministers in as many months... a bond market meltdown... and a bunch of millennial numpties gluing themselves to roads and priceless artworks...

News out of the UK of late has been anything but the kind of Keep Calm and Carry On, stiff upper lip attitude we’ve come to expect from our friends across The Pond. 

“You seriously couldn't make this stuff up,” remarked UK-born investor, Robert Marstrand, when we caught up with him earlier in the week. “It really is banana republic stuff, frankly. It's embarrassing and they just need to get a grip.”

Quite.

Rob is something of a British refugee who, having left his beloved England fifteen or so years ago, decamped to Argentina’s capital. Before that he spent a couple of decades working as an investment banker for UBS, where he was stationed variously between London, Zürich and hong Kong. 

Most recently, he’s teamed up with the folks at Southbank Investment Research to create UK Independent Wealth, a publication aimed at helping British investors reclaim their financial independence. (Check out his work, here.)

We caught up with Rob to try and make heads or tails out of the Shakespearean tragi-comedy that is modern day British politics. A short, lightly edited (for clarity) excerpt from that conversation serves as today’s feature essay, below. Please enjoy...

---

A Complete Britshow
A Conversation with Joel Bowman and Robert Marstrand

[Ed. Note: The following is an excerpt from a Fatal Conceits Podcast recorded earlier this week, tracking the soap opera that is modern day British politics. We pick up the action mid-conversation, just as Boris Johnson was on his way out and Liz Truss was preparing to become the UK’s shortest serving Prime Minister in history...

Joel Bowman: So between the pinches and the parties, Boris was shown the door. This all gets a little kind of Game of Thrones from here with some coup d'etats and "et tu brutes." So then we have Liz Truss, billed as the kind of Maggie Thatcher Iron Lady Version 2.0. She comes along with her new Chancellor of the Exchequer, her mini budget, her tax cuts. She's supposed to reign in spending, fix the economy. She's supposed to tamp down on inflation which is running, I think it was 13 plus percent recently, so it's still as high or higher than it is in many other Western countries at the moment. But bring us up to speed with what happened with the very short lived Truss government, I think it was only 55 days or something in the end.

Robert Marstrand: Yeah, so Johnson resigned in July. There was an election process within the Conservative party, in which they narrowed down the candidates to two. The Conservative party members, who are people that pay dues to the party, about 140,000 people, voted and chose Liz Truss over Rishi Sunak who we'll come onto. So she got into power. In the middle of this, literally, she went to see the Queen to officially take the role in September and the Queen passed away, I think, two days later, which was obviously a massive period of mourning for the country as the Queen's been on the throne for 70 years. 

Then there was the period of the long queue around London to go and see the Queen's coffin and the funeral service. And then very shortly after that, champing at the bit, the Truss government and her Chancellor, who's like the Treasury Secretary, launched this mini budget, which was all about tax cuts and energy subsidies and promised structural reformers to get rid of EU law after Brexit and very non-specific statements about cutting public spending.

It was at the same moment that the markets were already throwing a wobbly, the [US] dollar was going through a spike, a lot of currencies falling against the dollar, a lot of bond markets dropping as yields rose in this inflationary rising interest rate environment. But they got all the blame. I mean, part of it was their fault. Frankly the communication was bad, they did it too fast, it was rushed, they should have tried to build a bit more consensus. And in that market turmoil, pension funds were melting down, and the Bank of England ended up stepping in. We can talk about the pension funds, it's a technical thing, but basically the party turned on her and so she got to a position where she suddenly had to backtrack all these policies rapidly, really rapid backpedaling. She kicked out senior people who'd only just been appointed, like the Chancellor and the Finance Minister effectively. And then she was gone and I think she resigned on day 45 and she was actually out of the role on day 49, something like that. She's the shortest serving Prime Minister in British history.

Joel Bowman: Yeah, it's quite extraordinary, isn't it? To have such an almost turnstile style leadership in... We're not talking about some banana republic here. We might expect something like this to happen down in our neck of the woods, here in South America, but this is a G7 country, people are supposed to be sensible and have a stiff upper lip and whatnot and, as you say, instead we have markets throwing wobblies and all kinds of things. 

I want to go back to that, to the bond market for a second, and the issue with the UK gilts because it was quite extraordinary to watch in such a short period of time, just what was going on with the pound sterling, what was happening with yields. I just want to read a quick quote from the Bank of England, which eventually stepped in with both halting its selling program and announcing that it was going to buy up to 65 billion pounds worth of bonds.

Here's the quote here. It says, "Were a dysfunction in this market to continue or worsen there would be a material risk to UK financial stability." It's quite an extraordinary statement. It goes on to say, "This would lead to an unwarranted tightening of financial conditions and a reduction of the flow of credit to the real economy," which I guess is part of the problem in the first place. 

But do you want to maybe unpack what was happening across the pond during that 10 day period? Because I remember first going over to the UK 20 plus years ago and being very disappointed when my meager Aussie dollar savings were slashed by two thirds. The pound was King, or Queen at the time, and we very nearly approached, I think, pound US dollar parity recently, which is something I haven't seen in my lifetime. So just walk us through what was happening at that particular moment, you mentioned pension funds of course being at the core of it.

Robert Marstrand: Yeah. Well, the root of this of course is that during COVID all the big Western central banks printed huge amounts of money in the process called QE to basically fund the government handouts, as far as I'm concerned. And they don't obviously present it that way, but they were printing money so that governments could borrow more money and spend it on the stimmy checks or in the UK furlough payments, as they were called. The Bank of England's been very slow to respond to the inflation that that's caused. In fact, they didn't even realize it was coming. I mean, clearly all of them, the Fed, Bank of England, European Central Bank plus others all made the same mistake, didn't think this would create inflation and it has. Don't blame it all on Putin, trust me, it's not all his fault, it's the central banks.

The day before the mini budget that Truss' government launched, the tax cutting - or actually canceling tax rises, most of it - the Bank of England had raised interest rates, but by less than the market expected, and they're way behind the curve compared to the Federal Reserve in terms of getting a grip on inflation. Inflation's already over 10% a year and still rising in the UK. And they announced the first stage of quantitative tightening, so that's selling gilts, UK government bonds, into the market to drain liquidity. So they were both tightening policy in one way, but not tightening it enough in another way, in that they weren't raising interest rates enough. Then the market throws a wobbly, and they have to completely backtrack and reverse and say, "Oh, actually no, we're not selling gilts this week anymore. We're going to buy them instead." I think it was two weeks actually. 

Now, what's interesting is the pension funds you mentioned, so these are the corporate pension funds, the money managed on behalf of a company or a public sector body to provide pensions for people in the future. It's not the sort of pensions where you put your own money into your own fund and then invest it, it's those corporate funds. Now it turned out (who knew?) it turned out they'd been playing fast and loose in the derivatives markets. These supposedly safe, stable, heavily regulated, boring pension funds have been taking on leverage in the derivative markets through something called liability driven investment or LDI.

Anyway, this leverage, when the bond market crashed, or moved quite quickly, meant they had to stump up tons of extra cash to cover their margin calls, their collateral if you like, with the people they were trading with, and they couldn't liquidate fast enough, which was going to create a snowball effect in the bond market and make things worse. So the bank stepped in to stabilize the bond market. But the interesting thing is it subsequently came to light that the Bank of England itself had 82% of its own employee pension funds in one of these leverage schemes that, in my opinion, shouldn't have been going on in the first place. So there was also a massive conflict of interest at the Bank of England, and obviously it would've been terribly embarrassing if their pension fund had got into big trouble. So there's a lot of layers and layers to this stuff.

Joel Bowman: Yeah, absolutely. It is, again, I keep using the word extraordinary, I'm cognizant of this, but they really are remarkable times when, as you say, you might well have the majority of pensions for workers at the Bank of England itself at risk...

Robert Marstrand: I mean, look, you seriously couldn't make this stuff up and it really is banana republic stuff, frankly. It's embarrassing and they just need to get a grip.

Joel Bowman: All right, so let's fast forward a little bit because we're going to come back and touch on a few of these points in our wrap up in a moment. But we should underscore that it was the present Prime Minister, who we're about to get to, who I believe was Chancellor of the Exchequer during the time when the government was printing money to extend these furlough payments. 

This is Rishi Sunak, he was the Chancellor of the Exchequer. I just checked this morning, but he was there from February of 2020, so this is right as the pandemic was really kicking off in the Western world. He took over from Sajid Javid, who served until February of that year. And Rishi was in that role from February 2020 to July of this year. So it was Rishi who really oversaw that massive spending program and, as they say, no bad deed goes unrewarded in the realm of politics. So after having spent all this money, which the government was printing to cover their ridiculous programs, he's now been awarded the top job. So let's go to our third Prime Minister in as many months. The demise of Truss and the rise of Sunak.

Robert Marstrand: Well, of course Sunak was extremely popular at first when he was Chancellor because he was handing out tons of money to people.

Joel Bowman: Funny that.

Robert Marstrand: Funny how people like free money, but they don't think about what comes next. So he actually resigned just before Boris Johnson resigned from his job. So he stuck the knife into Johnson, clearly with an eye on getting the top job. Then things didn't go to plan for the establishment and Truss got the job. Then she got effectively kicked out, resigned technically, but effectively got kicked out, she had no authority. He put his hat in the ring again to run for Prime Minister. Boris Johnson came back and was running, so he reappeared and he had to hustle himself onto a plane. He was on holiday in Barbados or somewhere and rushed back over the weekend to get back in to garner enough support from MPs to go forward. And there was a third candidate who is not worth talking about.

And then Johnson just suddenly dropped out, having claimed he had enough support, dropped out. And so Sunak effectively was anointed the head of the Conservative party without it going to any kind of vote of even the members of the Conservative party, the grassroots activists and members. So a lot of people see it as a kind of globalist coup if you like, because he's always been a bit more of that kind of globalist, high tax, big state. He's ex Goldman Sachs, so financial establishment. So a lot of people are very upset about it who feel that it's happened in an undemocratic way, both within the Conservative party and clearly outside the Conservative party. 

But just to clarify, Joel, I think you must have got his name wrong because President Biden said that he's called Rashi Sanuk, not Rishi Sunak. So Biden obviously gets everything right, so we'll have to change his name.

Joel Bowman: Well, he would know. I can't remember the last time Biden made a gaff so let's just go with Rashi Sanuk from now on shall we?

Robert Marstrand: Rashi Sanuk it is.

Ed. Note: You can listen to the entire Fatal Conceits Podcast, right here...

Robert Marstrand on the Britshow

Or watch it on our YouTube channel, below...

As always, feel free to leave any comments in the section below and to share our work with friend and foe on both sides of The Pond.

And that will do us for another week. It’s a cold and rainy old Sunday down here in Buenos Aires, just the kind of day to put a roast in the oven, uncork a bottle of malbec and unplug the digital devices. 

Just a heads up that Bill is off for another week as he continues to plan out the next phase of our project from down in Florida. We’ll have details on all that in due course (watch this space…)

In the meantime, we’ve got a selection of guest essays from some of Bill’s private network of professional investors, money managers and most trusted analysts. And of course we’ll have more from Tom Dyson and Dan Denning throughout the week, too. 

Whatever you’re up to this weekend, we hope you’re enjoying yourself. 

Cheers,
Joel Bowman