Jupiter: Outlook 2024: Rampant debt and a rancorous election

The most pressing need early in 2024 is that the US resolves its debt crisis. Thanks to fiscal incontinence and an inability to remain within the maximum permitted borrowings’ ceiling prescribed by Congress, the Biden administration remains in financial special measures when it comes to paying for public services. The deadline for resolution expires on 19th January, beyond which funding will be withdrawn and public services will begin to close with a final guillotine of 2nd February. The political sensitivity is obvious: the fiscal competence and responsibility of both parties is under the spotlight in an election year. The alternative to a public sector shutdown, and the nuclear option which nobody wishes to trigger either accidentally or deliberately, is that the US government defaults on its loans.

Strategically, across the majority of Western democracies the exceptionally high level of government debt and how to deal with it remains the elephant in the room. Tactically, the cost of servicing it is a significant preoccupation. As we enter the New Year, the markets represented by those who provide capital, and the central bank authorities who, using interest rates, set the base cost, remain locked in a Mexican stand-off. Essentially this is a battle for supremacy over who calls the shots on monetary policy. Confronting us is virtually the reverse of the situation in mid-2021: then, investors were pushing up government bond yields (with prices heading in the opposite direction) as the perceived inflationary risk grew while the central banks denied there was a problem and refused to raise interest rates from rock bottom; now with inflation falling, investors are driving yields down while central banks are reluctant to reduce interest rates from cyclical highs.

Central bankers are determined to stick to the narrative of interest rates being “higher for longer” and “it’s still too early to be contemplating cuts”, as recently reinforced by the Governor of the Bank of England.  Conversely, markets are telling the central banks, and the Federal Reserve in particular, that if they were not cautious enough two years ago, they are being far too conservative now. Who will blink first? Time will tell whether the markets are to be disappointed again, or the central banks are forced to capitulate, or whether pistols remain drawn but nobody dares move. At the centre of the argument is the cost of failing to get firmly to grips with inflation versus the cost of being too firm and wrecking the economy. Deft policy surgery is made more difficult by interest rates being blunt instruments rather than precision tools.

 

A rancorous US election is fast approaching

Away from economics but sure to be reflected in investment barometers of risk and sentiment represented by bond yields and exchange rates, 2024 will be dominated by what will be one of the most extraordinary and rancorous US presidential elections in history. In the blue corner, Joe Biden; in the red, most likely to be Donald Trump and not impossibly while incarcerated at the equivalent of His Majesty’s Pleasure in clink. Hostilities are already evident but they break out for real in January at the Iowa Caucus where the Republicans formally begin their presidential nominee selection process. It will be morbidly compelling viewing, not least after the primaries have opened and Trump begins a series of four criminal trials (two federal, the other two at state level) encompassing 92 felonies. The US goes to the polls, appropriately, on 5th November 2024. In less than a year’s time we will know whether the outcome is something the rest of the world needs to worry about given the simmering temperature of geopolitical tensions at the centre of which are the malign or disruptive influences of Russia, Iran, China and North Korea.

The UK general election in 2024 (technically, it is allowed to be as late as January 2025 but will be unusually coincident with the US election) will be highly relevant domestically but a relative sideshow for global investors. However, a potential simultaneous change of administration in London and Washington, were both to happen, could alter the dynamics in NATO. That would provide a further challenge in forecasting the future movement in the global geopolitical tectonic plates, as well as potentially changing the direction of the war in Ukraine.

Our summary a year ago is enduring. We might have seen elements of today’s conditions before, but none of us has ever seen them in their totality in our investment careers, however long they span. Opportunities are there to be taken, but new risks present themselves and must be managed or mitigated against. From an investment perspective, we believe it pays to be open-minded and adaptable rather than prescriptive and dogmatic. Aiming to keep up in the good times, trying to lose less in more challenging conditions, this is what we believe goes to the heart of compounding long-term wealth.

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