UK's catastrophic finances: the markets smell blood...

Key Markets update for Thursday, 23 January 2025

Great Britain, the paragon of all things right, honourable and conservative, is running one of the world's largest budget deficits. Recall, a few months ago Bloomberg's analyst Simon White looked at Britain's fiscal position and judged it "catastrophic," which I have underscored in this newsletter back in August. Insofar as this is an outcome of UK's oligarchic, imperialistic system of governance, it was predictable, as I pointed out back in October 2021 in "The Fall of Global Britain: an investment hypothesis".

Please disperse, nothing to see here!

But Great Britain has exercised great skill in deflecting attention away from itself and keeping up the appearance of a liberal democracy, leader of the free world and stronghold of human rights. However, somewhere along the way, the British ruling establishment lost its cool and the façade started to crumble, revealing a system that is more similar to that of the Soviet Union than to a liberal democracy.

I began to notice this in the immediate aftermath of the U.S. pullout from Afghanistan in August 2021. The reaction to that event among the British political class was strangely hysterical, suggesting that their involvement and exposure in Afghanistan was more consequential than we knew. The hysteria only escalated with the Ukraine war. It seems that Ukraine's defeat will hit Britain harder than other Western powers.

By now, it appears that the markets are beginning to smell blood. Earlier this week, the founder of Bridgewater Capital, Ray Dalio warned that Britain could be heading for a debt death spiral if costs of borrowing increase and the government doesn't reduce its budget deficits. They would do that, of course, but the deficits are all for a good cause, you see: saving the planet from evil climate change and saving democracy and freedom from evil Russians.

The day after Ray Dalio pointed out that the emperor is naked, columnist Marcus Ashworth rushed an article in Bloomberg reassuring the markets that the emperor's new suit is still just as magnificent as ever, and Ray Dalio is only trying to draw attention to himself in order to sell his new book, so please ignore him. Goldman Sachs reaffirmed that everything's cool because Britain's cost of borrowing is going to decline in 2025. How does Goldman Sachs know this? Well it’s because the Bank of England will lower the rates, that’s how. I have to wonder why they haven't thought of that sooner, but what do I know?

The next big short?

Still, the scent of blood is now drifting. Yesterday, none other than Michael Burry of the Big Short fame picked up on Dalio's warnings in this X thread and pointed out that the UK's annual interest payments on debt are over £100 billion (close to 10% of its budget), forcing the following choices on the government: (1) borrow more money, (2) cut spending, and (3) raise taxes.

Knowing what we know about politicians and their inclinations, the government will probably opt for 1 and 3 while actually increasing spending on worthy projects like capturing carbon from the atmosphere and building more solar power plants, as well as allocating more money to Ukraine and other foreign misadventure, all making the outcome quite predictable.

Accordingly, Burry suggested that the pound and British gilts could be among the next big shorts, but for those who subscribe to TrendCompass, you knew all that since 2021 from my “fall of Britain” investment hypothesis which I revisited and updated it in two parts, linked below:

Part 1: The coming collapse of Britain

Part 2: The fall of Britain

Furthermore, I-System trend strategies had you on the right side of these trends long before they caught wider attention in the markets. They will likely continue to trend because the Great British trainwreck is far from over and the large-scale price events in the pound, gilts and likely also in FTSE are still ahead.

To learn more about TrendCompass reports please check our main TrendCompass web page. We encourage you to also have a read through our TrendCompass User Manual page.

Trading signals for Key Markets, 21 Jan. 2025

With yesterday’s closing prices we have the following signals: