Ep.112: Is The US Heading For An 'Economic And Financial Catastrophe'?!

Hello and welcome to episode 112 of the Market Maker podcast. And this week, Piers and I are going to talk about economic and financial catastrophes. Not my words.

Favorite topic.

Yeah, not my words. That was the U.S. Treasury Secretary, uh, former head of the Fed, Janet Yellen, urging Congress on Thursday to raise the debt ceiling. And there's been a major talking point both in mainstream media and also in financial markets. Certainly has had quite a large impact in pockets of the market, which we'll talk about. But conscious of the fact that many students particularly might not be familiar with the concept of the debt ceiling— what it is, what it entails, what the process is, has it happened before, and if so, what was the market impact What's the likely outcome here? So we're going to go over all of that, and we're going to talk about Donald Trump. That's right, he's back on the scene for, uh, well, earlier in the week, the wrong reasons. We won't delve into that side of things, but he has been commenting about this debt ceiling issue. And of course, he's going to be running, he's gunning for the Republican candidacy to run for president again. So he's definitely been vocal on this issue And for good reason, he has a track record in this department, which we'll also go into. And the question is, is with some of his comments, could he be right in terms of his strategy and how he thinks he would play this game? And so we'll have a look at that as well. Um, but otherwise, other topics to touch upon this week, we had the Bank of England raise rates again. I think it was the 12th consecutive time. So we'll have a look at that. And then also a number of big investment banks changing their tune on the likes of the sterling currency. I mean, even you and I were pretty sizable bears not so long ago, but things change. And certainly the banks are changing tact as well on their view, on their outlook going forward for, for the British pound. And then finally, US CPI weakened And actually, I was just looking at the stock's performance on the week. Mega-cap tech is absolutely smashing it so far. So all this talk of debt ceiling worries and economic catastrophes, uh, I don't think the memo quite landed on the door of big tech because looking at the NASDAQ on my chart, still going up overnight, um, and the S&P is trading at a pretty decent level as well. So yeah, that's what's on the agenda. So to kick it off, Piers, maybe we could start with what is the debt ceiling?

Yeah, well, I think always the best thing to start here is rather than the debt ceiling, it's just the debt and trying to get your head around it. There's a great, there's a great website. Well, I don't know if anybody's been to New York, then you might have noticed near Times Square there's the US debt clock. So they've got this, the big clock on the wall that's kind of measuring how the amount of total US debt is changing over time, right? What's interesting is they have moved it. I was there, I was in New York in, when was it, February. They have moved it. It used to be in a very prominent location. And I'm not kidding. It was on a really busy junction by Times Square, you know, very prominent. They've now moved it down one of the side streets. So it's not—

that was a physical thing then. I know that was a website.

No, no, no.

Why would they do that in the first place?

I don't, I, I don't know. Well, I don't know the reasoning behind or who got it up there, but there was—

it must be, yeah, a campaign of some sort, right? Anti-establishment.

But the website is perhaps what more people are familiar with. So you should go and have a look at it. It's US Debt Clock. Org. Okay, usdebtclock.org. And on there, it's just counting over time, how's the debt levels in the US changing? There's a whole load of figures on this website, but top left is the key one, right? That's the total amount of, of national debt. And right now we're at $31.7 trillion. What's amazing about this is just how quickly it's changing over time. And I was— I got my stopwatch out just before coming on air, and every 40 seconds another $1 million gets added to the US debt mountain. Okay, $1 million every 40 seconds. Um, and if you break it down, debt per citizen, it's 90— well, basically $95,000. And but that's per citizen. If you think about it from a taxpayer's point of view, Obviously, adults and workers pay tax. So from a taxpayer's point of view, it's nearly $250,000 owed per taxpayer in the US. So the point is there's a lot of debt here, right? And it's crazy amounts and it's just going up and it's going up and it's going up. And it's, you know, through the decades it's been rising and rising and rising. We've had some episodes where it's gone through surges to the upside when we have a crisis. And obviously the COVID situation over the last few years has again been a real catalyst for, you know, a big surge to the upside. That's because government stimulus programs to support economies through crises, you know, that means the government steps in and spends more. But, you know, they don't have— they don't have a money tree where they can just pluck the notes off, right? The money's got to come from somewhere, so they borrow it in order to fund these big stimulus programs. Okay. And so the borrowing levels has got to now $31.74 trillion. Now, why is this important, like, right now? And why is it getting more attention in the press? We actually talked about this in January. You might remember. Um, on one of the pod episodes. But, um, the reason why it's now, uh, grabbing more headlines, more column inches, and that trend is going to continue in the weeks to come. And I would predict that by the time we get to the last week of May or the start of June, uh, it is going to dominate. That'll be all you can read about in the financial— the Financial Times front page will be talking about the debt ceiling every day. Okay, this is— it's coming. It's where we're now coming to the, the big crescendo. Why? Well, because the US's debt level, which as I said is going up $1 million every 40 seconds, is going to hit what's called the debt ceiling. And this is quite simply, um, it's the amount of money that Congress has agreed to borrow, and they set a limit, and that's the total amount that Congress— that's the political system— has signed off on. And unless Congress approves the borrowing of additional money on top of that, then it's, it's, it's not legal, right? You can't— the government can't borrow more than what the government itself has agreed to borrow. And this debt ceiling is approaching. So that's it in a nutshell. I mean, the history behind this is— because it's a little bit weird, right? The US— other countries don't operate with a debt ceiling, which is a self-imposed limit that can only be increased if a bill is passed through government. So it's a bit like putting a gun to your head every couple of years or putting a gun to the government's head every couple of years when you've got to try and get this through. And it's become a political weapon. But look, the history of it is actually the debt ceiling has been around since 1917. Prior to that, like most governments to this day, any borrowing was kind of agreed for specific purposes, right? You have a budget and like— so let's say an example in the US, would be they dug the Panama Canal, and that was an expensive project. And so, right, the government signed it off, if you like. There was a bill that went through the House of Representatives and the Senate, and Congress signed off on this spending project. And so that used to be what happened every time there was a big project, right? Let's look at— let's talk about it and let's agree. But in 1917, as the US were looking to enter the First World War, the spend was going to be massive. And so they put in place this idea, well, let's set a debt ceiling. It's a kind of, I guess, just to give ourselves self-enforced discipline, if you like. I mean, ironically, discipline is definitely not a word you would use when it comes to describing where the US are with their debt levels. We'll perhaps come onto that later. But so in 1917, this thing kicked in. All right. And it was actually in the 1930s they set a single debt ceiling, an actual figure. Um, and since then, every year, um, we've had issues. And actually, since 1960, um, the debt ceiling has been renegotiated higher 78 times. Um, 49 times under Republican presidents, 29 times under Democrats. Um, and so yeah, this is, this is the debt ceiling, and here we are yet again. It happens all the time, it's just this time's a little bit more spicy.

So two points there. One, given I agree the intensity of the issue will become more acute as we get towards the end of the month, is there a potential then to initiate some sort of trade short term to capture some of that, you know, manifestation of fear in the market. So is that a thing? Is that how you might—

it's definitely from a trade— with my trader's hat on, then yeah, there's volatility is going to increase in certain assets, and it depends how far this game of chicken goes down the path. Because what happens this— with, with this debt ceiling thing, so it has to be that a bill has to get passed through the House of Representatives and the Senate, which means that it becomes incredibly political. And the thing about debt and spending is an incredibly divisive, uh, political concept, okay? And typically, and I'm gonna very much be kind of generalizing here, but typically your Democrat side of the aisle, or if you want to talk in UK terms, the Labour Party side, the left side, typically left-leaning political organizations have the ethos of where they as a government should play a larger role in society. They should play a larger role in running an economy. Through that larger role should involve taxing people more and spending more. Okay, so the, the left side tend to want to spend a lot more money and have more control over the system. The right side of the aisle, the Republicans or the Conservatives, right, they are kind of the opposite in terms of their political ethos. They want to take— to have less influence. They're kind of free market thinkers, you know, let the economy get on with it, itself. They typically are tax less, spend less, right? So that's the kind of the divide here in the political sort of ethos. So what happens when we come up against the debt ceiling? Because who's in power at the moment in the US? Well, the Democrats, right, in terms of, um, the president. So Biden is a Democrat, but the House— and then you've got your two, your two parts of Congress, the House of Representatives, and you've got the Senate. So really, in the US political system, you've got three pillars, if you like. Okay, now at the moment, two of them are Democrat. So you've got the House, the White House is Democrat, and the Senate, right? But then in the House, you've got the Republicans who have the majority. All right, so when we come up to the debt ceiling, this is the Republicans' chance, who are the party not in power from the presidential point of view. This is the Republicans' chance. They've got a weapon here because they control the House of Representatives. Any bills that get signed off in that part of Congress, well, actually, they're in control of because they have the majority. So when the Democrats go, right, we're going to raise the debt ceiling because, look, we want to spend a load of money on things like climate change and so on. We're going to raise the debt ceiling. We're going to borrow more. The exact opposite to the Republican ethos, right? And the Republicans are going, no, no way. And this become— you get this standoff. And what happens is the Republicans say, well, look, if you want to raise your debt ceiling yet again, well, fine. However, we're only going to do it. We're only going to agree to that if you agree to our list of terms, which is now about a mile long.

If you agree to fund my US-Mexico border wall.

Indeed. Yeah, maybe it's a perfect example, right?

Let's talk a little bit about that and Trump, then I'll come back to that second point I wanted to have. Um, because, you know, if you polarize that scenario you described, where Republicans can really have a lot of leverage for negotiation— so Donald Trump urged Republican lawmakers to just let the US default, let it happen on its debts unless Democrats capitulate to demands for massive spending cuts. That was what he said, and all very timely, of course. He said this in New Hampshire, and that's a critical early voting state for these things. So, you know, given how, uh, expansive the US is, US is strategically, you want to focus on swing areas, important ones that then influence and act as sentiment bellwethers for other areas. And New Hampshire is one of those. So he made those comments at a town hall gathering, prime time television broadcast there. Um, he said, it's really psychological more than anything else, and it could be really bad. It could be maybe nothing. Maybe it's a bad week or a bad day. Who knows? I just You gotta admire, um, the fact that I think everyone's so kind of cautious, particularly tiptoeing around the political spectrum, but also the market. Yeah, the repercussion it could have. And here he is, just out there saying exactly what he thinks with no barrier at all. And to give it some context, the reason why He is quite important within this from how he suggests to manage the situation, of course, is because the United States federal government shut down for a record-breaking 35 days. This was the end of 2018 going through that New Year period. It's the longest government shutdown in history and the second within his term as president. So he's done it. He's been through this twice. So to give it some context, what does that mean? I got the numbers here. As a result, 9 executive departments with around 800,000 employees had to shut down partially or in full because of this brinksmanship that was happening. And that affected about one-fourth of government activities, causing employees to be furloughed and required to work without pay at that point. Uh, the Congressional Budget Office estimated the shutdown cost the American economy to be in around at least $11 billion, excluding indirect costs that were difficult to, to kind of quantify. So the idea here, then the strategy, like using Trump's model, is that, look, they are in government, they will take the blame. So he's got nothing to lose. By suggesting this because in the end the Democrats will have to buckle to some degree. Um, the problem that he ran into when he was in power was that I remember, cuz he was trying to fund at the time, he had a demand for just short of $6 billion he wanted in federal funds to fund the border wall, the Mexican wall.

I don't know.

Yeah. God knows what state that's in these days. But the Democrats like, no way, we're not paying, we're not paying for that. and he was like, right, we'll shut down and let's play it out. But every, uh, at the beginning, and this goes onto my kind of second point, the markets were fairly kind of passive in reaction to this. It was like all very, this happened before, it's happened 78 times or whatever the figure is. And it's like, yeah, it will get resolved. But what Trump did was something we've never seen before, is he went another week. Another week. And actually it becomes almost, um, self-defeating in a way, because every time it compounds, because more and more people then are not getting paid, it's not being productive in the economy. There's kind of first, second order impacts of that. And in the end he had to buckle. Um, so yeah, that— on my second question then, the US can't default, right? So what's the problem? And we are standing here looking at that debt clock. I'm almost hypnotized by looking at those numbers. 31.7 trillion. Let's go 50 trillion. What difference does it make? We've done it 78 times. What was that figure back in— when did you say? 1917?

Yeah.

What was it then? And if you said to someone in 1935, this figure, $32 trillion, they would've thought you're bonkers. I don't know. I don't understand why we sit here every almost other year.

Yeah.

And we get so fascinated by this thing. And I think I saw the short end of the rates market, so fixed income, which is highly sensitive to this, did take quite a substantial move this week. And I think I read the probability it was pricing of a default was in the low single percentage figures. But again, I can see that from a function of, I don't know, maybe hedging for worst-case outcomes or making money speculatively on predicting these short-term market movements over this repeatable cycle. Yeah, it's not going to default though.

I mean, so I think, well, yeah, you're— look, you're right, this is a repeatable cycle. So each time the cycle comes around, each time we arrive at the part of the cycle where it's right, we're about to hit the debt ceiling, right, the Democrats and the Republicans start arguing, throwing their toys about, and okay, how far down that path do they want to go beyond the deadline? So how many weeks, and then how many weeks is the government shut down and all the rest of it? I mean, really, the impact on financial markets is always temporary, right? And how large the impact is temporarily very much depends on your view at that point in the cycle each time. And your view is, right, just how far apart are the two sides? You know, at what stage of the negotiation, and is there any kind of sign that they're coming together, and how quickly are they coming together, and when might they find a middle ground, and when might this thing get passed through. Always with the inevitability that they will agree terms and that we will have forgotten all about this, you know, in a month's time. Okay, that's always been the case. Now, Human beings though, we're a bit irrational. We kind of get fed by the sensationalist media who, you know, each time we arrive at this part in the cycle, you know, love to hype it up. And then we consume that and we kind of maybe irrationally fear that default scenario, even though 78 times before it hasn't happened. And the 79th time now, It won't happen. And Trump's point's quite an interesting one. Well, I guess it's an interesting one. His point is, well, I don't know what will happen. It might be bad, might not be bad. His point is that really we fear the unknown more than anything else. And that unknown is what would happen if the US just didn't agree to raise the ceiling and would there be a default and what would be the repercussions? And our fear about that unknown is monstrous. Okay. Now, if it were to actually happen, I'm pretty sure there wouldn't be a default. And I don't know, they'd sort it out another way and it wouldn't have the knock-on ramifications of a financial disaster across the earth. But that's kind of what people fear, right? And that's what drives this short-term volatility in the run-up to this debt ceiling deadline, you know, each, each time. And, and I— so I actually quite like Trump's attitude towards this. I mean, there aren't many more individuals that I dislike, uh, more than Trump, but every now and then I do find myself, um, aligning with his approach. I actually think that there's two, there's two things to Trump's comment. Number one is just the debt levels generally, and I've spoken about this. The debt levels are going in the wrong direction. They're already too high. They're trending further higher. That's going to carry an inevitable moment, tipping point in the future where all of this kind of debt-fueled multi-decade cycle is going to kind of come crashing down. Okay, so I think I'm definitely with him on the fact that there's too much debt. The other point is about negotiation. And look, Trump has a very, um, aggressive, uh, bully boy, uh, approach when it comes to negotiation. And you have to say, as a straight-up negotiation tactic, very effective. Um, you might not like it in terms of it being aggressive and bullying, but I tell you what, it does concentrate the mind to get things done. So his approach is, well, you know, Democrats, we will not agree to your increase in spending. That's it, done. We're not— we are not negotiating. So when I said earlier, are they going to find a middle ground? Well, Trump's approach is to go nowhere near the middle ground, and in fact move further away from the middle ground as the negotiation's going on, dragging the other side firstly to the middle ground and then beyond the middle ground to kind of reach Trump, who's kind of moved way off stream, right? And so in the end, Trump gets a deal that is closer to his starting point, um, you know, goes beyond that middle ground, if you see what I'm trying to say. So I, I actually do like his approach here because my view is on debt, that they've got too much and they need to stop spending.

I think politically as well, from a strategic point of view, it's a good topic for him to really start galvanizing his base in the run-up, if you like. And he can talk about America, and I read he was talking about what he would have done differently with Ukraine, all these types of things. He's trying to really tap into that already, and these are very important issues for the voting base at the moment, just given the cost of living crisis. You know, he's really going to be tapping into all of that. That does lead me then to my kind of next series of questions, which is you mentioned there about mainstream media and the consumption of that from an average Joe on the street. Now they are going to be reading that this is a potential disaster, a collapse. We're already seeing all of this financial market volatility and interest rates and mortgage defaults and the rest of it. If the consumer then gets less confident and we're already talking about the prospects of do we, don't we slow down, do we have a recession or not, does that accelerate that? And as a knock-on effect, impact growth, impact the Fed and this idea about then this rate cutting priced in by markets toward the end of the year?

It does accelerate that, but for how long? Remember, don't forget that this always gets resolved and Therefore, it will create temporary volatility. But that being said, I mean, I do think the sides are further apart than they've ever been going into this situation. So it might be that we have a more elongated government shutdown, a more elongated period of limbo and uncertainty. Now, what will that have an impact? Yeah, it will. You know, just simple stuff like If the risk of US default goes up, right, and it might be still super low, but it might be just moving from super, super low to not quite so low, right? Still stays low, but that move, that direction of travel means that US yields, US Treasury yields will go up. Now, US Treasury yields are a benchmark yield that is a reference point for the rate of interest on loans, like literally across the planet, but never mind just in the US, right? US government bond yields are, you know, the number one reference point when you're setting loan rates. Okay, so if these yields go up, well then yeah, the cost of borrowing goes up across the system, right? And so it's like another interest rate hike. Even though it's not the Fed necessarily going, right, we're raising interest rates, borrowing costs go up anyway because of how the market works, right? So you can certainly get borrowing costs going up, exacerbating, of course, an already, you know, chronic cost of living crisis. It's the perfect— it is literally the perfect narrative for the Republicans because Biden wants to spend more And the Republicans can say, look, your spending's out of control. Your spending got us to where we are in the first place anyway, because we got all this inflation that now the Fed's having to hike rates on. Now you want to spend more? We're saying no. And you Democrats are refusing to agree to spend less. And so now we've hit the debt ceiling, and you're making matters even worse. It's literally the perfect platform for the Republicans, I think.

You know who's loving this? He sat on the sidelines just going, I love this little TV show that comes on every other year. It's the people I always go back to who enjoy all of the things that the West do. China must be sitting there. Xi Jinping must be sitting there. And we talked about this before with the inflation situation. Why not, why not poke Russia again, stoke the energy situation? This whole debt ceiling goes on. Maybe I might make some noises about Taiwan again. That will throw a little, yeah, spanner in the works. It's when you think about that Ray Dalio kind of supercycle, when he's talking about the transition of power of time, it's so— it's when you actually look objectively, it's so hilarious how Western society is set up where we're almost our worst enemy.

Well, I've got a slight tangent here because I was having a conversation with someone I just bumped— you know when you're on the tube and you kind of get on the tube and then like there's someone right next to you who that you know, you don't know very well, but you just randomly happen to be stood like right next to them because the tube's packed, so you've got no choice but to kind of engage in conversation. And right, it obviously starts off small talk and then, then you get on to maybe some interesting topics. But anyway, this, um, this lady's husband, we used to live like two doors down from them, um, years back. Anyway, her husband, um, is the like project manager for major construction projects, right? So such as he did the Tottenham, uh, football stadium project, which is widely considered to be the best stadium in the world, right? Obviously. But at the moment he's been doing Madison Square Garden upgrade in New York. And I was basically talking and I was saying, look, what's next for this guy? What's he going to do next? And she said, ah, well, he's really holding out for Chelsea. He wants the Chelsea Stadium upgrade. And that's been a massive saga over decades because they haven't been able to get planning permission. Anyway, I was saying, well, you know, what's the holdup now? And she goes, well, American owners. And I said, well, what do you mean? They're throwing money at Chelsea like it's going out of fashion. They spent like $300 million on players. She goes, yeah, American money is not worth as much anymore. And I said, what? How do you mean? And she said, well, basically American money is leveraged, is borrowed, right? Is debt leveraged. But now interest rates are up and they keep going up. Well, actually, the cost of borrowing has got so high that actually US leveraged money isn't as valuable anymore. And she was saying basically he's, he's really looking for projects that are owned by the Saudis or the Qataris or the Middle East, because that's just straight up cash. There's no debt interest on cash. And so that money is now more valuable. So I guess my point with that tangent kind of comes back— coming back to the debt ceiling and everything is the more indebted the US become, and you could say the West more broadly, the more indebted they become, when interest rates go up, then unfortunately it has a hugely negative impact on your status in the world in terms of your your, your power to invest and spend and grow.

So, and, and at the same time, the opposite effect is happening with the realization of the economic potential or productivity of China, Africa, all these other places long term. Yeah, where it is cash because it's sponsored by the Chinese state.

And to put some numbers on what I'm saying, so as the US debt moves up, of course, and as interest rates go up, well, then their, their, their net interest payments go up, right? And you've kind of got the double whammy over the last 12 months because not only has debt gone up a lot because of fiscal stimulus during COVID but then interest rates have gone up a lot at the same time. So you're getting a double upward force on net interest payments. So in 2020 2, the US government's, uh, net interest payments on their debt was $400 billion. Okay, um, and that was on a deficit of 6.8%. Now that was last year based on, uh, an average interest rate, which was still like on average, because remember interest rates went from 0 to basically 5%, so on average That calculation was based on a 2% interest rate. Well, in 2023, it's going to be an average of 5%, and so it's going to go from $400 billion to what, I don't know, $800, $900 billion spent just on interest costs. To put that into context, last year when they were spending $400 billion, that was more than they spent on elementary and secondary education, disaster relief, agriculture, science and space programs, foreign aid, natural resources, veterans benefits and services, and environmental protection combined. They spent more on their debt interest than all of that stuff, and that's just going to get worse. So the point is, the longer debt goes up, And with interest rates staying high, they're just gonna have less money to spend on their economy.

And an interesting thing here, leading us into a little bit of the inflation numbers that came outta the US this week, was that the inflation numbers actually dropped. We'll talk about that in a moment. Stocks had a temporary rally. However, then, and just leaning into a little bit about, your buddy who you were talking about, the market flipped. And it flipped in the intraday because there was a Bloomberg source report, people familiar with the matter, where an investment firm called the Royal Group— and the Royal Group is controlled by a top Abu Dhabi royal family member— and the source report was saying they've built a short position worth billions of dollars into US stocks. And this is a complete contrast to what we heard, I think it was like October of last year, 6 months ago or so, when they were saying they were going to invest as much as $10 billion into US stocks and European stocks. And actually markets sold off a bit on that. So it's interesting, just given again, it's that Middle Eastern money that was steering the ship of US equities momentarily. Midweek this week. Yeah, but, um, US inflation then. US CPI rose by 4.9% from a year earlier. That actually marks the first sub-5% reading in 2 years. The core reading, ex-food and energy, that also cooled slightly. I know you've spoken about this before, but perhaps maybe just a quick summary of why it's important. But several key elements showed moderation in April. And shelter costs, which are the biggest services component, make up about one-third of the overall CPI index, rose by 0.4% last month. So it was up, but that is the smallest in over a year. So yeah, the inflation figures then, what do you think?

Yeah, I think it was a— it was kind of a bit, bit mixed, but net overall marginally positive. I mean, I think you mentioned tech stocks have been having a good week. I mean, the stocks didn't react necessarily like bang immediately, but I think in the end you have seen rate, rate-sensitive sectors have, have gone up. Um, I say it's mixed because, yeah, that headline reading is great, below 5%, you know, that's psychological, but lowest reading on the headline for 2 more than 2 years. Obviously that trend is continuing. The reason why it's mixed, because the trend on the core CPI side is not continuing. Well, it's not going down. It was going down and it's kind of not anymore. It kind of came off its peak from September of last year when core inflation was 6.6% and it dropped month on month. It dropped from 6.6%, 6.3%, 6%, 5.7%. That was December. January, 5.6%. February 5.5. So the, the rate of decline slowing then. So February 5.5, March 5.6, so it ticked back up. April 5.5. So really, when you're looking at 2023, 4 months of data now in, core inflation's flat. It's not going down anymore, it's flat. And so that's why it's still a little bit mixed. However, you would be— the counter to, to that analysis is to say, well, yeah, it is flat, but the reasons why it's flat seems to weirdly mostly be due to secondhand car sales, which have suddenly ramped back up again on a year-on-year comparison. So a lot of that core goods inflation was driven by a huge 4.4% monthly jump in used car prices. Okay, so you might say that's a, maybe a, a temporary upside influence. The more important driver, of course, CPI, as you mentioned it, shelter services. And all the data is still pointing towards the fact that that has reached the tipping point now. And so you are, I think, net overall, whilst that used car sales number was, has been a bit of a spanner in the works this month. I think that more broadly inflation does seem to be tracking lower, but we had a really strong labor market report last week out of the US, so it's kind of— the jury's still out a little bit on how fast inflation might continue to drop in 2023. Powell certainly doesn't think it's going to drop as fast as markets expect, and so That's why some out there are saying that interest rates will have to stay higher for longer. They may even have to go up more.

Um, okay, and then let's conclude then a quick wrap of the Bank of England, who raised interest rates 0.25%, 4.5% now for benchmark rate. They warned it would not hit its inflation target until 2025. So just kind of connecting to what you were just describing, but the inflation situation is still much worse here, you could say, in terms of how high the numbers still remain. They did say though that the UK will not experience a recession, and if you remember several months ago, I mean, it was ultra doom gloom UK. Um, however, things— the tide has seemingly turned quite a lot. And actually, the downturn has not been— even from backward-looking economic data that we've had— not as bad as feared. Um, they release their forecasts, which they do, um, every other meeting, essentially, kind of like the Fed do with their projections. And they showed a higher pass for CPI and the biggest GDP forecast upgrade on record. The improvement mainly due to lower energy prices, prices along with fiscal stimulus, lower unemployment boosting consumer confidence and spending was the rationale.

It's all a bit weird, isn't it? Because yeah, we were very— well, I mean, I won't put words in your mouth. I was very bearish the UK at the start of this year. Just hasn't happened yet. Should I add that word in?

He's still holding on at the moment.

Yeah, it's like, well, what recession? And even though inflation— look, I think it's because energy costs, right? Household energy, the gas price, that, that was kind of what was feeding a lot of that kind of negativity around the UK economic outlook. 6 months ago, right? But that's fallen off a cliff, right? The gas pricing, which obviously was driven higher by the Ukraine-Russia thing, um, but that's like collapsed. So we're expecting one of the big elements that's contributing to inflation and the cost of living crisis here in the UK, one of those big major forces is going away. It's not going away immediately because household gas bills haven't gone down just the way the pricing of it works, but it will do, right? So I think that's a really big piece of this puzzle that's shifted people's outlook. But to go as far as to say we're not even going to have a recession now, inflation's going to stay higher for longer. Obviously that means then the pathway is open for the Bank of England to continue to hike rates. So this is where it comes— and look, when we talk about things like FX exchange rates, um, it's always monetary policy differential. That's the key catalyst. So what is the monetary policy outlook in one country, the UK, versus the monetary policy outlook in another country, let's say the US? And then look at the cable FX rate, so sterling versus the dollar. And right now we've had quite a radical shift in the last few months, and it's gone from— in the US, right, we're thinking the Fed are going to have to hike more for longer, but really the Fed are now at the top. Okay, Powell said as much, so the Fed have stopped hiking. But here in the UK, it's kind of gone the opposite. It's like, well, they're going to have to stop hiking and start cutting rates because we're going to have a massive recession. It's gone from that to actually now, well, they're continuing to hike and they will continue to hike even more. So it's kind of really flipped. And that's why cable, that's sterling versus the dollar, has had a really strong rally this year in 2023. And really, if you go back to the autumn of last year, we were— we nosedived down to 1.07 very briefly, and now we're tracking up above 1.25. And that's kind of back to levels we haven't seen since last summer. And yeah, it's— sterling is back. Um, it would seem.

Yeah, and, uh, the team at Goldman Sachs said exactly as you described. They said essentially, we think that the same factors that acted as headwinds on sterling in 2022, mostly natural gas prices and the relative stance of the Bank of England's policy, have now turned to tailwinds.

Right.

And so them, Citi, SocGen, NatWest, they're all upgrading their forecasts, and it all comes after this week, um, was it the, the cable hit a 5-month high? No, there was a cable to a 1-year high against the dollar, so sterling, and 5-month high against the euro. So yeah, it's all— I bet BoJo is not liking that, is he?

Must, must be the coronation.

All right, cool. Well, look, we'll wrap it up there for this week. Thanks everyone, uh, for listening. Thank you, Piers, for, for sharing your insights, and we'll catch you next week. Take care, everyone.

Have a good weekend.