The Trashing of Truss’s Trousseau


The dowry of goodwill that we would normally expect to endow a new Prime Minister with has been well and truly trashed. The chorus of disapproval for what she and her Chancellor are trying to achieve has been deafening. Is the hue and cry reasonable, logical and justifiable or a Tower of Babel full of noise and confusion? I emphatically believe it is the latter and here’s why.

Before Kwarteng’s Budget sections of the commentariat were already getting twitchy as the first thing the Chancellor did on arrival at the Treasury was to sack his Permanent Secretary, one Sir Tom Scholar. This caused much clutching of pearls from old senior colleagues, such as Sir Robin Butler and Sir Gus O’Donnell (or GOD as he was known around Whitehall), who declared it highly improper to dismiss such a good and honourable servant of us all. In reality though this is a man, like a Dickensian character, who has grinded away in the same office for 30 years producing endless pontifications on why nothing should change, why Brexit is too awful to contemplate, why Pension funds should be forced to buy his gilt-edged securities for evermore. Actually he hadn’t even always been in attendance at the Horseguards’ road HQ as it now has emerged that for several years up until 2018, Scholar was permitted to spend stretches of time working remotely from South America, where his wife and family moved. One former Minister aware of the agreement joked he was the “pioneer of working from home”.  All in all, I don’t think the nation needs to trouble itself further about his removal.

Moving on to Kwarteng’s fateful Budget speech, the trouble seems to have started when he announced cuts to the top and bottom rates of income tax, without any offsetting spending cuts and of course, coming on top of an estimated £65bn of subsidies for our energy bills. Quite apart from the harrumphing about tax cuts for the rich this whole thing initially got the forex and bond markets terribly excited in a downward direction. I say initially because overnight in the Far East sterling was driven down to 1.03 dollars to the pound. Anybody who knows anything about those Far Eastern traders knows that at the first whiff of cordite they always panic (probably due to the long history of insecurity in that volatile part of the world) but then they always fall into line when the more mature US and UK markets open for business. Unfortunately the boys and girls who make up the bond markets over here and have never seen a bear market in their bailiwick thanks to decades of cheap money sprayed around by the Central Banks, also panicked when they saw a wave of gilt selling coming towards them. How so? Well for north of ten years now our pension funds had been ordered by their regulators to stuff themselves full of “safe government” bonds but because the  income on these things are so low they indulged in fancy hedging strategies to boost that income. Suddenly the commentariat start muttering that Kwarteng’s unfunded Budget is going to push interest rates further and faster and the damn bursts causing nasty margin calls on those involved in gilt hedging insurance. 

For a moment please indulge me. For a very long time I and some others have been warning that our pension funds’ massive switch into low yielding fixed income bonds and away from income producing equities was bound to end in disaster. In a City Grump I wrote back on 14th November 2012 entitled “What’s happened to your pension?”, I  said:

“It has been for some time now that the Pensions regulator and the FSA (now the FCA) have insisted that bonds are relatively risk free, compared to equity, investments and therefore must feature, big time, in pension funds. But the BoE’s manipulation of falling yields means that ever more bonds have to be purchased by your harassed pension fund manager in an effort to match the actuarial requirements of your pension. This is madness.”

Well, last week the BoE’s chickens came home to roost and the furious clucking from the likes of Legal & General and others up to their necks in bond hedging meant our brilliant central bank decided it must step in and become the government  bond buyer of the last resort as gilt yields were rapidly heading to 4%. Never mind that US bonds already yielded 4%, let’s have a panic here because Mr Kwarteng is incompetent, isn’t he? Total stuff and nonsense – and here we are a few days later wondering what the whoopsy was all about. All I’d say is I hope the regulators, aided and abetted by the likes of Scholar at the Treasury, are hung, drawn and quartered for their recklessness over the last decade and more.

Anyway, after this unedifying episode in the gilt (or should that be guilt?) market, just about all and sundry have decided that interest rates should whizz on up from the current 2.25% to something like 6% thus totally ignoring the fact that all the important inflation indicators (commodities, energy, house prices and even shipping rates) are massively turning down in the key US market. Ergo, after a little more macho chest beating from Fed Governor Powell, interest rates will peak and fall back in 2023. All this is totally ignored by our Government’s many detractors.

Finally we come to what appears to be the big thing that is exercising the limited brainpower of the wets in the Tory Party (yes, I’m thinking Grant Shapps and others) together with the slithery, slippery Mr Gove. They maintain the optics of cutting the top rate of tax (isn’t that something used to dispense spirits in a pub?) is terrible because, at a time when people struggling to pay their bills, helping the rich is just not on.  In other words, lets ignore this cut is just £2bn (one thirty-fifth the cost of the pandemic) and by the Treasury’s own calculations will be recouped in very short order as people are incentivised to return to work here. Let’s ignore everyone is being extensively helped with their energy bills (here please note well that the mooted £65bn of cost to the Exchequer is likely to fall to £30bn or less if gas prices stay at the current levels they have fallen to). Instead let’s label Mrs Truss a bad, bad girl and administer a good spanking. Pathetic nonsense that means we can all sit here and watch the Tory Party that used to stand for low taxes, the freedom of the individual and the entrepreneurial spirit, blow itself to kingdom come.

I suppose the postscript to this Whitehall farce is the political scribblers and the punch drunk traders appear to be setting great store by the audit that the Office of Budget Responsibility ( OBR) is going to carry out on what Mr Gove is going to allow to remain ( sic) of Kwarteng’s Budget. This has to be, currently, the greatest three card trick around. When you turn the three cards over you see that they are comprised of ex Treasury and BoE senior honchos. Ergo, as about as independent as my foot is from my leg. But never mind, the game must go on. Shame Truss appears now to be playing long stop instead of bowling for a brighter future.

The City Grump has spent some 40 years in the City of London. He started as a stockbroker’s analyst but after some years he decided he was too grumpy to continue with the sell side of things so he moved to the buy side and became a fund manager for the next 20 years, selling his own business in the 1990s. Post the millennium, he found himself in turn chairing a stockbroker, a financial PR company, and an Exchange. He still keeps his hand in, chairing a brace of VCTs and investing personally in startups. The City Grump’s publications are available here.