Hung out to dry?
Or perhaps in a flap.
Odd how we keep getting our Budgets the wrong side of bigger global stories and greater uncertainty, thereby hitting a bond sell off.
Does anyone at the UK Treasury have a calendar?
Reeves, like Truss, is in the same old bind. Without structural reform, there is no growth, without money, no reform. Here are her voluminous supporting papers. So much effort for so little.
Both maybe thought Joe Biden did it on the never never, why can’t we?
And after so long, the outcome markets most desire in the US looks likely, in other words that no one wins. And on the bright side, one irritating candidate has to now leave the stage, for good.
CAREFULLY CRAFTED
So, the ho-hum budget first.
Reeves baked in higher inflation for longer by the post-election pay rises – creating less room for maneuver. The O.B.R now forecasts a very modest rise in inflation over the next year. However, real interest rates remain too high, although it will require cover from the US, to cut rates here. But that too will happen.
That embedded inflation also precluded raising consumption taxes, as they hit inflation - crazy, as excess consumption in many areas, is the core issue.
She also needs to be lucky. Tory chancellors weren’t, but one day that may happen to a UK chancellor. Luck is rather more likely than achieving the current rather puny growth forecasts, which still assume increased productivity, especially in the public sector.
She will seemingly stick with the usual populist nonsense on alcohol taxes and fuel duty (surely a major error). While the desire by HMRC to broaden the tax base and suck everyone into providing frightening amounts of data to them, continues.
This looks like a slightly demented and sinister desire, because it underpins a belief that with enough data, they will know everything. The way every budget has a whopping benefit from “closing the tax gap”, £6 billion of it this time, of tax due but not recovered, is extraordinary (link shows the 2023 position) and seldom challenged.
In reality this is about finding new ways to fine you, and the more people are drawn into tax, as well as the more complex it is, the more the resulting fines.
FUTURE HINTS
We also note the first step to closing tax advantages for charities, or at least those the current government happens to dislike. Once it can pick and choose charities, it will not stop at education, nor will a future government share their tastes.
Another theme is one rule for the private sector, another for the state. The attack on carers, allowing them to earn more (so kind) while at the same time introducing a marginal tax hike rate of some 17% on earnings between ÂŁ5,000 and ÂŁ9,100, is a very clever sting.
Against that at last acknowledging that pension surpluses on “bought out” schemes should not endlessly accrue to the buyers, never the workers, is good news. True, again, just so far, the miners, but if that’s the first step for one off pensioner payments, from massively over-funded buy outs, it is no bad thing.
Women get hit – the new £22 billion of employment tax, all to be raised from the private sector, will hit employment, in particular female part time employment. And in areas where the minimum wage has already driven large scale shifts from payroll to welfare, it will not make it any easier to reverse that slide.
Against that there is quite clear-eyed desire not to hurt the residential property market, in many ways the other big potential tax target. Nor, as yet most pensions.
And I am not that fussed over farmland, anything with a tax break gets overpriced and hoarded. We can get misty-eyed about farmers, but the guys hauling the hay are seldom the ones pocketing the cheques.
Lower asset prices and more liquidity are no bad thing.
An A-
So overall, given her hand, the limited number of big revenue targets left, and given prior restrictions on housing and consumption taxes, this was an elegant compromise. Aside from the childish swipe at private schools, it seemed balanced. A massive fiscal drag will also persist, of course.
The long list of departmental handouts sounded a lot, but really will not amount to much, even for the NHS - we still need to banish their ridiculous silos that absorb cash, but deliver no healthcare outcomes.
So, Wes Streeting at Health remains key in all this. Otherwise, Reeves will find, like Hunt, that just feeding the public sector beast, simply grows a bigger mouth.
Another, more consequential contest, for the next Prime Minister also closes, and Kemi is a genuine reformer, if she ever gets to No 10. We will see the end of the drift we have endured for much of this century; only early Blair was a comparable radical.
SIDEWAYS WOULD BE GOOD
Markets? Well, they don’t like much of any of it.
The cyclical fall in interest rates has driven a lot of them up this year, but the sense of too far too fast hangs heavy.
We will not stop inflation as long as governments are hooked on deficit spending, and as long as they keep passing inflationary laws on wages and job security.
Whoever wins in the US election on Tuesday night, like Reeves, has the same problems the day after. Too many wars, an uncompetitive economy, too much regulation, too much debt - those are not easy to solve.
Markets may rise on positions been unwound and new ones taken, but ultimately will respond to rate cuts and falling inflation.
So, whether they end up in a flap, or we end up hung out to dry, it all comes to much the same thing.
Halloween or Guy Fawkes Night?
There arrives a point at which our gaze lifts beyond the immediate chaos of politics, beyond the maelstrom, to the line of sight beyond, to calmer waters. We are there now, the US election (on November 5th) no longer matters much to how we trade out the year. The next administration can’t start enacting policies until January, the State of the Union speech and the new Congress.
In the UK, we have had a phoney war since July, awaiting a budget, due the day before Halloween. Budgets are (or should be) a process, albeit leaky. Sadly, most of the leaks and badly flown kites, to date, are predictable, telling of a cash strapped government desperate to pay off their supporters, by ever higher taxes. They hope markets won’t notice. Some chance.
Globally inflation is falling based on goods deflation, a fair bit of which is out of China. The ongoing normalisation of energy supply, post Ukraine, also contribute, and is offset by regulatory rises in labour costs, stagnant productivity, and out of control welfare. None of that changes.
Meanwhile investment and necessities are now the areas being squeezed hardest, and business confidence is elusive.
From this OECD update
So where are the dangers for investors?
One has been to ignore gold, a long running afterthought in our in-house momentum portfolios, at a steady one sixth weighting. Some afterthought!
A more dangerous mirage is fixed interest, because it has been priced for a massive set of rate cuts for far too long, and all you get is a speedy convergence back to negative real interest rates.
Indeed, for a lot of investors, service inflation, not goods, is already the pain point, and service inflation and post-tax interest rates have already converged.
Although with the internet, net interest margin for the banks is not as volatile as of old. There are no longer big pots of locked in money in current accounts. So, falling rates are not hurting bank earnings much, indeed the danger is more of elevated rates causing defaults. But is that denting profits? Not really. Banks are getting good at holding their margins.
Another dangerous deceit has been the flow into value and into emerging markets, that trend has lifted prices, has been doing so all year, but again quite slowly, while some sectors and markets, like aerospace and Latin America, have been pretty vile.
Both Value and Emerging Markets have now had an awful lot of false dawns. Those too feel like a mainly 2025 trade now.
Europe – where next?
Europe seems genuinely to be struggling. I notice credit default swaps on French debt remain elevated after Macron’s summer failures. While Germany still relies on China and the motor industry too much. Without peace in Ukraine, it will struggle, although the arrival of lower energy prices and more tariff protection against Chinese dumping, will slowly help.
We are (nearly) all protectionists now.
So? Well, what has worked, likely still works, and while October might (yet again) be seeing a leg higher, it feels hard to get too excited, until after November 5th.
Private Equity
Two other 2025 themes are private equity and competition.
Private equity is just about holding its own. Those big, expected, discount compressions are not yet happening, so conflicting market views persist. The bears who, judged by the discounts, are still winning, see overstretched balance sheets, unaffordable debt, at any likely refinancing rate and a closed IPO exit market. So, a lot of stale assets.
The latter is both a reflection of how thoroughly investors felt ripped off in the last IPO boom and the bypassing of over regulated, backward looking public stock markets. For hot stocks, in particular, capital is still easier to raise off market. You can buy into AI without buying IPO’s.
However some mid-market managers are quite happy to use trade sales instead, and those will pick up, once politics gets out of the way and interest rates get more sensible.
Some smaller tech areas, which never relied on debt, nor expected an IPO exit, are starting to look quite frisky, as recent buys have not been at such high prices and they have ridden the post COVID technology expansion well.
And tech has been moving very fast of late. So, buying debt free, post 2020 investments, as they now start to exit, can be pretty good, and decreasingly offset by the collapse of lockdown casualties.
Competition
On competition both Draghi and then Lagarde are saying loudly that competition policy in Europe, which has been seen as being by national market alone, will continue to weigh on productivity. Instead, the competition view must now be pan-European, and on that metric, for example, we have far too many telcos and banks. We now have a new EU Competition Commissioner, but also a desire for a “new approach to competition policy” clearly stated by the EU President in July.
So whatever nativist German noises there are, if Commerzbank has an Italian suitor, that deal is still possibly good for Europe. If Vodafone wants a merger in the UK (or any other) mobile market, that should be fine too. Indeed, clear evidence exists globally that low prices cripple investment in the telecom sector, and to keep investing, keep advancing, sensible returns are now needed.
Of course, that goes quite contrary to the idea of competition authorities (and regulators) as agents of social change and protectionism, but it is being said very loudly now by the ECB. This comes with clear warnings about the need for spending cuts, to get Euro budgets under control, aimed notably at France, presumably as Italy is deaf and Spain is behaving.
Yes, we have heard it before, but the clash between cheap services (but no investment, no stability) and a sensible return (with investment, and stability) is getting far clearer.
Lower inflation will at last allow the rates of basic services to rise, to give a sensible return, to create a real market.
WE ARE NOT NOW THAT STRENGTH
Markets are confused, as are Central Banks, and while generally indifferent to small wars, we know that’s how large wars start. And we have another month till November 5th and the US election. In the UK the Chancellor says it is all terrible, but is splashing cash around with abandon, but then cancelling dozens of projects, and claiming she is pro-growth, while taxing investment ever harder and encouraging so much capital flight even the OBR has noticed.
The colossal COVID debt burden still hovers over everything, a burden that can only be shed by growth or inflation, one an investor’s friend, the other their mortal foe.
Market confusion is more about politics than economics, no US rate cut in July, then a double cut in September, now a November (post-election) cut looks uncertain. The stated reason for a double cut was weak employment, but the real reason was political. Powell even said in his press conference that the Governors voted for the jumbo cut “in the best interests of the American people” so not economics, and I suspect those archetypal insiders will believe keeping Trump out is exactly that.
So, we get a “value” rally, as collapsing labour markets would lead to multiple rate cuts, and market interest rates, surprised at the severity,  then overshoot on the downside.
Except there is little evidence of anything wrong in US labour markets, as Friday showed, they are fine, and wages, along with rigid labour markets are driving inflation. Weird. But then good labour markets, plus buoyant earnings, plus falling rates sounds pretty good for equities?
Plus, something most odd in China, which from nowhere became one of the top markets in the last year, outperforming the major UK averages. Yet no one is clear why, on fundamentals. Yes, there was a stimulus package, possibly one focused on equities, possibly bigger than expected, but no one thinks it solves anything.
So, it (and ripples into luxury and metals) seems an almighty short squeeze. China had become so unloved, even its proudest fans had bailed out. The rush back in left other emerging markets, like India, struggling.
[Culled from two pages on Yahoo finance – read more here and here]
MANNERS, CLIMATES, COUNCILS, GOVERNMENTS.
Meanwhile, the Tory Conference was oddly upbeat, with some real choices, and a fair bit of optimism. The Tory party is in theoretical retreat, but greatly energised by a real debate, with members involved, about the new leader and a new direction. The disastrous election result had focused minds nicely, and yet was still discounted. Starmer had won fewer votes than Corbyn, and his popularity was already below Sunak’s. The loss was about “three tens”; voters switching to Reform, to the Lib Dems and the Sofa, sitting it out.
None of that was the love of another party, all of it was hatred of those Tories, divided and incompetent and now gone. In so far as the rump of the party now had stars, they were all standing for leader, no big guns were left after the disaster.
It was generally agreed that it must be the fault of Central Office and candidate selection, not the Party. The conference was also largely devoid of the usual big brother manipulation, fake applause, dire autocue speeches approved by a SPAD and ministers just too busy to care.
Tugendhat was bouncy, had the youth vote and the best video, but not convincing. Cleverly had worked hard, was fun and avuncular, relaxing and the obvious unity candidate. Jenrick gave some very strong speeches, plenty of thought, but seemed off-form and weary at the closing main event. Badenoch is an enigma, slightly thrown by adding “2030” to her pitch, when everyone was suddenly thinking “2029” again. Yet she is the one who wants to reform, draw a line below the stale “what did we do last time” and start afresh.  She had the best merch too.
It is still a split party, for all that. A good chunk of the younger party is very keen on Net Zero, and they were extremely visible, indeed Net Zero before all else. However the MPs know that was a Cameron fantasy, so I am not sure how that plays out.
But also, a clear understanding that talking right, governing left is finally over, and that border security is high priority, and defence is too, but not with quite the gung-ho optimism of before.
In many ways Starmer’s inability to know what sleaze and greed looks like, even if it is all innocent (a big even) bodes ill for his time; “they are all the same” is a deep-seated rallying cry of pain.
THE SCEPTRE AND THE ISLE
I am enjoying “The Sale of the Late King’s Goods”, a slightly wonkish account of Charles I’s lost trophies, but an excellent canter through the lead up to the English Civil War. It is striking how state policy was all so plausible and desirable, except for a massive inconsistency on faith, finance and Europe.
The King was desperate to be trendy, to think common decency only applied to others, had no real conviction, in restlessly appeasing various European Courts, seeking favours that never came. While funding was all about just getting to the next OBR review with enough cash to pay off friends. (Well OK, not the OBR back then, but a truly sovereign Parliament).
After finding so many conflicting aims inevitably failed to work, he then tried to drag Scotland into a standard set of beliefs and rules, and hoped blindly that the Irish would do us a favour. The desire to be liked, to look good, to look to Europe for answers, to throw money at white elephants and foreign wars, and the absurd doctrinal battles, all felt far too familiar.
If we don’t know where we are going, just buying expensive tickets won’t complete our journey. To strive, to seek.
The title of this piece comes from Ulysses, a poem by Alfred, Lord Tennyson
https://poets.org/poem/ulysses
Andrew Hunt’s piece this month, which looks at the solidity of underlying data and China may be of interest to serious investors.
Tiptoeing Through the Tulips
Is real estate safe yet? How about renewables? And an innocuous Tulip.
All three of this week’s topics are notable for what they are not, Real Estate valuations do not reflect property markets or indeed replacement cost, Renewable Energy valuations do not reflect anything much, but include plenty of hope,  and the new City Minister seems to have no obvious purpose beyond being a safe and reasonably loyal supporter of all things welfare related.
Unreal Estate
As we have remarked before, somehow the RICS valuations of property assets, used to value quoted property companies, became heavily reliant on interest rates and comparable bond yields and rather less interested in the real property market. They also seem to have become a tool for bank lending, disregarding other more real-world factors. Which explains the paradox of falling valuations alongside robust occupancy levels and a level of visible new office construction, certainly in London, which remains unabated and indeed the wider market is  seemingly indifferent to the slump.
There is a lot behind those paradoxes, long lead times through planning, the desire to replace older stock if (as so often) it is to be leased out, the dominance of bank funding, not equity. Even so both collapsing valuations and the discounts then applied, have been damaging. This has been exacerbated by underlying fears about vanishing bank financing, in many ways a self-fulfilling prophecy.
We had something of a buyer’s strike where vendors can’t get bank finance to stay, and their potential buyers can’t finance to buy. The impact of working from home and the inevitable changes in business models adds to this.
Some areas, notably much of Docklands and many regional and secondary offices, have become untouchable. Closed end property vehicles have been forced to sell to meet bank covenants, and several open-ended ones have simply been forced to liquidate. Something of a perfect storm.
Yet, prime real estate has in the end, come through over time, and as we have noted before the residential market has been pretty immune from falls in at least nominal value.
In both UK and Europe valuations are now becoming more stable, and I would expect for the same reason they fell so fast, they will start to recover as rates fall.
For all that, in the equity market this year we have seen reasonable returns, as discounts to stated NAVs narrow, on both sides of the Atlantic. A number of activists are also pushing through mergers or reconstructions, which helps.
And yet nerves persist, the underlying discounts maybe less, but for Investment Trusts that own REITs, there are two tiers of discount (one underlying and one at the vehicle itself) and that top level has widened in cases.
Having endured that lot, and avoided earlier temptation, I am looking to re-stablish positions in half a dozen of these stocks in the UK and Europe, to work out the two that look like long term holds into the next cycle.
Not Renewed
Renewables have somewhat of the same issue, they are valued in part, again on the discount rate, so were driven down by rate rises, but also an odd view that energy prices are destined to fall over time. However, just as I have seldom seen prime city centre values fall for long, the hope of long run falling energy prices, runs counter to my experience.
There is also a great deal of uncertainty, both about what they produce, after numerous equipment and supplier failures, when they produce, and most of all, how to get product to the consumer with a credible margin.
But overall, the two sectors, property and renewables are quite similar, you have to get land, get planning, install infrastructure, hire builders, pay banks, realise your timescales were always far too optimistic, be nice to buyers, accept a discount, move on.
Having been wary of Renewables on the way down, I do now wonder if they are a separate asset class, or just a subset of several, including utilities, construction and distribution. If so, is it not better to leave that to the big multinationals with deep pockets?
Planting Tulips
So, to the new City Minister : Reading the current incumbent’s speech to the Stock Exchange, (not high on my list) it was of course indistinguishable from the last lot. The Treasury keeps these speeches, and the newest minister trots them out – often this is just an exercise in how well the next one mimics sincerity.
Has the Treasury orthodoxy changed? No. The allocation of capital remains the point of pain at the end of staggering amounts of hopelessly outdated regulation, some of them completely failing in their objectives. That much is unchanged.
Tulip herself is deeply worthy, UCL degree in Eng Lit, King’s London Masters in Politics, Policy, Government, so she should know how it all works and be able to write a good memo. But if we think the Government’s talk of “growth” is anything more than the illusory plug to stop the welfare budget draining us dry, a most implausible appointment. The milch cow must be kept placidly tethered, while it is milked.
The City will naturally be content, as ever, as long as no one rocks the boat.
But for all the ill-mannered sneering at the nice Mr. Draghi, and the EU’s failure to grow, we are in pretty much the same place. Now if Tulip wanted to be useful, and justify her principled disloyalty over leaving the EU, she should be mapping out how to join the Euro in 2030.
No road back to Rome exists, save through that thicket of joining the Euro first, the EU got that wrong before, it will not do so this time.
While of course half of Draghi’s capital market complaints are shorthand for saying that after all, Europe needs the City of London, not vice versa.
Cheer Up, They Said
After a pleasant summer, the dampness returns, exposing a quite enormous and unbalanced level of growth among the verdant thickets of both Middle England and the NASDAQ.
Markets must climb a wall of worry, and the next two months are not short of that. Forget interest rates and non-existent recessions, that’s just the stuttering voice of old economic models, fed fouled data from the last century.
IT IS ALL POLITICS
No, the risks now all look political; the prevailing orthodoxy is the West can keep borrowing levels high, to fund bloated and protected wages and welfare weirdness, impervious to international competition, or indeed to inflation. It has worked so far, and with excess and free flowing capital, there may always be a funder, mainly of state debt or residential mortgages, as well as a buyer of a few anointed equities.
And so far, that has remained the trend and indeed, somehow, the centre has held, once exceptional debt has now become permanent. This is aided in part by centre and centre left parties collaborating to silence the right, often behind the somewhat specious argument of protecting democracy from the wrong kind of votes.
But markets are jittery, they know the sums don’t add up, as do voters.
Debt as % of GDP, US in red, Japan in purple, UK light blue, France dark blue
 IMF data mapper – from this page.
The same defence of democracy continues to require the now usual never-ending wars, and divisive and punitive trade barriers and sanctions.
Both businesses and investors are quite happy to sit on the sidelines, until a few questions get answered. The UK budget is expected to finally nail the myth of growth, by heavy new taxation, although it has almost been oversold, the reality might be a relief. It is not just the severity (it won’t be that bad) that matters, but also the direction of travel. Will it hammer savers, investors wealth creators and employment or attack consumption and waste?
Labour denials of an extra £2,000 a year tax on average incomes remains to us implausible and indeed we suggested  many would be relieved at only that. Well before the election we said it will need about £20bn (economics is pretty simple really) and suggested the biggest chunk of that will come from fuel duties; we will see. Indeed, we’ve always known that various fudges would be used to skirt round the creaking OBR defences too.
The main UK stock market indices are once more in slow retreat, and while sterling is strong, we attribute that to short term interest rate differentials. High government borrowing is after all good for lenders. While in the US, it remains impossible to tell where the legislature ends up. Although like Starmer, many voters are so convinced the alternative is useless, they will overlook the socialist taint.
EMBRACING THE SIDELINES
Just now, the sidelines feel a good place: hedge funds, shortish term, high quality debt. There is scant evidence that the normal run upwards for emerging markets and smaller companies, from rate cuts, with attendant dollar weakness, has started, although many areas have moved in anticipation. But why buy in September when November is so much more certain?
That switch to smaller companies and emerging markets also may not happen this time, emerging markets have a lot of china dogs that look quite fragile, and smaller company liquidity is dire, so if yields stay high and defaults low, why add risk? While the inevitable fiscal squeeze will not help the hoped for returns and dynamism of a monetary easing cycle; you need both to work.
India meanwhile still stands out long term, but both the centre and more starkly the states are showing a notable loss of fiscal discipline, unrest in Bengal does not help and the IPO market is frothier than a Bollywood musical.
ROULETTE AT THE TORY PARTY
Given the apparent penchant for gambling, how many of the six (now five) chambers hold live rounds? We should glance at these ever-fascinating trials. The party faces strategic questions. Notably when does it expect to recover the 200 odd seats it needs, and how?
Well, I suspect the group saying next time (2029) will still dominate, although it looks rather unlikely. As to how, the assumption, I assume, is by halving the Lib Dems, but that’s only 36 seats, which leaves over 150 to get from Labour.
Interestingly every leadership candidate agrees that it was all Central Office’s fault, not for instance the wrong policies or a foolish rush to the polls. Most also at least pay lip service to rebuilding from the bottom up through local councils. Indeed, they even accept associations might matter.
Although there is also quite a bit, still, of finger crossing and waiting for Labour to implode. Not such an obvious solution this time.
As for Reform, if they also fail to implode, but settle in to be a real alternative, like their French and German counterparts, they will at least deny the Tory party their votes. Who knows, David Cameron might even emerge, in twenty years’ time, like Barnier as the compromise leader, from a party of no current electoral relevance.
It is hard to get involved in the contest, which will be down to four from the original six by next week. With so few MP’s, the choice is not brilliant.
It is a very narrow electorate, just 120 survivors of the wreck, so calling it and the shifting allegiances it reveals is hard. However once decided, it will be clear if the party is going long or short and which seats it is targeting, which in time will matter a great deal. Is it still unaware that a missed target could be fatal?
SAVERS TO BORROWERS
As for markets, I tend to ignore summer and short week trading, and the switch from bonds to equities, from savers to borrowers is a powerful economic force, as rates fall, but while the direction is clear, the angle of descent is not.
I assume it could be worse, that is even more uncertain but wondering how. Roll on Guy Fawkes Day.
OUR OWN EVOLUTION
This blog is evolving - when we started Monogram was a fund manager in widely accessible products, but that’s no longer the path - we are increasingly moving towards family offices and offshore clients.
With a less domestic focus, it seems time to move this to a stand-alone blog. Which brings with it a touch more freedom. It will continue to remain fascinated by the world of economics and politics, and indeed fund management. But may be happier to poke about in the mud for sustenance, or sound a startled alarm, as we become the Campden Snipe.