I’m So Bored With the USA: Beware of Presidents Bearing Gifts 

 

 

“I’m standing alone, I’m watching you all, I’m seeing you sinking
I’m standing alone, you’re weighing the gold, I’m watching you sinking
Fool’s gold” 

 

As the dust settles on Trump’s visit to the UK, and his follow-up criticisms in his speech at the UN, we look back at the goodies his visit bestowed upon us. 

 

During his visit trump bestowed upon the isles a US-UK tech deal worth £31bn to build the datacentres AI requires. Downing Street described the investment as “record-breaking” investment, whilst the BBC’s business editor Simon Jack referred to “A wowee number.”  

The government prefers to describe them as “the factories powering AI”, rather than accepting that they are little more than hi-tech warehouses full of machines rather than people.  

Blackstone’s new premises outside Blyth in Northumberland total in excess of 500,000 m2, and will accommodate up to 10 datacentres. Construction will require up to 1,200 workers for an estimated 10 years. 

Is this, as the PM thinks, “Jobs, jobs, jobs”? Yes and no. Once up and running, the entire complex will need only 40 employees for each datacentre, who won’t be highly paid technicians, but low paid workers undertaking basic maintenance, support and security. 

The vast computing power of these hyper-datacentres are essential to Microsoft, Google and the other US tech giants who seek to control the AI industry. This isn’t a British project, its Silicon Valley outsourcing.  The billions they generate won’t, as PM Starmer claims, stay here, they will be repatriated to the USofA.  

 

‘This isn’t a British project, its Silicon Valley outsourcing’

 

There are already significant downsides to these projects, as they consume significant amounts of  energy and water. In documents published earlier this year, the borough of Tower Hamlets warned of the risk of a “sudden increase in connection applications from datacentres, reserving available network capacity”. The consequences, officials warned, could be that “housebuilding, at scale, is unable to proceed for potentially 10 years+, due to lack of available electrical capacity”. 

Tech is, of course, big news for US investors; Nvidia accounts for 7% of the S&P500 index. The soaring stock values of  the “Magnificent 7” — Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla, which represent C.36% of the Index, are propping up these record gains. “The market, in other words, is floating on a wave of AI mystique.” 

Some of the transactions that drive these valuations are both self-serving and circular. 

For example, Nvidia recently announced a new $100-bn investment in OpenAI, the creator of ChatGPT. The news triggered a predictable jump in stock prices, but the question is, does this deal reflect the broader economy? Or, is it just another example of money chasing money, driving the Index to a series of all-time highs? 

When the deal is analysed, the $100bn doesn’t flow through the broader economy, instead it is a circular financing scheme, with OpenAI spending those new billions on Nvidia chips. It is also highly speculative as, to date, OpenAI has never made a profit. 

Jean-Philippe Bouchard,  chair of Capital Fund Management, argues that it is the foolishness of current market theorists and their belief that markets are somehow efficient : “it’s all wrong. It’s not weakly wrong – it’s badly wrong”, he says. 

The Efficient-market hypothesis (EMH) can best be described as the markets know best, whereas, in reality, the market is little more than the aggregate of what participants are thinking. This, perhaps, explains some of the seemingly overvalued prices of certain stocks, and assets such as Crypto, etc.,  

Essentially, the fear of missing out creates a momentum which drives the inflows and outflows of money.  

Whether or not the AI bubble bursts, we need to be more sceptical of the deeply unequal economy riding on its back. To this we can add the increasing distortions created by inequality; in the US, the top 1% now owns more wealth than the bottom 93%. 

 

‘in the US, the top 1% now owns more wealth than the bottom 93%’

 

Overall, the US economy doesn’t look so robust; job creation has stalled and, despite the curbs on migration, unemployment is rising. Tariffs are pushing up the cost of imports and keeping  inflation above target levels and growth is slowing.  

Trump is at war with the governor of the Fed, Jerome Powell, and wants him out. Powell is the voice of reason, saying that stocks are “fairly highly valued”. Being charitable, this is an understatement, as, by historical standards, stocks are extremely highly valued. 

Given that economic cycles are cyclical we are overdue a correction, maybe even a recession. If we accept that the 2020 pandemic was an exception, it has been 17-years since there was a prolonged fall in share prices.  

A bull market of this length dims the memory and leads to talk of new paradigms, the classic it’s different this time. It never is, but many of today’s traders have little or no experience of what a genuine financial market panic feels like. 

But, whilst the band plays everyone dances, and share prices in New York and London show that everyone is dancing merrily. But, as in the US, the underlying fundamentals in the UK tell a different story. Growth has stalled, inflation is running at almost double the BoE’s 2% target, and the constant speculation about tax rises in the forthcoming budget further dulls consumer and business confidence. 

 

‘many of today’s traders have little or no experience of what a genuine financial market panic feels like’

 

Whilst no two market crashes are rarely the same, if there is a consistent theme, it is investor exuberance. 

Despite what Trump tells everyone, the performance of the US economy is mediocre, and the weaknesses have been disguised by the fact that the wealthy continue to prosper disproportionately; the top 10% of earners account for almost half of consumer spending – the highest level since the late 1980s. 

The has led to a circularity in the performance of the S&P. investment by the wealthy has driven the market to new highs, and, in-turn 30% of the wealth of Americans is based on  their share portfolios. As the majority of shares are owned by the wealthy, that the US economy is relying on the stockmarket boom continuing, and for the rich to carry on spending their gains. 

For the majority, those on low and middle incomes, life is a mundane struggle, as their real incomes have almost flatlined since the pandemic.  

Such a skewed market means that any substantial market correction impacts the wealthy disproportionately, which could lead to them restricting their spending, thus slowing growth. If you add the negative impact of tariffs a recession becomes a reality.  

One of the key points supporting stock prices is the markets expectation that a Trump influenced Fed will cut interest rates. 

 

‘For the majority, those on low and middle incomes, life is a mundane struggle’

 

Since the 1970s, when Fed governor Paul Volker took on inflation, central banks have favoured fighting inflation rather than supporting employment. 

Today, the Fed has twin targets: keeping inflation at 2% over time and supporting employment. With inflation at C.3% there is now a choice: keep interest rates higher than the markets expect in order to tame inflation, or ditch the inflation target to justify interest rate cuts. 

If the Fed resists the pressure for cheaper borrowing, it increases the chances of the US economy falling into recession, or, alternatively bowing to Trump’s pressure will keep the stock market bubble inflated for a time, at the risk of higher inflation.  

There is the added uncertainty as to how the bond markets will react to Trump’s lower interest rates. This could negatively impact mortgage rates and the cost of servicing the US national debt, which is currently 124% of GDP, and rising. 

The old saying of “America sneezes and the rest of the world catches a cold”, still runs true.  

Our economy is dealing with a triple whammy; Brexit, tariffs, and fact that Labour is now a closet-Tory party, practising a similar form of neoliberal economic orthodoxy. 

Looking beyond economic policy, the three most popular parties – Reform, Labour and the Tories – ape each other;  tougher on crime and immigrants, and deferential to big business. All three prioritise the same socially conservative voters, and believe that economic growth can be driven by deregulation and the City, with the GFC seemingly forgotten. 

Labour have seemingly forgotten what they were, and, as their popularity plumbs the depths, there appears to be a fight for the soul of the party. 

Representing the right is the PM and his team, for the left we have Andy Burnham and a slew of MPs frightened of losing their seats.  

Burnham arguments for wholesale changes to see off an existential threat to the party’s ideas are more in-line with what Labour was; higher council tax on more expensive properties, investing more in building council housing, a 50% rate of income tax on higher earners, and nationalising utilities. 

He also supports scrapping the two-child benefit limit, describing it an abhorrent policy: “It cannot be justified. It’s the worst of Westminster, that’s what it is.” 

He said it was not “a crime” to have three children, as his parents did. The policy had been introduced, he suggested, by politicians who “don’t deal in the real world and “have these myths of families: ‘Oh, yeah, they’re all having kids for benefits.” 

Clearly something needs to change. PM Starmer should be riding into this week’s party conference as a conquering hero, a leader in his prime. Instead, he is mired in tanking poll ratings, three scandalous exits and plots by his own MPs to oust him. 

 

‘he is mired in tanking poll ratings, three scandalous exits and plots by his own MPs to oust him’

 

By any measure, his premiership has, to date, delivered only disappointment. He has been weak dealing with Israel, toadied to Trump, his benefit reforms were a disaster, and his people judgement awry, E.G., trusting Peter Mandelson. 

All the policies that voters expected, such as tackling child poverty or building a humane benefits system remain unfulfilled. It is almost inexplicable that a government with a working majority of 156 pretends all of this is out of its hands. It feels like they were beaten before they started, the revelation of the Tory legacy £22bn blackhole was just too much for them to cope with. 

Starmer and his supporters are getting all huffy about the potential challenge from Burnham, when they would be spending their energy contemplating why there is a challenge. If you can’t see where you have gone wrong there is little to no likelihood of it being fixed.    

Clive Lewis, the Labour MP for Norwich South, said the party needs more democracy, discussion and pluralism to confront the authoritarian voices of not only Reform, but also his own party. 

There is a lack of cohesive dialogue from the leadership, who seem to prefer more heavy-handed tactics, which are leading to unrest and the desire for change. Starmer and his team appear to be control freaks, centralising everything, including candidate selection, which leaves both grassroots members and leftwing voices increasingly marginalised. 

Control aside, a large part of the discontent is caused by the apparent duplicity of Starmer’s leadership campaign in 2020. Virtually all the policies he campaigned on have been dropped. Instead of renationalising  privatised utilities such as water, a policy that voter support, providers continue to run riot, doing as they wish, when they wish. This is just another example of Starmer’s conversion to a neoliberal orthodoxy that has repeatedly failed. 

The populist right has taken advantage of this leadership vacuum, seizing the middle-ground, offering nativist, nationalist solutions to problems that a Labour government should be capable of solving. 

Starmer’s failure has seen Reform seize the initiative, polling C.13 points ahead of the Conservatives and 10 points ahead of Labour. Even in areas such as Merseyside, whose 16 constituencies used to be Labour safe seats, the party no longer seems assured. The government’s strategy for dealing with Reform is fundamentally flawed; shifting to the right and talking tough on immigration only legitimises racism and increases Reform’s support. 

‘shifting to the right and talking tough on immigration only legitimises racism and increases Reform’s support’

 

In the aftermath of Starmer’s “ill-judged island of strangers” speech both he and the party Labour became less popular, especially among Labour’s own voters. It significantly boosted immigration as an issue in people’s minds. There is no evidence it helped to reduce support for Reform, or convince Reform voters that they should vote Labour. 

Today, the closest we have to an effective leftwing party is the LibDems and Greens. As a result, there isn’t a party that seriously addresses this country’s socially corrosive inequality, the exploitative and dysfunctional character of the privatised utilities and wider British capitalism. Reform’s racist myths that dominate the debate about immigration and multiculturalism remain unchallenged. As a result, mainstream politics continues to move rightwards without solving, and often inflaming, the problems it claims to be addressing. 

If Farage is to be defeated, Labour needs to start asking itself the hard questions, rather than sulking and threatening its members. 

 

“Don’t waste your words
I don’t need anything from you” 

 

“housebuilding, at scale, is unable to proceed for potentially 10 years+, due to lack of available electrical capacity”

 

This week, in the aftermath of Trump’s visit we consider the UK-UK tech deal. As you would expect this is totally one-sided, doing little for us, and a great deal for Trump and his tech bros.

Looking back on the visit, it makes me squirm. Yes, we are good at pomp and pageantry, but, ultimately we wasted a great deal of money, on a bigot who loves his ego stroked, and who will do what he wants either way.

Considering tech made me look at markets and the importance of the Magnificent 7. My conclusion is that they resemble a Ponzi scheme. Circular deals amongst themselves, propping up their over-valuations, with investors dominated by the wealthy, and late to the party retail, all driven by the fear of missing out.

This feels just like 1999.

Both the US and UK economies have slowing mediocre growth, sticky inflation and rising unemployment.

In both nativism is the order of the day, giving the masses the scapegoats they seek.

Neither Trump nor Farage have the answers to the real problems, but they are good at using the media to sell their bigotry.

Labour, like the Tories before are ideologically adrift. So scared by Reform that their only answer is to become Reform. This week’s conference will tell us much of what party members really think. Having watched the chancellors’ stuttering, shambolic performance on breakfast TV she is very clearly over-promoted.

As to Starmer, he’s devious. Campaigns on one set of polices, leads and governs on the opposite; you can fool some of the people some of the time, but…….

Lyrically, we celebrate our wonderful tech alliance with the US with “Fools Gold“ by the Stone Roses. We end with their “I Am the Resurrection”, which Starmer was supposed to be…..

Let’s hope he enjoys what time he has left.

Philip.       

 

@coldwarsteve

 

 

 

Philip Gilbert is a city-based corporate financier, and former investment banker.

Philip is a great believer in meritocracy, and in the belief that if you want something enough you can make it happen. These beliefs were formed in his formative years, of the late 1970s and 80s

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