This Equity FD Blog would like to start off with some reassurance. The words that will be written here have been carefully considered. We are very confident that they will not devalue the national currency, spook the bond markets, or threaten the level of your pension. Read it with relaxation.
Which is just as well really after the extraordinary events of the past few weeks. The sudden death, ten days of mourning and the funeral of Queen Elizabeth II were moving and traumatic for many millions of people. It turned out, however, that they would be followed within a few days by the Government attempting to implement an entirely new economic strategy for which it had clearly not prepared the ground and be forced to abandon it and the Chancellor who articulated it after three weeks. The alternative was that sterling was heading for the status of the Central African Franc, mortgage rates were about to go through the proverbial roof and pension funds enter meltdown. Even an ignominious U-Turn was better than continuing to drive straight over a very large cliff edge. Yet it could not stop Liz Truss herself following the Chancellor she had fired into oblivion.
Both the cause and the consequence of this has been chronic political instability. Consider this. Between the morning of July 13th 2016 (David Cameron’s last day in office) and October 14th 2022, seven individuals have served as Chancellor of the Exchequer (George Osborne, Philip Hammond, Sajid Javid, Rishi Sunak, Nadhim Zahawi, Kwasi Kwarteng and now Jeremy Hunt). During that same period there have also been four Prime Ministers (Mr Cameron, Theresa May, Boris Johnson and Liz Truss) and we are now due to have another one. Seven Chancellors and five Prime Ministers in comfortably less than seven years.
How unstable is this by historical standards? The seven Chancellors who served before George Osborne entered the scene (so from Sir Geoffrey Howe to Alistair Darling) lasted for 31 years between them. The four Prime Ministers who were in 10 Downing Street in advance of the Cameron era (Margaret Thatcher, John Major, Tony Blair and Gordon Brown) also stuck around for 31 years in total. We have somehow entered a world in which there are boy bands that last longer than a British Prime Minister or Chancellor. And that is not to mention other departments across Whitehall such as the Department for Business, Energy and Industrial Strategy, the Department for Health and the Department for Education which have also witnessed turnout on a chronic scale. In the last instance – the Secretary of State responsible for the schooling of our young people – there have been five of them between September 2021 and September 2022. This is the political equivalent of truancy.
Imagine that this were not a country but a company. What would one think of a business that was on its fourth CEO in under seven years with the prospect of a fifth arriving imminently? What would one assume about the condition of a firm which was on its seventh CFO in less than seven years? How much confidence would one have in any Board which had decided to undertake a fundamental change in direction, only to reverse course again entirely some 21 days later? Would this strike a reasonable individual as an investment opportunity that they really had to be part of?
The worst aspect of all this is that it was so predictable. Every aspect of the “strategy” and the “tactics” was deeply flawed from the outset. There was absolutely no need to hold a mini-Budget of any kind at all in September. The only policy issue which had to be addressed (because the price changes were due to kick in on October 1st) were to reaffirm what was happening with domestic energy bills (the original announcement here had been drowned out by the death of the Queen) and set out what arrangements would be for business energy customers (none were yet in place). Everything else could have been deferred until late October, November or even early December which is when financial statements are customarily delivered in Westminster. There was no rush.
Except perhaps a sugar rush. A new team comes in. It fires a 35-year veteran of the civil service as the Permanent Secretary at His Majesty’s Treasury on a Wednesday afternoon, much as if he had been caught with his hands in the national till, generating enormous and unnecessary ill-will in so doing, and then decides to approach what would have been the most dramatic switch in economic outlook since the mid-1970s in the manner of a student essay crisis. This was strategic insanity.
The tactics were not much better either. The original mini-Budget was held on a Friday morning. Absolutely anyone who knows anything about currency markets appreciates that if you are about to make statements which might conceivably be contentious or controversial (such as committing yourself to about £45 billion in tax cuts without offering any hint of how they might be funded) then a Friday morning is about the worst possible time to pick because trading is comparatively thin and hence what might be a ripple of disapproval at a different time of the week becomes a tidal wave. If the (former) Chancellor was not aware of this, then he should never have been let into the Treasury.
We are, nonetheless, back to where we were in terms of the economy before this shambles. A lot of credibility has been lost but the severity of the shift that the (new) Chancellor insisted upon as the price for him assuming office is such that the markets must at least be convinced that there will be no more experiments with which they disapprove wholeheartedly. It is not completely impossible that any recession, if probably unavoidable in some form, will be short and not unduly severe. The age of ultra-low interest rates is surely over but that does not mean that they hit excessive heights. We should be able to travel on foreign holidays next year without bartering cigarettes as a currency.
What should CFOs learn from all of this? In one very strange way the experience has been cathartic. We have been presented with the supreme case study in how not to run a country (or anything). Every aspect of what took place on September 23rd and the six weeks or so afterwards should be carefully recorded and assume not only a central role in what business schools teach but also be part of our collective corporate memory. The past few weeks have, after all, been rather like an entire nation finding itself involuntarily obliged to participate in a roller-coaster ride of an unknown duration.
There is a simple rule here and it has a name, stability. Not stability for its own sake but stability as the platform from which carefully contemplated change can be constructed. The most central figure in striking that right balance between consistency and innovation is frequently the CFO. That is why the quality of the CFO is so often so vital to whether or not a business can realise its potential. Seven CFOs in less than seven years is a sign that something has seriously come off the rails. There cannot be a CFO in the land who would not have handled matters better than the farce we have endured. At least we can all see – and emphatically so- how not to do it. We have to hope the seventh CFO at the Treasury can limit the damage that the other CFOs in the UK will spend 2023 trying to deal with.