Summer is officially ending, and it is a good time to summarise the highlights of this note through August, to get our bearings ahead of the all-too-often turbulent Autumn:
· AI smoke and mirrors. Nvidia, the largest company in the world by stock market value, is at the centre of this, and there is little room for disappointment.
· Wobbly government bond markets. In plain English, investors are demanding a much bigger return e.g. the yield on the 30-year US Treasury rose above 5.3% for the first time since 2007.
· Unrelenting debt growth. The US government continues to ignore the gap between their costs and their income i.e. the deficit, which in turn has to be funded by issuing new bonds. Lack of action to close this gap pushes up the yield, that is the interest rate which the government has to pay investors who hold these bonds.
· Entwined politics and economies. The US electorate, very unhappy about the cost of living, have an opportunity to take charge in the November Mid Term elections. If they do, Trump could become even more dangerous and unpredictable in the 2nd half of his four years.
· All calm (but for those bond jitters). Despite these issues of considerable global significance, let alone bubble US valuations, stock markets were calm this month. The S&P 500 was up by 4%, very slightly more than the FTSE 250, which is all about the UK economy.
· And manic too! On average markets are calm, but there is still a bubbling mania in some quarters. Forty-three geared ETF’s lost more than 90% of their value in the last 12 months. Yet in July, $7 billion went into one geared bet on a semiconductor ETF. The eventual multi-year bear market will wipe the floor of this mania.
Elephants in the room? Climate change – a known unknown. Putin, Trump, Netanyahu – none like losing, each one is under pressure, and all are capable of doing something very stupid. Trump in particular is the dog that didn’t bark in August… lest we forget…
The Trump Bill Has To Be Paid
When the idiot Trump threw his Tariff Tantrum in April 2025, he didn't just wreck the outlook for US assets — he shredded something harder to rebuild: the trust in America that rested on shared moral values. All within just 6 months of taking office. Single-handedly, he pulled the threads out of a world order that had underpinned relative peace since 1945. Similarly with the institutions that spread the West's prosperity — spearheaded by the US — to poorer nations, from physical infrastructure to public health.
The consequences beyond America's borders were felt almost immediately. The consequences for America itself have been slower to arrive — but they are now unmistakably building, and they are arriving on two fronts at once: financial markets, and US households.
Tariffs have hit US households, just as most analysts expected, with the exception of the lightweights and sycophants with which Trump surrounds himself. Tariffs are a tax paid by US importers, not foreigners, and they pass this extra cost to US consumers. The headline hit to inflation appears modest. But this hides a much bigger hit to the typical American family.
In fact if you strip out the impact of the tariffs, US inflation would probably be below the Federal Reserve’s 2% target. The one thing stopping the Fed declaring victory is Trump’s stupidity.
This raises some interesting issues.
Tax paid by US companies have fallen sharply this year, by about 30%, but not because of the trade war. They fell because Trump’s infantile "One Big Beautiful Bill" handed companies fatter and faster tax deductions.
So Trump cut taxes for businesses, and, via tariffs, raised costs for households. It was a clear transfer of wealth “from the checkout to the boardroom”. And this at a time when 37% of American adults cannot cover a $400 emergency expense from their cash or savings. It’s not a vote winner.
The deficit doesn’t help. The gap between what the US government spends and receives in tax, the deficit, is growing year on year with no end in sight. These deficits are filled by the government issuing bonds every year, adding to the existing pile accumulated over years and decades past. The interest paid on these is around $1 trillion a year, bigger than their gargantuan defence budget, and their second largest outlay (behind Social Security), and also it’s fastest-growing…
As the debt pile grows, and nervous investors demand higher yields to buy new bonds, it also reaches ordinary Americans through higher mortgage, car-loan and small-business rates. The fall guy is clear.
Clearly the debt pile, and the annual deficit, are serious problems. But the US government isn’t bankrupt – it simply chooses not to solve the problem. More than that, it has deliberately chosen to let rip on that debt and damn the consequences (this tendency preceded Trump, he has just gone even further). More taxation would help, but they chose not to do that, in fact the reverse.
For example, in 2000 US tax receipts as a percentage of GDP (the size of the economy) were 28.3%, and by 2024 had gone down to 25.6%. In contrast, the UK was 32.7% in 2000, and in 2024 the tax take was 34.4% of the economy (and is undoubtedly higher now).
What is really interesting is that if the US collected a similar amount in tax, they would have no annual deficit – rather they would have a surplus. Paying more tax doesn’t have to be bad – it depends on where it is spent. The solution is in their hands, and it is a solution somewhat less painful than that which will be needed in, say, the UK and France.
Their financial recklessness is compounded by an erosion of the checks that are supposed to catch it. For example, many of the so-called Inspectors General, independent watchdogs within each government agency to root out waste and corruption, were sacked on the 5th day of Trump’s term. The head of the Office of Government Ethics was also shown the door – it’s like giving the referee a red card.
And of course there are multiple allegations of corruption linked to the President and family and friends. Research showed that companies which won tariff “exemptions” were much more likely to have made donations to Trump and his party. Hmmm. If Trump loses the House Of Representatives in November, expect impeachment proceedings, wide-ranging corruption enquiries, and, once he has left office, a few people facing jail time.
There is no one single dramatic rupture of US financial stability and global credibility. Just a continual drip drip drip. In the meantime the world is rebalancing. Trump is known to be weak and feeble-minded. He is now regularly challenged, from Greenland to Iran, and from Canada to China, the latter enjoying the opportunity more than most:
· US isn’t capitalist it’s corporatist with a corrupt underpin.
· China isn’t communist it’s capitalist with a socialist underpin.
After the next Presidential election the US might find itself on a similar path to China.
That’s the context for this Autumn. We hope for calm, are prepared for much worse, and in the meantime are enjoying a range of opportunities…
Turning to What’s Hot in August, gold mining funds were the big winners, many up 30%. We cover whether this is a new uptrend, or a sucker’s rally. The dud funds weren’t terrible, and include a couple of US small cap funds suffering from uncertainty on US interest rates.
On sectors, in addition to Commodities, driven by gold, three fringe sectors showed, Healthcare, Financials and Tech. The only mainstream equity sector is Asia Pacific ex Japan, benefiting from both tech and Value opportunities.
In the very short term, a wide range of indices and asset classes are at interesting junctures. The S&P 500 appears to be close to rolling over. The FTSE 250 is breaking higher, but may well have to combat US weakness. Can copper and uranium miners continue their bounce if gold turns lower? And will they all tumble if the yield on US government bonds, the biggest market in the world, goes notably higher and spooks everyone? (Look out for US government 10 year bond yields going up through 5% - Scott Bessent, US Treasury Secretary, will look even more flaky than usual, as he flusters his way through another emergency press conference and puts another plaster on a bullet wound).
Notwithstanding the vulnerability, we are keeping our corporate guard up rather than running for the exit.