The ructions in the UK over the past few weeks have truly been the stuff of Hollywood and the story is nowhere near its finale. There have been screeches of discontent about the anointing of yet another new Prime Minister being undemocratic because there was no public vote. Lack of democracy has indeed reared its ugly head in the UK but not in the way the country appoints prime ministers. For that, look to “the market”.
The sequence of UK political events since David Cameron’s Brexit-vote-induced resignation of 2016 has been bizarre to say the least. Who would have foreseen that four UK prime ministers would have resigned in succession during the fixed terms of their parliaments? All along, though, the prime ministerial succession rules have been clear. As long as the current UK parliament automatically dissolves by December 17th 2024 at the latest and free and fair elections take place in January 2025, the fabric of the UK’s parliamentary democracy will have been upheld. In name at any rate.
What I find a lot more alarming – and something that politicians, analysts and commentators have oddly been less vocal about – is the role of that invisible, anonymous, amorphous mass a.k.a. “the market” in forcing political change on a democratic nation. “The market”, comically yet sinisterly caricatured as “bond vigilantes” forcing the political hands of an incumbent government.
Commentators, analysts and politicians all seem to have adopted the view that the reaction of “the market” to Liz Truss’s policy measures was fine and dandy. I have no particular comment to make about those policies. But I do not take the view that it was fine and dandy for the market to strong-arm the elected government of one of the world’s largest economies into submission. I support the notion of free-market economies playing their role in allocating capital to fund productive growth at the best marginal rates in the most efficient way.
People have been saying with abandon that “the market” rejected Truss’s plan without any sense that they found that menacing or remotely unacceptable. No screeches of discontent there. Philip Hammond, UK finance minister between 2016 and 2019, interviewed by Bloomberg the other day, said the most important thing for the government now is to calm the markets. “We’ve seen the power of the markets over the last few weeks,” he said, adding that newly-appointed finance minister Jeremy Hunt was putting together a package that would have been reassuring to the market.
“What we mustn’t do now,” Hammond continued, “is something that signals to the market more chaos, instability and uncertainty.” With regard to Truss’s policy agenda, he said “it doesn’t matter whether it’s credible or not credible because the markets were not going to allow it”. Hold on: the markets were not going to allow the plans even if they were credible?
I completely get that investors have skin in the game when it comes to what governments do insofar as they need to run the numbers to gauge fair value in their quest to ensure they are fairly compensated for providing financing and in doing so taking on a given level of risk. I also get that heavily indebted governments need to work harder to keep investors engaged.
But I dislike having “the market” personified as a single sentient being with absolute power to make or break governments. After all, what is “the market”? “The market” is a collective of thousands of nominally discrete investors and other participants. Sterling didn’t collapse nor did Gilt yields blow out because of a political course of action whose fundaments had been clear for weeks. Sterling and Gilts collapsed because investors sensed an opportunity to take on a government that didn’t have its policy tactics lined up and win, at a particularly unsettling and uncertain time for the UK and global economy.
This was no act of efficient capital allocation. This was an example of institutional investors sensing blood in the water, aggressively shorting and dumping assets for financial gain in a one-way bet that just gained momentum with all the look of collusion. Actions that took on a dimension of self-destruction as the rout came close to destroying one of their own: the pension funds running leveraged interest-rate derivatives (LDI) strategies.
Will Rishi Sunak’s succession to 10 Downing Street signal an end to the market volatility? “The market” is in wait-and-see mode. What happens next depends on what he does and whether “the market” likes what “it” hears. [What it won’t like one bit is the UK flash PMI for October showing the fastest rate of decline (excluding pandemic lockdowns) since the eye of the global financial crisis in March 2009.]
What happened in the UK in recent weeks was nothing short of a political coup staged by professionals working in the financial markets. The gunslingers and renegades are back, and they won’t go away now they’ve scored a major victory. Governments the world over are on high alert. Time for action!
