Market Update 30th August 2022

All gas and gaiters

The world is full of little ironies. Last week the government announced a ban on peat in domestic compost, albeit not until 2024. Today, the chancellor is flying to the United States to have a chat about the energy crisis. The latter is pointless at the best of times, but arguably especially so given the unlikelihood of his still being chancellor this time next week. Presumably he discounted the option of having a Teams call and donating the cost of the flight to the UN’s crowdfunding appeal to raise money for Pakistan.

Doubtless by the time she is confirmed as prime minister next Monday, Liz Truss will have a plan for how to deal with energy bills that precious few will actually be able to afford to pay. This is one of those rare occasions when a sticking plaster has to be found. It is not far different from the banking crisis of 2008 and 2009. Without Plan B, then the banking system would have collapsed. It is a classic case of necessity begetting invention.

The challenge facing Ms Truss and her chancellor is surmountable. As my starting point, let me quote the government’s own words (which I take as being truthful). The GOV.UK website has a factsheet on our energy supply, which duly states: “…the UK is in no way dependent on Russian gas supply. Our largest single source of gas is from the UK Continental Shelf and the vast majority of our imports come from reliable suppliers such as Norway…Russia made up less than 4% of total gas supply in 2021.”

So the cost of producing our gas, and of supplying this to homes, businesses and power producers has effectively nothing to do with Russia. It is a good starting point. The energy crisis, one might argue, is one of the inefficiencies of the market, not one of a lack of supply. The catch is that the vast increase in the cost of gas in particular comes from everyone thinking that prices are going to rise, and therefore buying in supplies (or contracts for supplies). It is this self-fulfilling circle that needs cracking. And necessity dictates that we are ultimately not going to see the simply terrifying predictions of where the price cap is heading. We wish Ms Truss well and we hope that she has understood the fragility of the UK’s reliance on wholesale gas markets.

Equity markets finished last week with an uncomfortable bump. The cause was Jay Powell saying that the markets need to believe that he is very hard and will keep raising interest rates until inflation is begging for mercy. I paraphrase, but his short speech at Jackson Hole was an attempt to re-establish the Federal Reserve’s credibility in being tough. The snag is that very few people actually believe it. Mr Powell has a pretty much unblemished record of kowtowing to anything the White House or the markets demand. It is worth just dwelling on how the Fed was so slow to rein back its stimulus last year in the face of what it persistently argued was transient inflation, but is now so keen to raise interest rates to tackle what is a largely transient peak caused by energy prices. It is not hard to sympathise with the view of much of the market that Powell’s Fed has lost the plot.

The US economy, overall, is still healthy enough. This week’s update to the monthly employment data is expected to show that another 300,000 jobs were filled in August. That is slightly down from July’s reading, but is still pointing to robust hiring, on average. It should help to cement a third consecutive 75 basis point rise in US interest rates at the FOMC’s next meeting in three weeks’ time. The risk is that in attempting to prove how hard it is, and before the energy spike works its way through the inflation calculations, the Fed raises rates too far, too fast. Perhaps bizarrely, this is what markets want to believe: their hope is that by this time next year, The Fed will again have seen the error of its ways and rates will be on their way down again.

It is a game of bluff, double bluff and triple bluff. It also underlines why we find it much more worthwhile searching for quality businesses that can rise through the obstacles that governments and Central Banks strew in their way. As certain observers say: form is temporary, class is permanent.

The more observant of our readers may notice that I have penned this week’s column under a different job description. Richard Pike’s arrival at Hawksmoor as our new Head of Investment Management is allowing me to pass across my hands-on management responsibilities and to spend more of my time concentrating on our market analysis. I am also delighted to have been invited to advise our Board on how we best meet the myriad of climate disclosures to be required of all involved in financial services.

Jim Wood-Smith – Market Commentator and Head of Climate Transition

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