What caught my eye this week.
Another week in the new unreality of British political and economic life. Pass me the smelling salts.
I said last week [1] how I long for these commentaries to look away from the ongoing car crash in Westminster. That though requires some break in the succession of disasters jackknifing into each other.
Don’t hold your breath – but feel free to skip to the links below.
The concrete developments from a financial point of view are quickly recounted. As well as dropping the scrapping of the 45% tax rate, the planned hike in corporation tax from 19% to 25% will now go ahead in April.
Offing the 45% tax band would have cost about £2bn. Bringing in the 25% corporation tax rate theoretically generates nearly £19bn.
In theory that’s £21bn towards the £60bn hole [2] in the public finances implied by the Mini Budget.
We’ve been promised from the start that spending cuts – or efficiencies, in politician-speak – would make up the rest of the gap. In her speed date press conference [3] announcing she’d sacked her chancellor, Truss found a few seconds to reiterate this intention.
Next week’s chancellor Jeremy Hunt will apparently reveal all on 31 October. [4] If he’s still around by then.
For now at least the reversal of the recent rise in National Insurance and the 1% cut in basic rate income tax due in April both survive. As far as I can tell the additional rate applied to dividend income is still to be abolished [5] and the recent 1.25% rise in dividend tax rates will also still be reversed.
The changes to stamp duty and getting rid of the banker’s bonus cap linger on.
Damaged goods
How we used to laugh at Italian politics, with its revolving door of new prime ministers, its fickle electorate, and sleaze.
But with three prime ministers in six years and four chancellors in three – and Boris Johnson more than filling in the blanks in the scandal department – no Briton need stand in an Italian’s shadow again.
Italy isn’t just a unwanted template for contemporary Britain, however. Because while it’s tempting for someone like me to see the acceleration of culture and technology colliding with the tribalism of social media to produce our current political maelstrom, the reality is other countries have been at it for years.
We just used to do things differently here. If anything, turning Italian at least offers the chance of turning back again.
So what changed?
In the dread word: Brexit.
As a generalization, the most deluded and out-out-touch Conservative MPs were always on the so-called Eurosceptic wing.
When I was growing up they were the comic relief of British politics. Very few serious people took them seriously.
Now and then one appeared as a sort of forlorn and romantic figure standing up for the memory of a fading Britain of yesteryear. You could spare them a moment’s respect. But it was in the way you stop chattering when you walk past a war memorial. You don’t want to go back there.
Tragically, all that changed when David Cameron’s gambit to rid his party of the Eurosceptics growing influence failed and they bamboozled the British public into voting for Brexit.
A project that had nothing to recommend it bar regaining that wistfully wished-for full sovereignty. Itself a red herring in my opinion, and after our politics since 2016 I’m not sure something you’d wish on your enemies.
If this is what taking back control looks like, I suggest we hand it over to my Roomba
— Monevator (@Monevator) October 14, 2022 [6]
Brexit was always a self-harming move from an economic perspective.
And I bemoaned how the methods of the Leave campaign – lies, for want of a better word – had damaged our cultural life, too. The loss of freedoms most of us were born with were also grievous.
But I never really argued with the sovereignty crowd. At least their reasons for wanting us out of the EU was intellectually coherent.
However their Brexit wasn’t the one the country voted for.
Not great men
Brexit – as imagined by most of the 52% who expected £350m a week for the NHS, economic growth, leveling up, more democratic politics and all the rest – was a con job perpetrated on the nation.
Its promises were at best amorphous, at most contradictory.
They wilted under scrutiny.
Yet like most such delusions in history, the perpetrators – and those they’ve hoodwinked – only doubled-down afterwards. It’s always easier to do that then recant.
Those who questioned Brexit were the enemies of the people. Those who wanted anything less than the Hard Brexit were traitors to the supposed vote for a proper Brexit.
I’m recounting all this yet again because it explains why we’re in the mess we’re in.
Economically-speaking, Brexit was a bad idea but as I’ve always said it’s a slow puncture. It creates friction and leaks growth. We have to work harder just to stay where we would have been before.
However politically-speaking, Brexit is a filter for incompetence and wishful thinking. That blow has come quick.
After offing Theresa May – herself the first politician to impale herself in trying to reconcile the fantasies of Brexit with the paltry reality – Boris Johnson purged his ranks of the Remainers who’d led successive revolts against the hard Brexit being railroaded through Parliament.
Those who formed Johnson’s government and that which has followed were thus of two camps.
Either true Brexiteers, or else Remainers prepared to pretend Brexit was a good idea.
Hardcore support for Brexit is like a filter that selects for magical thinking, disdain for experts, and the belief that if you say something enough times it must be true.
No surprise that hasn’t worked out so well in practice.
In filtering for Brexit believers, the Parliamentary Tory party had purged nearly all its most capable – or at least realistic – men and women, or sent them to the back benches. We’ve been government mostly by the dregs since.
As for the reconciled Remainers, I understand those who say we need to move on. But I have not heard one of these people (who include Truss and Hunt, incidentally) say something like: “Brexit was a terrible idea with tough economic consequences, but we have to make the best of it.”
Rather, they too spout the nonsense about Brexit dividends and having our cake and eating it.
Which perpetuates the national feeling that has something has gone very wrong.
Contract
This is all relevant to our current travails because as I say our leaders have been increasingly selected from the least capable Tory MPs – the faction identified by its disdain for experts.
But it also matters because the fantasy of Brexit-thinking has escaped from the fringes and moved into the public consciousness.
We’re possibly not fatally infected yet. Almost everyone – even many of the rich, and not a few Tory MPs – thought scrapping the 45% tax rate was at the least a bad look. Some sense remains.
But listening to people’s reactions to the Mini Budget and its reversals more broadly, we now seem to be an electorate of cake-ists – only we never got the cake, let alone a chance to eat it.
Few want taxes to rise. Even fewer think spending should be cut. Investors I follow on Twitter are writing to their MPs bemoaning how the corporation tax rise will threaten the dividends they live on.
And while I don’t have much sympathy for Liz Truss, I’m not surprised she keeps banging on about the energy price cap. A potentially vastly expensive relief package that within days everybody took for granted.
When the Maxi-Mini Budget dropped I looked for pros as well as cons, much to some reader’s disquiet [7]. And from the start the tension between a loose fiscal policy and the Bank of England’s fight against inflation was clear.
That’s why I called it a Push-Me, Pull-You [8] budget. It looked sure to cause ructions in the months and years ahead.
But I’m not going to claim I foresaw the extent of market tumult that followed.
Guns before butter
At some point we’ll learn how much of the spike in gilt yields [9] was amplified by technical factors related to the unwinding of pension fund leverage.
Now the damage is done I doubt it can be reversed, anyway. But it’s conceivable that the market’s seeming reaction to the unfunded tax cuts laid out by Truss and Kwarteng was overblown.
What would certainly have improved their position with the markets – though not the electorate, which is doubtless why they didn’t do it – would have been if they’d simultaneously explained where they’d cut spending to help pay for their program.
And also if they’d allowed the Office for Budget Responsibility – which they’d all but sidelined – to cost it out.
But like sacking the veteran Secretary to the Treasury Sir Tom Scholar on taking office, ignoring the OBR was just the latest manifestation of the scorning of expertise (/reality) that has benighted British politics since the Referendum.
With a surname like Scholar he never really stood a chance.
Anyway, would Kwarteng’s have been my Budget for the country in its precarious position in 2022? With the world facing inflationary pressure and the cost of government borrowing rising all year? And a war raging on the edge of Europe? In the midst of an expensive energy crisis?
No, it would not.
Maybe in 2019 it might have had more merit. But as that rare Brexit-y MP with the ability to use a spreadsheet Rishi Sunak so presciently warned, now was not the time.
With that said, I am not going to pretend I saw no merit in trying to shake Britain out of its low productivity slumber – or even to row back from an ever-more costly state.
The issues Truss and Kwarteng identified haven’t gone away. The irony is their antics have probably only made them more entrenched.
Return the gift
I can’t tell you if mortgage rates will settle, or how deep the coming recession will be. The markets were underwhelmed by Truss’s latest U-turns but I expect she’ll be gone in a fortnight anyway.
For now the more troubling question for me is what happens when Sir Keir Starmer’s Labour embarks on its near-certain path to victory in the general election in 18 months or so.
Can it tone down the populist temperature? Dare it say that Brexit was folly and transparently outline plans to at least ameliorate the worst affects?
The crisis in care and NHS staffing is one reason to relax immigration, pronto. And while I expect I’ll have a bus pass when the UK inevitably rejoins the EU, moving towards a softer Brexit via one of the other trading relationships would be a start.
Alternatively, will Starmer and Labour also start to unravel within weeks of gaining office?
Labour has the same problems with a membership base that’s far from what was, historically at least, the center ground of British politics.
I’ve no doubt its MPs are equally capable of scandals and gaffes to be rapidly exposed and pilloried on social media too.
I suppose that’s when we’ll discover whether Britain is just the new Italy, or if something deeper and even more troubling is going on that has put us on this rollercoaster.
Have a great weekend all.
From Monevator
What happens to bond yields when interest rates rise? – Monevator [9]
Capital gains tax on gilts – Monevator [10]
From the archive-ator: Why are we surprised when would-be retirees think again? – Monevator [11]
News
Note: Some links are Google search results – in PC/desktop view you can click to read the piece without being a paid subscriber. Try privacy/incognito mode to avoid cookies. Consider subscribing if you read them a lot!1 [12]
What was in the Mini Budget, and what has now changed? – BBC [13]
Bank of England warns mortgage defaults to rise in the months ahead – Guardian [14]
‘Windfall tax’ for low-carbon energy firms in U-turn from Liz Truss – Independent [15]
Mortgage borrowers face new wave of interest rate rises [Search result] – FT [16]
Natwest is close these 43 bank branches [List] – Yahoo Finance [17]
The lipstick effect: Britons turn to small luxuries in the face of cost-of-living crisis – Guardian [18]
[19]
Value remains cheap versus growth [PDF] – GMO [20]
Products and services
Atom Bank offers first 5% savings account for a decade, fixed for five years – This Is Money [21]
M&S launches its own version of ‘buy now, pay later’ – Which [22]
Can you really save £120 by doing your washing at night this winter? – This Is Money [23]
Claim up to £1,000 cashback when you transfer your pension to Interactive Investor. Terms apply – Interactive Investor [24]
Vanguard adds two new ETFs to its ESG product range in the UK – Vanguard [25]
Can equity release help hard-pressed pensioners? [Search result] – FT [26]
What to do if you need to remortgage – Which [27]
Homes for sale near woods, in pictures – Guardian [28]
Comment and opinion
How to tax (a guide for governments) [Search result] – FT [29]
Low taxes aren’t the recipe for growth in the UK, says Guy Spier – FT Advisor [30]
$10 or under? Get it – Budgets are Sexy [31]
The bond vigilantes are back – The Motley Fool UK [32]
The Great British Retirement Survey 2022 [PDF] – Interactive Investor [33]
Carrying on spending in retirement as the market falls – Humble Dollar [34]
When will soaring interest rates hit house prices? – This Is Money [35]
The great pension funds panic of 2022 [Podcast] – A Long Time in Finance [36]
Tailoring your portfolio when one-size does not fit all – Morningstar [37]
There will be drawdowns – Compound Advisors [38]
Four key questions about today’s market – Banker of FIRE [39]
Fear itself – Morningstar [40]
Another inflation mini-special
Core US inflation hits a 40-year high – Bloomberg via Yahoo [41]
Whither long-term US inflation? – Morningstar [42]
The last time the Fed killed inflation with a recession – A Wealth of Common Sense [43]
Naughty corner: Active antics
The survival game for active fund managers – Behavioural Investment [44]
High yields abound in the UK stock market right now – UK Dividend Stocks [45]
The evolution of endowment investing – Neckar’s Mind and Markets [46]
Bitcoin becoming less volatile than stocks raises a warning flag – Yahoo Finance [47]
The sages of Wall Street – Verdad [48]
The performance of small cap stocks over economic cycles [Nerdy] – TEBI [49]
One study of New York commercial real estate suggests a long-term, post-pandemic 39% loss of value [Research] – SSRN [50]
Covid corner
[51]
The tragic consequences of the politicisation of science in the US [Search result] – FT [52]
Kindle book bargains
Mastering The Market Cycle by Howard Marks – £0.99 on Kindle [53]
Go Big: How To Fix Our World by Ed Miliband – £0.99 on Kindle [54]
Talking To My Daughter: A Brief History Of Capitalism by Yanis Varoufakis – £0.99 on Kindle [55]
My Life, Our Times by Gordon Brown – £0.99 on Kindle [56]
Environmental factors
Burn coal and stop building renewables? [No…] – Klement on Investing [57]
Off our beat
Summary of Ben Bernanke’s work that won his Nobel Prize – Marginal Revolution [58]
This week on we’re screwed: A.I. Joe Rogan interviews A.I. Steve Jobs [Podcast] – Podcast.AI [59]
Annie Duke shares thoughts from Quit: The Power of Knowing When To Walk Away [60] – Next Big Idea Club [61]
How burnout broke Britain, and how it can recover – Guardian [62]
Why are men so hard to help – National Affairs [63]
Text-ure: what the texts messages of tech titans reveal- No Mercy, No Malice [64]
So farewell, Kwasi. Your career died so Liz Truss’s might live for at least 15 more minutes – Guardian [65]
And finally…
“Economists are criticized for not being able to predict the future, but, because the data are incomplete and subject to revision, we cannot even be sure what happened in the recent past. Noisy data make effective policymaking all the more difficult.”
– Ben Bernanke, The Courage To Act [66]
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