Blain’s Morning Porridge May 19th 2025 – Credit Ratings, Reconciliation Bills, Yoorp and Inflation!
“It’s easier to sit behind a protective tariff and make bad stuff than it is to use that protection to make better stuff – let’s sit behind this tariff and make crappy cars no one else wants.”
Lots of stuff going on this week! Top of the list is how hard-line Republican Hawks in Washington have reset Trump’s Big, Beautiful Bill. Don’t make him angry… We also have the UK doing a deal with Europe. And, Mark Blyth gives a masterclass in how we should think about inflation.
It feels like Groundhog Week all over again. It’s important to remember there is more going on in the global economy and markets than just Trump….
Washington Tremblor
A tectonic shiver passed through Washington over the weekend. The first tremblor was Moody’s warning on the lack of action to trim to US deficit – cutting the USA’s credit rating by one notch from AAA. It should not have been a surprise, and contrary to many commentaries it does not spell the immediate collapse of the US Treasury market. (That may still be coming!) It brings Moody’s into line with Fitch and S&P who both rate the US as AA+ equivalent.
What is important about the Moody’s downgrade was the timing. It came right in front of a critical House Budget Committee meeting on Trump’s Big, Beautiful Bill to cut billionaires taxes and undo the US successes in renewable energy. That was the second tremblor – 5 Republican fiscal hard-liners voted against the Bill and it fell. It demonstrates the thinness of Trump’s legislative control and hints of ongoing legislative gridlock to come. No doubt deals will be done with the holdouts to secure their support, but it was a timely reminder of how insecure Trump’s control of the legislature is.
The bill itself will likely still be passed in some form, and will have profound implications – which will be the subject of a future Morning Porridge. In the immediate wake of the rejection, the Republicans look divided. Every single Democrat voted against the bill. There are risks – a gridlocked legislature might spend less money, but it won’t provide effective global leadership, recovery or solve the US’s overspending problem. Some may think the Bill’s rejection is positive signal – a sign there is an element of control over Trump’s baser instincts and deluge of ill-considered policy making, and thus the burgeoning US deficit will be addressed.
There is, however, a strong possibility it will just make him angry and even more erratic. The state of Trump’s mind is an issue of infinite jest and concern. Over the weekend Trump did not disappoint with a series of furious tweets on Truth Social on a range of perceived slights.
He lashed out at Walmart for daring to pass on the costs of his tariffs to US consumers. The message is clear: American businesses should regard tariffs as a corporate tax on their operations. Go figure that into US corporate earnings statements.
Last week I wrote a brief note, (posted on the front page of the website), about Bruce Springsteen’s comments on Trump at the opening night of his latest European Tour. The Boss laid out his objections to the Trump regime clearly online: “They’re rolling back historic Civil Rights legislation that led to a more just and plural society. They’re abandoning our great allies and siding with dictators against those struggling for their freedom. They’re defunding American universities that won’t bow down to their ideological demands. They’re removing residents off American streets and, without due process of law, are deporting them to foreign detention centers and prisons.”
Trump went ballistic and threatened him: “This dried out ‘prune’ of a rocker ought to KEEP HIS MOUTH SHUT until he gets back into the Country. Then we’ll all see how it goes for him!”
The Boss vs Trump? Now that would be and interesting election.
Across the ditch…
(US readers – the pond is the Atlantic, the ditch is the English Channel.)
Here on the other side of the pond we’re waiting to see what kind of deal the UK Government has been able secure on a new relationship with Europe. While leading Brexiteers are screaming it’s a betrayal of Brexit and will no doubt demand a re-vote (from their tax-exiles in Dubai), the majority of Brits will be delighted if they don’t have to stand in line in the “others” passport queue! Apparently, the negotiations are all about giving Brits access to E-Gates in return for the French getting all our fish. Can’t we find a solution where UK fishermen get to sell their fish in France? They pay top-Euro for piscine produce Brits have absolutely no interest in!
The reality was Brexit was a self-inflicted wound. A mistake that made us look foolish. Unravelling its worst elements and signing a new, non-membership, deal – effectively a form of trade deal – with the UK’s largest trading platform should be a no-brainer. Let’s wait and see what emerges..
Meanwhile – Inflation… a new look
One of my great mates is Professor Mark Blyth – a truly brilliant and clever economist at Brown University in Rhode Island. He’s a fellow Scot, talks twice as fast as me, and is very, very funny. Make some time to listen to him – his insights into markets and macro are fresh and he’s not afraid to prick the pomposity of the status quo. He just sent me a copy of his latest book; Inflation, a Guide for Winners and Losers. It is co-authored with Nicolo Fraccaroli. (Mark has one of my marine paintings on his study wall – on the basis BitCoin’s value is scarcity, it will be worth something some day.)
My prescription for using the money you made last week from being long US Stocks is go buy a copy: This is the Link to Amazon… but there are plenty of other (possibly better) places to spend your dosh. (Personally, I make a point of buying my business books from Daunts on Cheapside – even though the founder skipped the shop and now runs Waterstones!)
The point Mark and Nicolo demolish Is the way traditional economists and central bankers view inflation in a very traditional manner – a monetary phenomenon that can only be addressed by raising interest rates – thus triggering economic pain and austerity. In reality, there are multiple real-event and real-world triggers to inflation – which means there are many more focused ways we can cure, address and even use inflation.
Some of these are good; for instance, a growing economy with rising wages getting ahead of itself is an upside problem. Inflation can also be useful – with skill, it could be used to address the huge debt quantums creating fear and trepidation across Western bond markets. (The worry is the beneficiaries of deliberate inflation will be those holding real assets – the top percentile of society, while those with less will be left with even less – especially if inflation means workers have lower disposable incomes.)
Other inflationary triggers are bad, like the kind of energy cost supply shocks that followed the Russian invasion of Ukraine, or like the stagflation bout we’re likely to see in the US as Trump’s trample over global trade is causing. Some are down right ugly – when inflation triggers get de-anchored from the economy, potentially causing run away inflationary expectations.
I reckon Trump’s recent trade surrender to China avoided an outright Fugly inflation event in the US economy which could have accelerated the end of the dollar hegemony to immediate from imminent. (De-dollarisation is still going to happen.)
Mark told me the critical point of the book was to stop us fearing inflation, but to understand it. If we know inflation, and know how to use it – then it could even become a policy tool in the modern central banking tool kit – much more focused than the hammer that is interest rates.
I suspect Inflation, Bond Rates and how to deal with recession/stagflation remains a likely big threat in the coming months. Boy Scout time: be prepared. I thoroughly recommend the book!
Out of time and back to the day job…
Bill Blain
Author of the Morning Porridge
Founder Windshift Capital
Partner Shard Capital
