More than a few observers suggested Andrew Bailey was either oblivious or crazy on Tuesday when, during remarks at the Institute of International Finance annual meeting in Washington, he effectively told the imperiled UK pension complex to drop dead.
“My message to the funds involved and all the firms is you’ve got three days left now,” he said, referencing the purported Friday end date of emergency Bank of England support for funds struggling to re-balance portfolios in the face of unprecedented volatility in UK government bonds. The bank was forced into an another intervention earlier this week amid a record selloff in linkers.
Bailey’s remarks came just hours after an industry group implored the BoE to consider extending support, at least through the end of the month.
Of course, the proximate cause of the ongoing tumult is Liz Truss’s budget. Every day, I try to be polite about that, although I’m not sure why. Yes, the juxtaposition with the BoE’s plans to trim its gilt holdings made the optics around Truss’s unfunded tax cuts that much worse given the implied burden on private investors who’d be compelled to absorb extra gilt supply, but the bank’s plans were known months in advance. And besides, QT is supposed to be a good thing in that it represents policy normalization.
Until the fiscal situation is “fixed” (whatever that means), chaos will reign in UK assets. I said as much on October 1, and my warnings have been borne out with more volatility and more BoE consternation. Kwasi Kwarteng did walk back one controversial part of the growth plan, canceling the planned abolition of the top tax rate, but that’s a Band-Aid on a bullet wound. Arguably, the whole plan needs to go.
None of that’s lost on Bailey and it’s at least possible he’s not crazy. Or if he is, he’s crazy like a fox.
Maybe Bailey “was playing 3D Chess and forcing the death of the Truss / Kwarteng budget with his ‘hard-stop’ comments on the BoE bond-buying program,” Nomura’s Charlie McElligott wrote Wednesday. Below, find Charlie’s rationale, which I’ll present without additional editorializing:
Bailey’s comments were, in my eyes, gamesmanship from the BoE back to the Truss government, a high risk game of chicken which is saying, “I’ll let markets dictate to you whether you and your budget survive” — and effectively saying that the blood will be on the government’s hands if there is a pension disaster which will then require a bailout later.
This “risking the left tail” to me actually increases the potential that the Truss government / Chancellor Kwarteng are forced to either reverse or modify the unfunded tax cuts and budget plan, or even outright resign, on a broad-based “no confidence” vote from global markets and the UK public.
And that outcome — a culling or outright U-turn of the budget plan, and / or straight-up resignations from the government — would then be a mega “right tail” for global markets which have been reeling ever since the shock budget announcement was first made a few weeks ago. It would take tremendous pressure off gilts and sterling, risking the potential for enormous squeezes across heavily-shorted global equities and global rates / bonds in a substantial relief rally. After all, this latest spiral in global markets did in fact accelerate due to the UK fiscal gong show adding gasoline to the inflation fire.
Remember, the British public is the group that destroyed their county’s future with Brexit. Their opinion may not be the best choice.
Truss’ position is crumbling.
The IMF, the IFS, the markets, the public, all the Tory MPs who supported Sunak, all the Tory MPs who are scared for their own seats, the SNP, all of Labor obviously, Britons who depend on public services including NHS, are all coming down on her. Cracks between her and her Chancellor of the Exchequer already appeared, she’s already given up on one piece of her tax cuts.
On 10/31 Kwarteng has to present detailed numbers for his budget, and my sense is that the numbers cannot come close to adding up.
Since Truss refuses to allow an energy conservation campaign, and hasn’t done anything to improve the UK’s energy situation (remember, UK has very little gas storage, having closed its national storage to save money), in a month or so there will be an emerging energy crisis, which she will also “own”.
Time is on BOE’s side, in the sense that Bailey can keep doing just enough to hold total calamity at bay, while Truss’ clock runs out. True BOE will lose some credibility, and may lose its QT tool for a period, but Bailey will have a chance to rebuild his position while Truss takes the fall.
That’s my best guess, anyway.