Bailey is damned if he does, damned if he doesn’t

With mayhem in the financial markets, what better way to find out what’s really going on than hearing from retired City trader, Anthony Peters, in his new weekly column. Anthony, who describes himself as an “old bond dog”,  worked for more than three decades in most areas of the international bond markets and for some of the City’s best known firms. His first hand experience of booms and busts, heydays and crises should be of invaluable help guiding us through today’s volatile markets.

Supertramp versus Genesis? What makes me think of these two quintessentially English progressive rock groups of the 1970s? I was out in the English countryside yesterday which presented itself at its finest in the autumn sunshine. There it was Supertramp land and “Crisis, what crisis?” while back in the Big Smoke it was all Genesis and “Selling England by the Pound”. So, the Bank of England was back in supporting the markets which remain exposed to the two-front attack driven by the disastrous side-effects of Liability Driven Investing on one hand and the new government’s insistence that those markets simply don’t understand how brilliant the plan is on the other. In the middle sits the Bank of England.

The Old Lady is responsible for neither but is now expected to take care of the effects of both. So, I suppose I feel a little for Governor Bailey but, to be frank, only a little. It used to be said of the late Yasser Arafat, erstwhile leader of the PLO and once winner of the Nobel peace prize, that he never missed an opportunity to miss an opportunity and, looking at the Andrew Bailey’s record over the past couple of years, nor has he. That said, being appointed as successor to the innately political and self-promoting Mark Carney who paraded his film star looks at any and every opportunity while making a considerable pig’s ear of the UK’s post-Brexit monetary policy was never going to be easy. Neither Carney nor Bailey would have been my first choice for the governorship but anybody who might have had the temerity to tell the Chancellor of the Exchequer who makes the appointment that the country was cruising for a bruising would probably never have been appointed.

Bailey certainly is between a rock and a hard place and his insistence during the Bank’s third round of intervention that support for the gilts market would end on Friday, that pension funds had three days left to get their books rebalanced and that they’d then be on their own was both right and wrong. Right inasmuch as that the bullet has to be bitten and it has to be bitten now. Affected parties cannot and should not expect the Bank of England to be standing guard outside their back door in perpetuity and the sooner they get the toxic positions cleared out, the sooner they can begin to rebuild. Wrong inasmuch as pushing everybody through the exit door at the same time is far more likely to cause a crush and a stampede in which injuries and deaths might result which could have been avoided if all had been permitted to unwind at a more measured pace. Damned if he does, damned if he doesn’t.

Then in the middle of it all, Bailey firmly places his foot in his mouth by declaring that interventions are temporary actions. Was Quantitative Easing not supposed to have been a temporary measure? I suppose if you regard something which lasts a mere 15 years as temporary, then I would have to agree that it was. I have occasionally referred to a conversation I had with a close friend who had been present at the meeting between HM Treasury and the Bank of England in late 2008 when the decision to embark on QE was taken. By all accounts everybody present was aware that they were stepping out onto thinnish ice and that although they all knew how to start the process, none of them were able to suggest how they could ever stop and reverse it again. I understand Governor Bailey’s sentiment and the way in which he is trying to prevent pension funds from sitting back and hoping for the best, something at which a number of them are championship contenders, but at the same time he risks spending just a little bit more of the paltry residue of his organisation’s credibility for as much as he might wish to bring an end on this painful LDI episode, he will barely be permitted to slam the door in the face of those who have not done as bidden and who think they might stand a better chance if they are not obliged to sell into a market which is forewarned of their arrival and ready to ambush them at will. So, while the Bank is still flying the QT flag, it is effectively back into QE mode. Those Treasury bods were in 2007 right to be circumspect; it’s so much easier to get into QE than it is to get out of it again.

Concurrently, Bailey has to contend with an apparently unrepentant Prime Minister and an equally unrepentant Chancellor. The latter has been touted as someone approaching the status of genius with a brain the size of a small African state. That might be true but as smart as Kwarteng’s brain might be, it quite clearly also has a pigeon flying loose in it. As far as the PM’s brain is concerned, I shall desist from repeating the line for which I took such abuse some weeks back – and before the new “mini-budget” had even been announced – which was to the effect that she was still looking for it.

Back in the late 1970s, the state of the art was fax machines that ran with rolls of chemical paper which faded within months. They served us as WhatsApp does today and as a medium for exchanging cartoons. There was one which was ubiquitous that showed a guy hanging from a branch over the water with the observation that when one is up to one’s a’se in crocodiles, it is easy to forget that the original objective was to drain the swamp. The crocodile snapping away underneath Andrew Bailey’s tuchis is the Federal Reserve.

In that, of course, Bailey is not alone. The BofE, the ECB, the BoJ, the BoK, and to some extent even the PBoC are all faced with a Federal Reserve which is confidently and unrelentingly tightening monetary policy. Most recently it was once again Loretta Mester of the Cleveland Fed, an acknowledged hawk, who repeated that the FOMC was far from done in terms of pushing rates higher. This time she went that little bit further than usual by articulating the obvious which is that until the level of Fed Funds surpasses not only the perceived neutral rate but also got ahead of inflation, they’d only be of limited value in the fight to wrestle it to the ground. The commentator on the news channel – it could have been either Bloomberg TV or CNBC which was playing in the background while I was brewing my first cup of coffee this morning– then displayed the customary ignorance by adding something along the lines of “…so far no sign of the Fed pivoting…” Have these guys learnt nothing? In my mind it conjures up the image of a football game with one side losing 5:1 with ten minutes to play and the commentator weighing up the chances of it ending in a draw.

There is no doubt that sterling is back to the wall but until the ambulance chasers of the mass media desist from obsessing about the level of cable – that sterling/dollar – and start looking as the world as a whole, they will make a bad situation look worse than it already is. Sterling began the year at £0.84/€. It has been beaten down since then to £0.885/€ at the time of writing. Grim but not disastrous. Over the same period, the dollar index has risen from its closing price on December 31st of 95.67 to stand at this moment in time at 113.11. The Aussie dollar this morning hit US$ 0.628, its lowest level since before Covid and it did that without the help of either LDI or Trussonomics. So best we circumnavigate the media hype and use our own judgement rather than that of people who make their living out of ratings rather than rates.

The author is a retired City trader specialising in fixed income who now works as a freelance strategy consultant. 

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