Blain’s Morning Porridge May 22 2025: The Debt Storm Approaches – Gale Force 9 Imminent.

“There are gale warnings in Dover, Wight, Portland, Plymouth. Westerly 8-10. Very Rough. Rain. Poor.”

When the rest of the world is increasingly concerned about the sustainability of US debt – of course it makes sense to increase the deficit through a politically motivated tax-cutting Big, Beautiful Bill. Not!  A Debt Storm is coming. Batten down the hatches.

The Morning Porridge will be intermittent over the next week or so. She-who-is and I are off racing the yacht to France tomorrow. After 2 months of an early summer, the weather is looking set to get a bit windy and wet.. so not entirely sure when we will sail back… When we were younger, a good Force 9 storm was something to brag about in the club. Today…? Working from the boat beckons.. (I’ll be on the Radiogram early doors Monday – likely from a port on the Normandy coast!)

Weather is a funny old thing.

30 years ago I looked to the sky for clues in the high clouds and on the horizon, which way in or out the leaves on trees were, and if the cattle in the field were standing up or lying down. These still guide me on what the wind and rain might do. Once you’d learnt its vernacular, the BBC Shipping Forecast gives a great picture of the synoptic situation – dad taught me how to listen and use it to predict the winds.

Today, I have all the latest sailing weather apps on my iPhone and iPad, loaded into a boat computer which punches the numbers – optimising the expected weather with my sails and predicted boat speed (“Polars” in boat speak) – to plan our course. Its not AI, but one day will be. Although we can now predict the weather – we still get it wrong.

Weather and markets are somewhat alike. Both are prone to chaotic breakouts when fronts change or sentiment breaks down. But we understand far more about the weather than we do about how the factors driving markets play out.

Today, the weather in the financial markets is looking “changeable”. If I were an old-school BBC weatherman I’d be advising a “robust” umbrella…. There may be trouble ahead.

And, back to bonds…

Before I start laying out my usual doom, gloom and the sheer bearish misery that may lie ahead of us… let me remind you of Blain’s Market Mantra No 2: “Things are Never as Bad as You Fear, but Seldom as Good as you Hope.”

There is stuff going on that excites me. The reason I was an Apple Addict –  “was” because of a deeply disappointing experience in an Apple store recently with very unhelpful arrogant staff – is the products are were stylish and practical. Life without an iPhone was inconceivable. But all markets evolve – the news Apple’s former chief designer Jony Ives is selling his io startup to Sam Altman to create a “hardware platform” for OpenAI points towards a new product paradigm in AI computing which could leave Apple range of product looking a bit Blackberry.

Imagine if Apple was made obsolete overnight? Wow. That would hurt. That’s one positive – product and market innovation goes on.

Unfortunately, global debt markets face a more tricky time….  And if bond markets get expensive, that means the cost of growth for all companies rises – and heavily indebted struggling firms – debt zombies – fall. Meaning limited demand for Jony Ives’ new bright shiny tech thing.

I am increasingly convinced a debt crisis approaches. I stick with my Long Gold strategy ahead of the storm front passing. Yesterday I wrote about how JGBs are the Canary in the Coalmine. The pachyderm in the room is the US Treasury Market, and that might be about to go off.

I can’t pretend to understand the intricacies of how the Republican’s are trying to reconcile Medicare, Local Taxes and Tax Cuts with Trump’s demands they pass his Big, Beautiful Bill. It is being debated among Trump’s party today in Washington. The Republicans argue about the number of angels on a pin-head, while the Democrats are 100% no.

There appears to be little understanding among any of them about the risks to the Treasury market – the beating heart of the US economy. For many years I’ve cited Political Competency as a key leg of what I called the Virtuous Sovereign Trinity alongside currency stability and debt sustainability. All three legs are looking wobbly in America: Global markets are increasingly nervous on the US debt-quantum – while it seeks to increase the fiscal deficit as rates rise, the dollar is no longer directing the proceeds of global trade into Treasuries, and confidence in American politics declines. Doh!

It feels like we’re approaching the end game of this cycle – decades of financialisation, rising inequality (its apparently fine the bottom 10% of Americans will lose out to give the top 10% of Americans bigger tax breaks – and no one blinks), and the debilitating cold treacle of political meh.

As that happens, markets are become less global and more insular – it will be Japanese investors that fund Japanese debt, meaning they aren’t going to fund the US. All of which spells crisis as the USA will be looking for investors to fund the deficit as a time when Trump has managed to offend about everyone. It means higher and higher US yields – precipitating the debt crisis.

Simple as.

Markets are equally responsible – we’ve been fooling ourselves since 2010 that’s it’s been the exceptional skills of top financiers to spot and nurture opportunities in Tech, to innovate new markets in crypto, NFTs, SPACs and whatevers, (yes, I chose all these deliberately to show how artificially low rates nurtured foolish speculation), and to use leverage and guile to create enormous wealth. Nonsense – it was ultra-low interest rates and QE that spawned the massive inflation in financial assets, made the rich richer, and made very average fools into market gods. That period of financial excess is coming due for payback.

Can the coming crisis be avoided? You can fool some of the people some of the time, but you can’t fool all of the people all the time.

The UK has had the learning lesson of Liz Truss – how political incompetency can destabilise the economy at extreme speed. The UK is a relatively small nation, blessed by strong government structures (parliamentary majorities enable swift implementation of policy) and an even stronger civil service which can “guide” (ie, tell the elected political amateurs what they can and can’t do.)

At the moment the Labour party is trying to do the right thing – fiscal prudence. They are making extremely unpopular spending decisions, attracting hatred and ire from all sides of the electoral spectrum – from farmers to pensioners. The Chancellor, Rachel Reeves, is sticking to the Treasury play book. She had the opportunity to use the new governments initial popularity to borrow more to repair some of the post-Brexit damage, but missed it. Treasury is delighted – balanced books is what they do.

Sadly, Labour politicians want re-elected, hence the rising rumours of a potential political coup to replace Starmer and Reeves with politicians who will steer back to Labour aligned policies.

The kind of political incompetency we are seeing in the USA is very different. Its deliberate and there are few adults in the room to control it.

My advice is simple… you can’t stem the tides, and you can’t fight a storm. You ride them. The answer to the question you are asking is Gold.

Anyone for the last few choc ice before the rains come?

Out of time, back to the day job, have a wonderful wet and windy bank holiday!

Bill Blain

Author of the Morning Porridge

Founder Windshift Capital

Partner Shard Capital

NB – this morning’s picture in a new painting I scribbled up while thinking about markets and sailing…. funny thing the human mind….