Last week we compared our Finance Minister Nigel Clarke very favourably with new UK Chancellor of the Exchequer Kwasi Kwarteng, who had one of the most unfortunate batting openings in recent memory for a brand new finance minister.

His turn at the bat, after his mini budget announcement the previous Friday, included the collapse in the pound to new lows, and a simultaneous collapse in UK long gilt market prices (gilts are the UK’s name for their domestic government debt) that imperilled the financial stability of the UK 2.5 trillion pound pension industry. But as Telegraph World Economy Editor Ambrose Evans – Pritchard notes in his article this week, ‘Schadenfreude is unwise : Europe is next in line for market punishment’, “A string of states will face their own rude awakening soon enough as global liquidity drains away and financial conditions tighten.”

The current global situation, whilst different in many ways, reminds me of the global financial crisis, and in particular the European aftermath endured by the so-called PIIGS, namely Portugal, Ireland, Italy, Greece and Spain, the latter captured in a series of my articles in the Jamaica Observer under titles such as “Jamaica is not Greece”.

The first point to note, however, is that despite the fulminations of the UK press, it is really not mainly Kwarteng’s fault, as the stage for this reversal began to be set from the second half of last year, as, in the short term at least, liquidity drives markets. As I noted last year, quoting also Morgan Stanley’s Ruchir Sharma, the presence of “bubbles” in almost every global asset class meant that as global central banks began to draw back their huge liquidity injections, the Jamaican stock market was soon likely to outperform the US stock market, due to the latter having a significantly higher valuation and having been a much greater beneficiary of the enormous fiscal and monetary support of the US Government and Federal Reserve. This year, those who invested in both US stocks and bonds in the traditional 60/40 equity/bond allocation have received one of the greatest investment hammerings in many decades, a decline of well over 20 per cent in some cases, with bonds providing absolutely no protection as they fell at least as much as stocks, the exact opposite of why they are included in a portfolio in the first place. This was extremely unsurprising, as it should have been anticipated that US ten year treasury bonds yielding say 2 per cent would resemble certificates of confiscation in our future high inflation world. However, the fall in US treasuries so far is nothing compared to the recent collapse in gilt prices, which was partially reversed early last week in a massive intervention by the Bank of England to buy gilts, itself a complete reversal of their plan to start quantitative tightening, for example, to begin selling gilts they had bought during the COVID crisis, mirroring thereby the announced quantitative tightening plans of the US Federal Reserve.

As Morgan Stanley’s excellent investment strategist Mike Wilson notes in a recent piece, the turmoil in the UK gilts market is merely the canary in the global coal mine. As their global equity guru, Wilson has been more right than just about everybody (that I know of) in calling the global stock market rises and falls of the last few years, probably because he anticipates the global liquidity flows from his perch atop the super connected Morgan Stanley investment bank in New York. He observes that world liquidity has already shrunk by almost $4 trillion (measured by the M2 money supply aggregate in US dollars) since peaking in March, and that we are now in the “danger zone” where financial accidents start to happen. I agree. The situation now reminds me distinctly of the period leading up to the financial crisis in 2007 and early 2008, when I wrote a series of articles warning that we needed to be prepared for what was to come, even using the “canary in the coal mine” analogy at that time more than once.

As Ambrose Evans-Pritchard also notes in his own piece, at the end of last week the European Systemic Risk Board issued its first “General Warning” since the body’s creation after the Lehman crisis, flagging “severe risks to financial stability”, with risks coming from multiple directions (energy, the worldwide interest rate shock, European housing cycle rolling over), that “may materialise simultaneously, thereby interacting with each other and mutually amplifying their impact.” He particularly notes the problem of Italy under a new right wing government, which may stumble into the same issues as Kwarteng, but with much less room for manoeuvre.

All of this can have its own potential impact on Jamaica, so it was therefore good to see the Observer editorial last Sunday titled “Sticking to debt reduction is the right policy”. The editorial noted that the feedback from Dr Nigel Clarkes recent trip to the financial capitals of the world was that not only was the confidence in Jamaica’s economy “rock solid”, but that it “has surged past countries that usually are thought to present much lower risks”. At the same time as the sterling and gilt collapse of last week, Jamaica’s bonds had barely moved from the week of the roadshow in mid September (when they were at 120 basis points over US treasuries) and our currency remains one of the very few that have appreciated against the US dollar this year. My participation in Sterling Asset Management’s annual investor forum (in conjunction with the Nationwide radio station) provided a welcome opportunity to explain how our central bank was now treating the exchange rate as an intermediate target to meet their real objective of reducing inflation, which we will discuss in more detail in future articles.