WOLF IN SHEEPS CLOTHING - FRIEND OR FOE?
MORE ALL-TIME HIGHS
We have two types of bull market running, possibly both are fakes. But one is a belief in faster rate cuts to avoid a recession, the other is faster earnings to avoid rate cuts.
They are very different. Meanwhile Reeves is talking hard, but doing nothing, Kemi is doing a lot but keeping quiet. History tells us that the latter wins.
While markets near all-time highs make investors nervous. 
Basic Schematic of a way to look at markets â © Charles Gillams
In the US the release of animal spirits, the destruction of red tape, cutting of government jobs, firing of obstructive regulators, plus reasonable earnings, are juicing the indices. And independent growth forecasts are shifting up nicely from the Biden days. But that keeps interest rates punitively high. As do tariff tantrums.
But in the UK (and arguably in Europe) it is a relief rally in the face of slumping or stagnant growth. The resulting rapidly falling interest rates, caused the UK market to shoot up mid-week, on the dual promise of more rate cuts and a falling currency (making dollar earnings more valuable), as estimates of economic growth collapsed.
KEMI THE SILENT
What of Kemi? There are still plenty in the Tory Party who either resent her, or fail to see any future for her. At a London conference last weekend, the problem of too many politicians chasing too little work and money was very clear, but no one was accepting the blame for their diminished position.
They have lived too long on the coat tails of Westminster to understand how long the path to redemption is. For that group, the resurgence of Reform is especially bitter. There had been a sudden burst of hope last year, as the victorious Labour hordes were found to have feet of clay. That hope is dissipating.
However, there was some great information on London polling, high quality, in depth, but the stage was so full of defeated (and ill disciplined) politicians, the real data got half shown, ignored  and shunted into the rush for lunch.
WHO CARES ABOUT BIG BAD NIGEL?
As Kemi knows well, she wonât be fighting anyone for four years, and when she fights, the ground campaign matters. She was in no rush to select candidates, noting no need for social gadflies, if when free school meals needed cutting, they wimped out.
Cleverley was sounding realistic too, in London the ground game needs to be there, to attract a good general. Just asking good generals (like him), if they wanted to run, with no money raised, was getting the process back to front.
And what a shambles London Tory politics is. The London Assembly is a joke, the last two Mayoral candidates came from its ranks, indeed were on stage, but were bafflingly poor. If the LA has a purpose, it is holding the Mayor, to account, but as he is directly elected, they have no weapons, (much as they seek more, see this report). They just fill endless posts and talk in an echo chamber. The power remains in the London Boroughs and the political associations that match them, who pick the MPs.
It a system almost designed to be vacuous and needs a rethink, as does the structure of opposition to it.
CCHQ staff numbers have collapsed, 75% have gone, the money spent on a lost election will cripple the party for years. Donors are heading for the hills, after watching Sunak burn their cheques. While associations are being told to merge, sell their drinking clubs, agree confederations, to allow a few paid staff, a recipe that was singularly unappealing in the hall.
ANY STRATEGY?
The big issues for 2029 look to be Net Zero and the Euro. Which matter little to most people, but they are the fault lines. Reform is clear on both. Nothing concerns younger Tory members as much as Net Zero, nothing concerns older ones as much as the EU.
Rather than worry about âuniting the rightâ it may be far more important strategically to split the left. Already half of Labour is happy to send us back to the Stone Age if Net Zero requires it, half can already see it creates inflation and destroys union jobs. In both major parties, there is a love of Brussels, as a gentle, civilised place, but in both a visceral hatred of the Euro.
So yet again, attack the fault, are Remainers serious about the Euro? If not, they are like the Scots Nats at the Independence Referendum, when challenged on keeping sterling â they had no answer, no credibility.
As for Reform, it is upset over deferred County elections, but should not be. A strong showing would generate funds, keep momentum building, but that was not on offer. They have no ground game, candidates have been parachuted in, associations cobbled together; far better to wait. They will have time, will (if real) pick up by-election seats and likely do better next year.
Importantly, every seat in the new unitary authorities will lack a true incumbent: in local elections incumbency counts. The old parties will be split by the bitter infighting between too many councillors for too few seats. And while they may not care, two tier councils are as bad as two tier policing, and should go.
If Kemi needs to care about Reform, it can wait. Insurgent parties frequently split and media attacks will follow. Rather than be fearful of the noise they create, she can wait to see if any of it has substance.
She can rely on getting her votes out, cutting defections, having clear policies, on message candidates, and rebuilt coffers. If that is achieved, she clears the stay at home âsofa votersâ and has a fighting chance.
Everyone knows that another leadership change before the next election will likely be fatal.
And if in London, do catch the Kingâs Gallery show of Renaissance Drawings, till 9th March, as others have noted, only the Uffizi can rival this collection. Casually shown, little publicised, but full of gems.
AGAINST THE TIDE
The two massive current market questions are about liquidity and rates: maybe thatâs just one question.
So, do we now question our long-held assumptions?
The storm in a teacup in a short trading week over UK Gilts is of little interest, we all know where it leads, I am sorry to say.
STILL ENOUGH LIQUIDITY?
Liquidity is the scary issue, and bond yields rising indicates a loss of liquidity, but is it serious?
I donât think so; the usual sequence is a panic causes a loss of liquidity, so settlement starts to fail, causing technical defaults, and then the frightened regulators crash the system. None of that is visible.
There are real strains, no doubt, Russia is struggling to finance war, China is suffering a property bust, but notably rates there are falling. Saudi Arabia canât fund expansion on less than 90$ oil, and both France and the wider EU are in very deep. But none of that is causing disastrous rate rises. Indeed, currencies, as intended, are taking some of the strain.
Gold and bitcoin are building vast, useless, liquid supplies of wealth. While a strong tech market is luring funds away from bonds, and of course the US Federal debt is vast.
Nor does anyone want to be in the market, when the inevitable happens, liquidity crises are a persistent feature of the system.
But for all that I see Central Banks still holding the line reasonably well. No one state has seen a dramatic failure, even the UK, always the weakest, is not yet really offering an enticing rate on ten-year money, given its failure to stop inflation.
So, the current liquidity action still looks, on balance, like bets for and against rate cuts, not distress.
And Trump has profoundly disrupted global markets, by offering a genuine, large-scale alternative to secular decline.
BACK TO RATE CUTS
What about rate cuts then? And inflation.
Inflation is clearly a problem, Biden has been running the US economy hot, to try to win the election, and now Trump optimism is doing the same.
US NON FARM PAYROLL - DECEMBER 2024
And the Fed rate cuts now look ahead of the curve. Indeed, the pre-election 50-basis point one always was.
We felt it was politically motivated, so a sharp kick through a reversal and a rate rise is indeed possible, but with real US rates still positive, it would also feel gratuitous.
The rest of the world has the opposite problem. True it will now import US dollar inflation, especially on energy, and its exports pre-tariffs will look more competitive, but I doubt if either matters, when austerity looms once more.
They just serve to disguise the underlying issues. Although it is possible Germany gets a Trumpian boost, post-election.
However, it will still be really hard for the European old guard to resist rate cuts, let alone allow rate rises. Taking down an already non-functioning banking system, would be reckless.
The UK is very vulnerable; thatâs why avoiding the Euro made so little sense, if we were set on swallowing the other nonsense.
I have never seen other outcomes, given Labour election promises and the need for some attempt to steady the ship before implementing real reforms. But nor have I ever seen other exits bar Truss II. If Reeves and her team let up on real service cuts, they have signed their own resignations. Spending money and raising taxes is instant, so never the hard part. Cutting bloated budgets is also easy, but does need nerve, time and skill. The jury is still out on if Labour has those.
WINTER BLUES
All the market turbulence relates to the holiday period, which in the US now spills over into late January with Martin Luther King Day, and the added impact of various Presidential comings and goings, so I think it can still be ignored.
Thin trading encourages stunts. While Q1 data is usually terrible, the most adjusted season of the year.
The first âliveâ Fed meeting therefore looks to be on March 19th. Which is well after earnings season.
So yes, volatility and reasons to be fearful, but overall, I fail to see this derails the Trump boom. Also, at some point the UK mood will change, if only for shares with high dollar earnings.
Adequate liquidity and on-going rate cuts therefore remain supportive narratives, but both are currently on a winter break.
Assuming no disasters on their return, the year ahead looks fine.
OTHER PLACES
India
I have had a longer look at the Indian economy.
In aggregate  India remains impressive, with plenty of money being made and invested. However, it can in the end go no faster than the average voter, and for some of those, life remains tough.
Modernisation and urbanisation look great on the IMF charts, but always come with a cost, in particular for the urban poor. To be clear, there is no old-style deprivation, no lack of food or clean water, no loss of civil order, there is some basic healthcare, but for all that a lot of surplus marginal labour still. Navigating those strains, while building a modern state, is no small feat. So, India looks great, but only if it can hold a basic policy line through and beyond the retirement of Narendra Modi. Here is a summary of Indiaâs 2025 issues, as taught to its civil servants.
Pakistan, Argentina, Poland, Hungary
Of the true frontier markets, which is the tier below emerging, the best Asian performer last year was Pakistan at +83%, but even they failed to match Argentina at + 91%. While closer to home the expected ending of the disaster that is the Ukraine War, let Poland achieve +46% and Hungary +36%.
None of these have much depth, all feel like recoveries from oversold positions.
Yet at some point Europe needs a single functioning capital market, not a string of small historic ones. Within that, the great advantages of New Europe, low state debt, plentiful land, skilled labour and big EU spend, could be attractive in the multi-year boom that will follow the end of hostilities.
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.
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 canât 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 wonât 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 â where next?
Europe seems genuinely to be struggling. I notice credit default swaps on French debt remain elevated after Macronâs 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 IPOâs.
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 ânew approach to competition policyâ 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.