Blain’s Morning Porridge Oct 1^st 2025 – Labour vs Reform; a bloody war beckons.

“Sincerity makes for a good movie, but for very poor government.”

Labour declared war on Reform yesterday. Is it a battle they can win? Populism trounced the ill-prepared conventional Democrats in the USA last year. UK Gilts are relatively stable, showing markets are not particularly concerned – yet. Little is known of Reform’s non-immigration or Europe agenda.  Can Labour regain the initiative?

The battlelines are drawn. If you are an investor in UK assets, then the next 4 years will be about Labour vs Reform battling for the political soul of the nation. It’s going to be a messy, bloody and particularly nasty. No holds barred between Labour’s conventional politics, and Farage’s brand of populism.

Place your bets accordingly.

Today it looks dire for Labour. They are trailing Reform some 9 points in the Polls after a dithering first year in office full of unforced errors and a lack of any discernible achievements. The new populist right-wing that has emerged after the Conservative Party destroyed itself has played a brilliant game, using blitzkrieg-media tactics to undermine and question every policy decision. Their campaigns have filled the streets with protest from every angle, uniting pensioners, farmers, free speechers and not a little outright thuggery (according to the Police 62% of those arrested at the Southport riots last year has “previous arrest or convictions for violent offending, including murder”).

But 4 years (till the next election) is a very, very long time in politics.

Labour might yet deliver – growth is modest, but there are some positive signs of improvement in hospitals and housing. Nigel Farage has a chequered past in having monumental bust ups within the multiple new parties he’s formed. (He is personally charismatic, but a notoriously poor judge of the character of the folk he associates himself with.) On the other hand, Labour seldom misses opportunities to snatch defeat from the jaws of victory.

I had better things to do than to watch UK premier Sir Kier Starmer’s performance at the Labour Party Conference yesterday. When I caught it on the BBC news, my first thought was he sounded like a Dalek. Then I regretted not investing in a flag supply company. The number of patriotic banners being waved in the hall was extraordinary – and utterly unconvincing. I’ve been to Labour Party Conference… they are not natural flag wavers.

Starmer ended his speech soto voce telling conference to “wave these flags”, nervous perhaps conference would dump them on camera! If he reckons waving cheap plastic flags in Blackpool will recover the support of the British Working Classes – who are still busily festooning every pole in the country with Union Jacks and St Georges Cross – I suspect, yet again, he’s missed the point.

These flags on the streets are symbolic – but not of suddenly reawakened patriotism. They are a cynical but brilliant part of the protest the new right wing strategists have manufactured to put immigration at the centre of political debate. Immigration has been weaponised into a battle for the nations heart and soul – and the flag flying supporters who feel so patriotic climbing up lampposts just don’t get how they’ve been manipulated. The right wing flag campaign is one of the cleverest propaganda campaigns we’ve seen in decades. Starmers sudden interest in vexillology looked, reactive.

(And before you damn me for my lack of patriotism… my now deceased Range Rover proudly carried Scottish plates and an SRU window sticker, while my racing dinghy has a Saltire (St Andrew’s Cross) painted on its transom!)

As party political speeches go, Starmer did well. The facts remain unchanged: he is a very good lawyer but is a very unlikely national political leader. Which is why he has a 66 point disapproval rating, making him 5 points worse than the average for UK premiers over the last 50 years..…

The key thing is the Markets don’t mind. Yet.

One of the most frequent charges levelled against Labour is that UK interest rates and bond yields are higher than in Europe. Yes. Well Spotted.0

But you have to compare like with like.

Real interest rates in the UK are lower than Europe – real interest rates are the actual rate minus inflation. The spread the UK pays on its debt, its’ sovereign credit spread, is much tighter than France.

• UK 10-year bonds are 4.7%. Inflation is 3.8% – a spread of 90 basis points
• French 10-year bonds are 3.55%. European Inflation is 2%, but French inflation is only 0.9%, thus a real credit spread of… 265 basis points.

You can’t illustrate more clearly that global investors place a smaller risk premium on UK debt. (Reform voters – that means the UK is perceived as less likely to go bust by investors.)

The question to ask would be why is UK inflation so much higher than Europe? Good question, and perhaps one to ask Nigel Farage. He will dither and deflect and not give an answer, trying to blame it on govt incompetence. He will be acutely aware the reason the UK’s inflation rate is so much higher is largely due to the ongoing consequences of Brexit on costs, prices, markets, supply chains and jobs. The right wing will bleat about wage inflation (the temerity of these socialists, actually paying workers enough to live on!), and tax hikes… but when the nation is bust after 14 years under the previous govt… what choices did they have?

The consensus the right-wing would have us believe is the UK bond market (Gilts) is the Sword of Damocles hanging over the UK: “Does Labour understand how close Labour is to a bond strike by global wealth funds”? writes Ambrose Prichard-Evans in the Torygraph this morning.

Nothing could be further from the truth – in the last few weeks the bond markets have been buying gilts. US bond giant Pimco announced last week it was buying long end gilts – I wrote about it in the Porridge. JP Morgan has a “buy” flag on gilts, and Goldman Sachs recently said: “The UK’s fiscal position looks less vulnerable than other European countries.”

The reality of the Gilts market is it attracts nearly 30% of its buyers from overseas, which is due to a number of factors including yield, the underlying political stability of the economy, the size and liquidity of gilts, and the outlook for the economy – which is for inflation to fall, growth to rise above Europe, and a number of key technical factors that support UK debt:

• UK Debt to GDP is 96%, well below France (115%), the USA (121%), or Italy (135%).
• The average debt of the UK has a duration of 14 years, compared to less than 8 in other Western nations.
• The Bank of England and UK Treasury demonstrated an ability to swiftly contain the bond market LDI contagion unleashed by the last bad, mad and dangerous to know duo that tried to wreck the UK economy with undeliverable promises; Liz Truss and Kwasi Kwarteng.

Even Ambrose in the Torygraph admits the UK has financial sovereignty. As a nation the UK scores well on the virtuous Sovereign Trinity of a stable currency, a sustainable bond market, and Rachel Reeves sticking to the rules to demonstrate Political Competency. UK Voters might not have much faith in Labour, but the Gilts market does. Nearly every single bond auction since Labour took power has been at least 3 times oversubscribed.

However, markets don’t get a vote.

Next May, UK local elections, will likely see further massive gains by Reform from Labour. The party strategists know they face tough budget decisions in coming weeks – which likely cause support to haemorrhage.

No matter what they promise, strip away the negative noise and the first 14 months of the new Labour government has precious little to show:

• Waiting lists at the NHS are falling, but slowly. Waiting times for emergency A&E care have reduced by less than 10%. I will be a couple of years before the new NHS online services are in place.
• Home starts collapsed last year, and are only just picking up – and not fast enough to meet the pledge of 1.5mm new homes in this parliament.
• Energy remains a crisis, and a rethink on fossil fuels to bring down cost will take years to impact costs.
• The UK was the fastest growing G7 economy in H1 2025, but there are few signs the positive sentiment exists to keep it up.

They key issue Labour faces is the propaganda war. Last night my father-in-law called from North Wales to ask what we thought of Sir Keir Starmer’s speech to the Labour Conference. I adore my wife’s dad, but he was watching GB News, and he absorbed the message telling us Starmer is “terrible, just terrible.” He’s been a life-long Tory, a successful small businessman, and is devoted to his disabled wife. He is a good person, but believes terrible, terrible things about the Government because a hedge fund in Dubai and a billionaire who own the channel want him to believe that…

Propaganda will trump good intentions every time.

Out of time, and back to the day job…

Bill Blain

CEO – Windshift Capital

Author – The Morning Porridge

Partner – Shard Capital