A new day, a new UK PM

Published: Tue 25 October 2022
Updated: Tue 22 November 2022
By steve

In Markets.

2022-10-25

Rishi Sunak, come on down!

Today, or maybe yesterday, Rishi Sunak became the latest UK PM. He’s incredibly smart, thin, brown, rich and short. He has not been battle-hardened in the ways of Westminster, and plenty on his own side, not to mention the other, would be delighted to see him fail. He is probably not terribly well known to the British public. I cannot see most of them warming very rapidly to a billionaire Wykhamist hedge-fund boss who has spent most of his professional life on the west coast of the USA. He has recently spent £100K on a swimming pool, allegedly. I don’t begrudge him the right to spend time with his money, but stories of his wealth will dog him wherever he goes, generating resentment amongst even his supporters. How he deals with this will be a serious test of his electability. As a politician, one is not allowed to have perfectly normal and justifiable reactions to people being mean to one.

Anyway, we will see how he copes with his new role.

Wrap

I’ll do this for the week. Generally, things have been risk off:

  • bond yields are generally down, in developed markets,
  • in spite of the miserable news about Xi appointing himself dictator for life, and surrounding him with cronies, commodities are generally up, if only a teeny bit,
  • practically all developed stock markets in N. America and Europe are up, by a couple of percent on the week,
  • the dollar has been struggling to make headway. I am sure this has been the main impetus for stocks and commodities,
  • crypto is also up. It’s like stocks, but with a beta of ~2, so this is to be expected. The big stories, as far as I can see were:
  • the UK has a new PM, who is a finance guy, so gilts are strong, for the moment,
  • the Dems will probably lose the HoR, but no more heavily than was expected months ago,
  • Biden is selling the SPR furiously, to bring down the price of gasoline, to improve the Dem’s election prospects. Weak demand for China is helping him achieve this,
  • Ukraine war grinding on, Russia losing a lot of young able men who don’t want to become cannon fodder in the freezing Ukraine winter,
  • OPEC+ trying, and seemingly succeeding, in keeping oil at around $85/barrel.

Thought

Simple models

Simple models help humans reason about the world. Complex models may come up with the right answers, but only if the parameters are known fully. Economics is a tough social science because, well, herd behaviour is not always rational.

Two models which have been used a lot are Krugman’s Washington DC babysitting co-op and Warren Mosler’s business-card currency model. I’m not joking here is an article on the co-op and here is an article on the business card money.

Although these models are relatively simple, they are still too complicated to introduce into a political debate about what the right course of action to take on the economy. Like all models, they leave a lot out, and will never be true except in a limited subset of real-world economic states.

The problem is that they shape the arguments of commentators, especially ones like Martin Wolf of the FT and Paul Krugman of the NY Times. So these models, not even mentioned in their columns, shape their thinking and, in turn, the thinking of advisors and politicians who are aligned with their general political positioning. (You don’t get to be a successful columnist unless you give your regular readership what they want, and what they want is to have their view of the world confirmed as correct.)

I am sure I am as subject to the baleful influence of oversimplified models as the next blogger. My early enthusiasm for Friedman was informed by the simplicity of his view of the world, compared to the rather more complex and convoluted view of Keynes.

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