It has been an oddly busy summer: Trump, a nervous Fed, India, a destabilised UK government and a hopeless French one.
Trump is becoming a parody of himself, although there are, at last, signs of the much-vaunted checks and balances. We said at the start that tariffs are taxes and he has no power to levy taxation. That issue is finally on its way to the Supreme Court, and I still fail to see how any justice who respects the Constitution can roll over on such a basic tenet. That some will, now seems likely, but a majority? I can’t see a total win or defeat, but some moderation.
So, Congress must act instead, resulting in more scrutiny, some kind of due process and less nonsense. The US Courts are rolling back other actions, on defunding universities and the use of the National Guard, both of which seem to align better with common sense.
We are starting to see tariff damage, not in prices when the tariffs are agreed and finalised, mainly below 20% with plenty of exemptions, but more in the anarchy of still disputed areas, and the blow to confidence (and so employment) that results. That damage remains, whatever the Supreme Court decides.
Although having spent half the year saying tariffs don’t materially help the deficit, it is amusing how the threat of repayment is now said to weaken the dollar. Make your mind up?
From this site – litigation tracker
Firing the team
The noise over firing Fed Governor Lisa Cook for cause is equally two edged. Markets didn’t react to that, because they were delighted, she was there largely as a provocation from the zombie days of Biden’s rule. Kamala’s casting vote got her in – she had comparatively little banking history, though quite an expert on Russia and trade. For all that it should need a smoking gun, not simple carelessness to depose her. But don’t doubt markets would be glad to see her go.
On the same basis, I was gearing up to defend Angela Rayner, again markets will be delighted she’s gone, but I am saddened by the process. Yes, it will convince some that politics is being cleaned up, but it will convince plenty of others to stay away, from a brutal game. Personally, I want to encourage far better politicians, not more amateur tax compliance experts.
Although a £800,000 flat in Brighton tells you where her aspirations were; many will be shocked at the purchase, given her party’s stance on housing. They also bullied others who fell foul of complex tax issues.
For all her special pleading this was a third home, so did seem more likely to incur the extra tax, albeit that’s now down to two, after her eviction from Prescott’s old pad. The charge of hypocrisy feels heavier than of any deliberate tax evasion.
Reeves remains for now
It also slightly obscures the week’s earlier reshuffle, removing the immensely self-satisfied Darren Jones from the Treasury. As a left-wing lawyer it is unclear whether that was to help Starmer, or slow up Reeves, despite market gossip, and given the year of disasters from the Chancellor, I struggle to see it as a bad thing to change her team.
The issue for Reeves remains (despite all the noise and kite flying) of too much expenditure for too little growth, it is not too little taxation, or too much business confidence.
Nor will any amount of growth destroying extra taxation solve those problems.
Too much of her deregulation has been long term (like the third Heathrow runway) or successfully emaciated, like her planning reforms, or her attack on the FCA. She needs business confidence to recover now, not in three years’ time.
What spooks markets was the failure of Labour Party discipline, and Starmer’s nerve, over announced spending cuts, that were simply not deliverable.
Are any cuts possible? If not, call the IMF.
And France?
I should mention France, but really nothing changes, Macron is unpopular, has no majority, won’t be getting one soon, and will limp on till 2027, a lame duck, playing at foreign affairs.
Although unlike the UK any boost from falling interest rates should at least be visible soon. It is another mess, not yet another crisis.
Markets
Markets remain fairly happy, they like falling interest rates, the cost of capital falls, the comparator return falls, both of which make equities feel better value and also let bond prices rise. Underneath the surface, there is still stagnation, share buy backs, commercial retreats, cost cutting, so I see little driving any positive earnings story, outside of the mega cap tech stocks and AI.
Europe remains stuck, beaten by Trump on tariffs, cowered by Putin, with no peace in sight. The political class seem helplessly awaiting the populist right, although given the one stable success in the larger European economies is Meloni, even that might be less bad. Spain has done OK, but their politics remains unstable.
There is a European belief (shared elsewhere) that if they can survive 2025, Trump will be facing the loss of Congress in 2026, and a Supreme Court that starts to enforce the law, so that it will all pass like a bad dream.
This view I now suspect is shared by India, where his oafish behaviour and support for Pakistan has gone down like a lead balloon. There is no way Modi can sacrifice his small farmers, any more than Europe can, and using India to disguise Trump’s own failures in Ukraine, simply shifts them back towards China.
Below it all is how to pay for the COVID saga, how to get OECD borrowing down, and in understanding that can’t be done, whilst still fighting global warming and Russian expansionism. At least Trump (like Xi and Modi) has got that far, Europe is still whistling in the wind.
I still like the US long term, and Asia.
And, one day, value, once interest rates finally move lower.