A somewhat lazy and low-hanging topic: the Great British Pound took a sh*t and died this month. My thoughts on what this means for financial independence and life for us Brits in general.
A mini-budget that was pretty full on
In what might be a new slang term for the ages, “Doing a KamiKwasi”, the Chancellor of the Exchequer spectacularly failed to read the room after two years of the whole world doing Quantitative Easing.
The Room said: ‘be fiscally conservative‘.
Mr Kwarteng felt that the spicier option of granting tax cuts in the hopes of stimulating spending would make everything better.
Well, it could have been that. It could also have been the intervention in fuel prices, which is popular but expensive.
Whatever – the point is, The Markets didn’t like it…
So the Great British Pound collapsed like a flan in a cupboard.
I could try to say something about this, but I thought this tweet by UK blog Monevator summed it up best:
Then the Bank of England called chicken first
So the problem with gilts tanking is that they are the traditional “safe” investment. Really. Which means that every low-medium risk portfolio or fund ever has a big bag of them.
Like… pretty much everyone’s pension funds in the UK.
Even better! Because yield were so low and gilts so safe, pension funds were leveraging them. Nothing ever goes wrong with leverage…
So as every overseas investor spotted the death spiral of our currency and bailed out, the Bank of England had to work out what could be least bad for the economy: a ton of inflation or not buying gilts and hoping that people’s pensions would still be paid.
They opted for the former and started buying more bonds.
For those of you who read my post on how money is actually made, you’ll know that this means adding more money into our already overblown money supply.
Yay! Such fun!
But the boss lady says it’s all OK! Until she doesn’t.
So then our intrepid Premier (who now has the great Twitter content tag #Trussterf*ck) reassured the markets by doing a famous UK Government U-Turn on, well, not a lot. A tax cut at the top price bracket got reversed.
However, there’s still the big problem, which is:
THE UK IS CURRENTLY SHORTING THE ENERGY MARKET…
…WHILE WE’re IN A SORT-OF COLD WAR WITH RUSSIA, one of the biggest suppliers.
Price cap on energy not as good as promised
The thing about the price caps on energy is that they’re monumentally popular. Hugely so. People have zero desire to return to the hairdryer-under-the-duvet and just-wear-more-jumpers pre-1990s heating methods. Keeping costs predictable and sort-of low means we can keep using it as if supply wasn’t being squeezed.
Which means we need more of at least one of the following to see us through the winter in twenty-first century comfort:
- Electricity
- Natural gas
- Oil
- Coal
- Firewood
That list ranges from “cleanest” to “dirtiest” in pretty much that order, at least in terms of emissions – although to be fair, oil and coal are debateable. Not the point, though. The point is that the UK isn’t really into, well, any of those.
Don’t get me wrong: we do a lot of the top two. However, one of the biggest players in the market is getting shot up by a government run by a comedian in a country that until a few years ago most people in Western Europe thought was basically its best buddy.
Anyway, suffice to say that demand could very well outstrip supply. When demand is stronger than supply, basic free market economics means that the price will go up until demand runs out, which isn’t likely when the whole of developed Europe is thinking the same thing as us about cold showers.
So, if you’re the UK Government and are promising to keep a flat rate of energy while going out to bid for these things on the global free market, you’re basically shorting the energy market at an increasingly big loss… with no end in sight, and no idea of how big a loss you could take. An unlimited downside.
So I guess more money from the Bank of England?
Well, at first.
It seems though that this all ends on Friday 14 October 2022. At least, according to the BBC. By Friday, every pension fund that’s up to its eyeballs in leveraged purchases of gilts needs to be sorted.
One thing financial institutions aren’t is fast. Well, generally. So let’s see what next week brings.
So what happens now?
Gazing into tea leaves isn’t a party trick I’m particularly good at, but a betting man could see a few things happening at the bottom of a brew.
Firstly, I’d expect more inflation. Yes, even more. This might change if Rogue Choice PM Liz Truss decides to sack the Chancellor and replace him with someone competent, but after the Cheese and Pork Markets speech I don’t think this will happen.
I mean, Mr Kwarteng might go, but the replacement will be, um, some quasi-Kwasi Chancellor.
In the longer term, you have to wonder if the pound will actually recover. At the moment the pound, the dollar and the euro are pretty evenly matched, but only the dollar is a global reserve currency. For Brits, we’re stuck with sterling. But if you’re in Asia, Africa, the Middle East… why would you look beyond USD?
It’s probably quite a good time to be investing in bonds, but if you’re heavily invested in them you’re probably having a bad time right now.
Temporarily, there’s an opportunity with a devalued pound for the UK to do some more competitive exporting around the world. The problem is that the UK imports a lot and doesn’t export much beyond, um, professional services. That classic, global-recession-proof market sector. Not great, I wouldn’t be too surprised if we start seeing more layoffs in the near future like we did in 2008-2009.
It’s time to redefine “safe” and “risky” investments
2022 has been a crap year for pretty much every asset class. Well, gold has held up I guess, but gold doesn’t usually grow in value much.
The thing is, gilts were meant to be “safe”. Government bonds are meant to be more safe than shares in general. This spectacular nosedive is usually seen in crypto… that other form of currency that’s made up and has only imputed value.
At least bitcoin is decentralised. Well, ish. It’s certainly got a bigger upside potential.
The sad fact is that no investments are “safe”. None. Which suggests that the actual best way to ensure a degree of safety is to invest in everything. Diversification across asset classes and within asset classes is probably the safest bet.
At least British shares are on sale
When a currency tanks like GBP, investors tend to pull out of the regional equities markets so that they’re not caught up in currency risk.
However, given that Brits are stuck with GBP anyway, the consolation prize is that there are some cheap shares out there at the moment.
I’m still early in my accumulation journey, so for me it has mostly been business as usual. However, I did squeeze the budgets a bit to put a couple of extra pennies into picked UK stocks on Trading212 with a solid cash moat, P/E ratio of less than 15, low cost to book value ratio and a reasonable dividend that I thought would survive any potential global or UK-specific recession that would last up to two years.
Obviously, a recession that’s on the long side would mean it’s anyone’s guess as to what businesses will survive.
Probably not going to change what happens to me in the long run, but psychologically I felt like I was making the most of opportunity, and that’s a big deal.
