Seeing beyond the headlinesrecession

Worldwide Financial Planning chief executive,

Last year a wannabe PM announced huge unfunded tax cuts. The UK needs overseas lenders and investors more than most large economies, and those overseas lenders (and bondholders) naturally freaked out, didn’t want to lend to the UK at those rates, and upped the cost of borrowing due to the new risk.

That triggered rates to spike, and banks jumped on the bandwagon with unaffordable rate rises. The UK is a debt driven economy, and with record borrowing and a society not used to paying for their debt (record low rates), markets freaked out. Equity markets fell.

Then came the little known LDI (Liability Driven Investment). You don’t know what it is but stay with me. Like the super killer mosquito, it could have wiped you out without the warning of the annoying buzz. It’s a risk management tool used inside pensions, which, when used correctly, keeps pensions balanced and afloat.

LDIs have to settle their payments each morning in cash. Because rates were now rising, they were having to settle each morning. Where do they get the cash from? Selling gilts because they are easy. Selling gilts lowers their value which of course raises their yield further, which means they need to sell more gilts again the next day as the LDI will trigger that. That spiral ends with Armageddon.

So, when I am told that Liz Truss and Kami Kwasi were unlucky, not so. It was monkeys and hand grenades.

The Bank of England offered to buy the gilts which stopped the panic and the ‘Chancellor’ was sacked, Truss replaced and overseas lenders relaxed, which eased interest rate policy.

We do, however, have strong inflation, in part caused by spending but not overly. China’s zero covid policy affects supply chains.

Energy costs caused by interference on all sides in the Ukraine make inflation very sticky indeed. China’s zero covid policy is gone and if the West (Biden) would like to look at the ceasefire agreed with Turkey’s skilful negotiators last year at the beginning of the war (that all sides agreed to), up until a visit from a bungling UK PM, that enormous humanitarian issue could subside very quickly.

In the meantime, central banks need to calm inflation rapidly. Believe it or not, fear is a good strategy and it is used widely. When the Bank of England increased rates by 0.75%, the headlines read “Largest Rise in 33 Years”. I might argue that the rise in 1992 from 10% to 12%, and a ‘same day threat’ to 15%, was more relevant. Googling ‘UK recession’ will return over 28 million results of which 5.52

Me

million results were for the last month alone.

The key is to avoid a tight labour market (too many jobs, not enough workers) leading to wage inflation and all the signs are showing that this is taking effect already which leads me to see through the horrific headlines, ie the bad news on layoffs is good news.

Higher taxes and credit cost coupled with fear mongering are methods of slowing economies. Hunt’s Autumn budget contained a 7% drop in disposable incomes and plenty of fear.

Soon

The headlines will soon read “less hiring, potential layoffs”. Trust me.

In the detail, however, know that the deputy governor of the BOE had tucked away in his notes that interest rates would peak 2% lower than they were communicating and Bank of England members noted that if rates did hit 5.25% it would trigger the longest recession since WW2. That cannot be allowed to happen.

As I write, two year and five-year fixed rate mortgages are all falling. One bank slashed up to 1.3% off its rates last week. Read into that what is obvious.

Peter McGahan is chief executive of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. If you have an enquiry please call 01872 222422.