TEARS OF A CLOWN
An eventful week, the triumph of Trump and the debasement of Starmer, both heralding fiscal expansion based on higher borrowing; the market likes one, not so hot on the other. And how does all this extra spending emerge in the UK retail sector?
Reeves could have been crying about anything, but the optics looked terrible, in the familiar role of a Chancellor undermined by her own leader, for doing the right thing.
Even the IMF have noticed that policymaking via the OBR is bad news.
Like the previous Tory newbies, the big one term mass of Labour MPs has little party or national loyalty: theirs is a purely extractive stance, of what they and their constituents can loot from the Treasury.
Starmer was greeted as order after chaos, but is just a continuation of the mess. He is the clown, as the aptly named Miracles sang with Smokey Robinson just before 1968, his stance is âonly there trying to fool the public.â
Fool me onceâŠ..
DO MARKETS CARE?
What do either mean for markets? Well equity markets like growth, real or artificial. To them whether wealth is being created, or borrowings are allowing the acceleration of consumption, matters little. So, both in the UK and US, that borrowings are rising far too fast, matters little for equities.
Bond markets are far less happy, but they are also still enjoying unusually high interest rates, at least by recent standards.
The whole package is being offset against a multi-year interest rate decline, as the COVID inflation peak slides further into history.
I have also always found a cheap currency is a nice extra cushion for any investor. Is the dollar cheap? Does it get cheaper? Possibly âyesâ to both. But why, is the more worrying question.
Although perhaps less puzzling, sterling strength is also odd. However, against the Euro it is looking sickly once again. It never recovered from Gordon Brownâs folly, although the Tory party was rebuilding it nicely up to BrexitâŠ.
IS ALL LOST?
As for Reeves, all this fiscal laxity, sheâs been splashing the cash for a year now, has to turn up in consumption and growth at some point, despite the high (but falling) savings rate.
âHousehold Saving Rate in the United Kingdom decreased to 10.90 percent in the first quarter of 2025 from 12 percent in the fourth quarter of 2024. Personal Savings in the United Kingdom averaged 7.77 percent from 1955 until 2025, reaching an all time high of 27.50 percent in the second quarter of 2020. source: Office for National Statisticsâ
Image and summary above in italics were clipped from this website
There is extra growth to be found there. I also sense the private sector, at least, is running pretty well now, adapting to change, cutting labour, de-gearing, putting the transient ill-effects of COVID well behind it.
So, the disaster is on the tax front, and the damage caused by out-of-control welfare spend.
The worry is that like the Tories before them, they are not remotely in control of those forces.
Will Reeves last? It is a heck of a sell signal if she does not. Will Starmer last? Not if he ditches her.
JUST WHEN YOU FELT SAFE
So, all is fine? No, not really, as those pesky tariffs are still largely unresolved and I sense in several cases, both sides still want a fight. Trump probably will take something, if he can sell it to the Rust Belt voter. But the assumption that he is always weak and seeking to cave, seems a tad dangerous.
I expect more chaos.
But a largely indifferent US market response.
GROUNDED
What is happening in the UK retail world?
I have been wading through some annual accounts. The big trends are the post COVID boom and the implications for space and shopping patterns. The race to online has not fully played out, but it certainly has slowed dramatically. Both M&S and J. Sainsbury claim to have done well in that time, the former seeing sales rise 50% overall, including a 75% jump in non-food, which looked to be in terminal decline at one point.
Although it still remains half the size of the stagnant Sainsbury.
Focused professional management has come in, driven from the top. A lot of the ânice toâ stuff has gone, old-style full-service retailing is for the birds now.
Supply chains that felt knitted together randomly, are now boldly strategic, with far more automation. While store locations and numbers plunged, the estates were reconfigured. Balance sheets now look solid, dividends recommenced or stabilised.
The lease side has changed, the REITs for a long time had the whip hand, no longer. I have been looking at both British Land and NewRiver accounts. While some REITs just had their retail estates slaughtered by creditors, others like British Land, while moving away from the mega centres (even Meadowhall has gone) have doubled down on retail parks. Why? Yield it seems, dividends are stretched, NAV in offices just fades away and donât ask about development profits.
In the end, do I believe in this surprising renaissance?
Not really, although some of the basket cases are now online, ASOS and Ocado, one-time market darlings, now have graphs that pay tribute to Disneyland, with fantastic towers, toppling to empty moats.
Retail is deserving of a lowly rating and still vulnerable, like all property, to an avaricious state.
MOVING ON
A final note, after five years in active fund management, I have moved on, disheartened by the terrible rigidity of the UK regulatorsâ rules, designed to rip off and confuse UK investors, which have so effectively destroyed the UK equity markets.
And it has to be said, rather attracted by the lure of momentum trading, less work, higher returns.
Running both together has been an excellent test bed.
Black Headed Bunting
Flags should be flying, the COVID cycle is over (says Lagarde) rates are falling, currency wars are afoot.
Ignore the noise, watch the graphs.
But somehow gloom pervades.
Truly a black topped bunting.
MIXED MARKETS
Markets are designed to confuse and a lot of that is happening, with the worst of recent gloom a way back now. In developed markets it was April, after which the value rally got going, very much with falling rates. And they are falling - seven cuts (or was it Trumpâs nine?) in Europe. Less than a year ago rates were at 3.75% and are now almost halved to 2%. Thereâs a rising currency, giving an urgency to cut fast enough to stop the damage from competitive devaluations.
India also did a surprise double cut (so 0.5%) this week.
LatAm is behaving oddly, it has been a top market, year to date, but largely because it hit a low at the turn of the year; year on year it is not up. Brazil is almost in lockdown with rising rates (14.75%), and no surprise, a year-on-year market fall. Mexico is well into rate cutting, at 8.5% from a post COVID high of 11.25%. That market is up 17% this year.
Another year-on-year top performer is the Hang Seng, up 28%. Why is that?
Aubrey Capital kindly hosted an Emerging Markets conference in the City this week. A speaker noted that as China and Russia now avoid the USD, many traders are ending up with, or need access to, a non-convertible currency.
The PRC therefore apparently facilitates global gold exchanges, as a substitute, in three new offshore hubs (as well as Shanghai). This is perhaps helping to ramp the gold price.
But that has physical limitations. However, China also has a convertible currency, in the Hong Kong Dollar.
If that gets used more, demand for it also rises.
The actual twelve-month top performer is the DAX in Germany, up 29%. But just across the Rhine, the CAC 40 has fallen over a year. If nothing else, easy terms like Emerging Markets, Developed Far East, LatAm and even Europe, are hiding some very mixed performances.
MISTS CLEARING
But the common theme does look like rate cuts, and thatâs a cause for optimism. The UK now needs to be very careful that Labourâs fiscal ineptitude is not forcing rates to stay materially higher than in Europe, (still at 4.25%). Â As a result, sterling is strong and in danger of getting stronger, helping inflation, but hurting growth. UK exporters are getting kicked enough already.
It hurts housebuilders too.
Compiled from the ECBâs recent publications
The UK market rally feels a lot about beaten up, high yielding stock, sensing some relief is inevitable, regardless of the Bank of Englandâs posture on inflation.
The strength in UK banks (a big part of that outperformance) is partly their attractive yields (as rates fall) but partly the belief that as rates stay high and weak demand persists, surplus capital allows them to buy back shares and reduce deposit rates, both of which the sector has been quite aggressive about. Thatâs nice, for banks, but it is a Goldilocks position, either rates now fall, or bad debts rise.
For all those caveats the Europe, Value and Emerging Markets rallies are real. And if rate cuts go on, we expect these to persist. Along with this, at some point, a currency reversal when the Federal Reserve finally moves.
Our work still does not suggest an outflow of funds from the US, just as it does not suggest a recession or pull back. None of which makes much sense, given the weaker dollar this year. Although it may simply show a reduced inflow rate into the US.
So, is something moving, that we canât see? Â Rising long rates are giving the same signal, of assets unexpectedly moving, out of fixed interest.
While I expect political chaos under Trump, amplified by an obsessed UK media, I do wish for some days of calm; could he not play more golf?
Some of us take no notice, of course.
OFFENSIVE FUNDING
Back in the UK, the defence review - a helpful two-page summary is available here; sounds like something for everyone. (If the Tory party had the intellectual depth to suggest this, both the profligacy and militarism would have raised Cain). But it is all (as ever) fabrication, there are no available funds, even though the serious work of building inventory, finally starts.
We are promised six new energetics factories, which sounds like a modish protein bar, but just means lethal explosives. It is the logical move, but only accountants can deliver it. Year to year accounting means we must accept (and hope) that 80% of the energetic output will be made, stored, and then destroyed, at a vast annual cost. This stuff does not keep well.
I have yet to find a minister that can allow that annual profligacy. Creative accounting is needed.
I also canât see how this hybrid Truss/Reeves can borrow (and tax) another 3% of GDP for defence. She has already rewritten the rules to add billions of spend, loaded the tax burden on companies, and now like Trump, wants to spend her way out of debt.
It simply wonât work.
KURD YOUR ENTHUSIASM
We noted last week (along with a speculation on tariffs, a mugâs game, I realise) how Turkey is surviving unconventional economics. It does sit in the Emerging Markets universe, and is owned in emerging EMEA funds.
Notably, while for some of those countries, the holdings are dominated by banks, for Turkey, it is all real manufacturing, distributing and retailing outfits that attract investment. The odd impact of high inflation.
Although much more tourism will put out more buntings, including those gracing the ruins at Kars.
OFF BALANCE
Trumpâs win with a clean sweep was a surprise, and one that recalibrates the investing world. Most UK media, right or left expects we want to hear ongoing condemnation of Trump and by extension Republican policies; not me, I think those policies pull the world back from the brink.
Why was I surprised? The market and polls (at least the serious ones), had him winning, but not the media. On election night CNN, which was otherwise brilliantly forensic, seemed upset at the New York Times calling it for the Republicans, quite late on in the process; facing reality had somehow become betrayal. Only ITV, to my mild surprise, was in the real world, giving us the facts, like old style journalism, first.
Just history? Not quite, because the investment media is still making the same mistake. Affluent Harris supporters are lining up, not to deny the result, but to concoct fantastic negatives. The resulting general doom is leaking into markets, blaming unenacted Trump policies (and indeed they are un-enactable for two more months) for rates hardening and a change of future Federal Reserve policies!
Nonsense, I would have said. Â The Federal Reserve will keep behaving as it has, all along - data dependent, rear view mirror stuff.
BRAVE NEW WORLD
So, what does change? Fundamentally it breaks the pack, the investable world was largely of one, foolish mind, that COVID, Ukraine, Climate Change and De-globalisation could all be funded, free, by simply raising debt and tax. There was an assumption of no impact on growth or competitiveness or consumption.
At last, we have the dominant global market saying otherwise. Now the ESG fanatics, armchair war mongers and de-globalisation crowd, must think again; they must pick their fights.
The world has long grown weary of American wars, fought on non-American soil. The idea given everything else, of the mighty EU military (yes, that one), stepping in, is risible.
Maybe we get no immediate peace, but the noise volume (and casualty toll) will drop sharply. A small mercy.
TRADING BLOWS
That Trump is full on for de-globalisation, is remarkably stupid. Â And so is China believing it can swamp the world in subsidised over-production for ever. Since it is unlikely that despite various efforts the WTO can be fixed anytime soon, this will continue to be a sporadic issue.
The long run trend to price American workers out of global markets will continue, which given Americaâs other advantages, is a relief for the rest of the world. But I also doubt if much of what China has produced becomes truly uncompetitive, even with a 60% tariff.
We can look forward to more spats, tariffs on rye whisky and smoked salmon - that kind of thing. Locally damaging, but I doubt if in the end it does much.
Meanwhile the big Biden era protectionist schemes, his beloved IRA and the cute but pricey CHIPS Act, both loathed in Europe, will be sensibly reined in, taking a fair bit of the heat out of trade matters.
MORNING IN AMERICA
Nor despite the panic over RFK Jr., do I have unusual fears for the pharma industry, about the most regulated sector on the planet, already facing long term persistent attacks on high margins for new drugs. This certainly needs fixing. But I am somewhat doubtful that the Senate will confirm RFK Jr.
From an investor point of view, less anti-trust activity looks a win, assuming Khan goes. While I can see anti-monopoly action against the Tech giants rumbling on, Trump is not a fan of them in general, I now donât see break-ups as likely.
And some of the ridiculous barriers to the extractive industries will come down, that have encouraged Americans to source raw materials from far less regulated and more polluting places, which can only be positive.
LABOUR MARKETS
What of the labour market? Here too deregulation will release a lot of direct jobs, by allowing business to produce more efficiently, and can be expected to release excess regulators (is there another kind?) onto the market too.
I canât see real migrant deportations, outside those with criminal convictions, rising much, and there will always be Democrat States undermining the effort, even if attempted. The place to control illegal migration, is always at the border, or close by. Biden let migration soar to four million over his term, against Trumpâs one million.
If Trump can get back to that lower level, given the pressures, he will have done well.
Deregulation and AI will improve labour use, but labour shortfalls from lower migration will cut supply, so the outcome is not clear, either way. But the migrants are not generally taking skilled professional jobs on arrival, which is where current wage inflation is.
PAIN IN THE WALLET
What of taxation? Trump will be very keen to keep those tax cut promises. I think some cuts can be funded, and in the end, Congress will want those too, before the midterms.
But full on, deficit exploding? Not likely.
We still donât have Trumpâs main economic picks. The Fed Chair will retire, on schedule (not early), to great applause, despite the noise to the contrary. I doubt if his replacement comes from outside the current Federal Reserve Board. A left field choice could upset markets, which Trump has been reluctant to do.
In summary although there is still a bias against Trumpâs America, in fashionable media and on the investment sales teams, I think it is like their views on the election itself, largely reflected noise.
The world they would like, not the world that is. There is a lot of discussion on why this happened of course.
And whatever pose they strike for the media, fund managers, at the core, know low tax, with economic growth, is balanced. The opposite, high tax and no growth is not. Long term returns flow from that.
That will be good for the global economy too.
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 canât 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 â 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 werenât, 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 âclosing the tax gapâ, ÂŁ6 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 âbought outâ schemes should not endlessly accrue to the buyers, never the workers, is good news. True, again, just so far, the miners, but if thatâs the first step for one off pensioner payments, from massively over-funded buy outs, it is no bad thing.
Women get hit â the new ÂŁ22 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 donât 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.
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, thatâs 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 donât add up, as do voters.
Debt as % of GDP, US in red, Japan in purple, UK light blue, France dark blue
 IMF data mapper â 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 wonât 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 ÂŁ2,000 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 ÂŁ20bn (economics is pretty simple really) and suggested the biggest chunk of that will come from fuel duties; we will see. Indeed, weâve 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 thatâs only 36 seats, which leaves over 150 to get from Labour.
Interestingly every leadership candidate agrees that it was all Central Officeâs 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 yearsâ 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 MPâs, 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 thatâs 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.