In today’s issue:

  • At first Labour blamed the Conservatives for the “black hole”
  • Now, THEY own it
  • Might they fill it with “black gold”?

In recent editions, I’ve covered the topic of defensive investment strategies.

Those appropriate for a world of poor growth prospects and lingering inflation pressures.

Why?

Because that’s the world we live in.

Britain’s economic stagnation may have begun under the Conservatives but, under Labour, things appear to be getting even worse.

We’ll explain why below, and what you can do about it…

When first elected they blamed their predecessors for the budgetary “black hole” they had inherited, supposedly without any foreknowledge.

But that was then.

Now, they have no one to blame but themselves.

The moment Labour’s first budget arrived in late October I predicted it would fail to deliver on its promises. In particular I predicted that tax revenues would disappoint and the budget black hole would grow.

Little did I know this would become plain already this month.

Every day brings with it more reports of lost jobs, shuttering businesses, squeezed consumers, the wealthy packing up and leaving… all of which are tax revenue negative.

Way back in the 1970s, legendary economist Arthur Laffer observed that, once an economy was already highly taxed, raising taxes by even more didn’t increase but rather reduced government revenue. This became known as the “Laffer Curve”.

If a heavily-taxed economy was already on the edge of recession, higher taxes were certain to push it over the edge.

Labour’s high tax obsession

Well, here we are. Labour has raised taxes all right and the result is that Britain is indeed slipping into recession.

It doesn’t help that borrowing costs have risen. Since the election, UK government bond yields have risen, rather than fallen, as the budget assumed.

Source: Koyfin

Nor does it help that energy prices continue their climb. As an input into absolutely everything, energy is basically a tax on the economy.

Applying the Laffer Curve logic above, Britain is already on the far side over the energy curve. Even higher prices from here would be outright recessionary in their effects.

So now we hear reports of Labour scrambling to try and correct the increasingly obvious mistakes of their first budget. They’re flailing around looking for some way, any way, to stimulate the economy and get it growing.

“Pave baby pave!” is the latest such idea. Apparently demolishing thousands of homes and building a third runway at Heathrow would help to pull Britain out of its economic funk.

Perhaps. But I doubt it.

That project might go the same way as HS2. Part of the runway might be built but, after a thousand feet or so, evidence of some ancient settlement might be uncovered. Or a rare species found.

The paving would have to cease until the government decided what to do about it. Perhaps a runway tunnel would need to be dug or some such.

Several years later, they might realise that’s not practical. Perhaps they’ll divert the runway. Or decide it was all too expensive and ambitious and just give up and try something else instead.

Such is par for the course in modern Britain it seems, regardless of whichever party is in power.

The contrast with how things are developing across the pond couldn’t be starker. President Donald Trump’s first week in office has been nothing short of a pro-growth policy whirlwind.

Trump is getting it done

He’s not throwing money around, mind you. He’s getting the government out of the way of those who would seek to build their businesses and serve their customers.

Among other things, he’s opening Alaska’s Arctic National Wildlife Refuge to new oil and gas drilling projects. He’s also getting rid of any government-imposed DEI – diversity, equity and inclusion – guidelines for private businesses.

Imagine that: being able to hire whomever you want for whatever you think needs to be done.

What a novel idea!

Imagine if the Victorians, who built our original industrial, modern infrastructure of railroads, ports, factories, sewers, etc, had thought of that? Britain would have been the leading 19th century global economy for certain.

Well, here we are in the 21st. And as investors, we need to find a way to navigate through the present nonsense.

This is where we can actually take some guidance from the Labour government. They’re beginning to realise that, if they can’t even keep the lights on, they’re not going to be able to deliver on anything and they’ll be thrown right out at the next election.

And so that is where I think they’ll start: with the lights.

This government are going to get to work lowering energy costs. But how?

The way you lower energy costs is by doing what works, not what doesn’t and thus needs to be subsidised with higher taxes.

Two words: oil and gas. Britain still has loads of both in its territorial North Sea waters. And it has potentially far, far more down in the South Atlantic.

Last autumn, in our publication The Fleet Street Letter, we drew investors’ attention to the huge oil and gas deposits in the territorial waters of the Falkland Islands. We also listed several companies we believed would benefit if drilling in the region ever went ahead.

Argentine President Milei has voiced support for developing the region, currently protected by UN treaty. With both UK and US support, that treaty could probably be amended.

Given President Trump’s “drill baby drill” mantra, he would almost certainly not stand in the way.

Bigger oil reserves than Saudi Arabia?

Markets agree. The Argentine state oil company’s share price soared last November on the news of Trump’s big win.

Source: Koyfin

Drilling has in fact already begun around the Falklands, but on a small scale to the north of the Islands, outside of the Antarctic protected zone.

Now, imagine scaling that up all the way down to Tierra del Fuego and beyond. And imagine Labour enjoying Britain’s share of the royalties from what some believe is a massive field larger than that of Ghawar in Saudi Arabia.

Thatcher inherited a terrible economic mess from her predecessors. She succeeded in part because her government presided over the North Sea oil and gas fields coming online and the royalties windfall they provided.

This government could do much the same and possibly save themselves from being a “one-term wonder”. If they could just get out of the way and let energy companies work their magic, not only in the North Sea but wherever they find valuable resources, they might even outdo the Iron Lady.

“Only Nixon could go to China,” as the Americans sometimes say when describing political expediency.

Perhaps someday Britons will say: “Only Labour could drill in the Antarctic.”

If they do, savvy investors will no doubt have been one step ahead.

Until next time,

John Butler
Investment Director, Fortune & Freedom


The Good, the Bad, and the Bubble

From Bill Bonner, writing today from Baltimore, Maryland

Can you really get ‘there’ from ‘here?’ Here we are… a late, degenerate empire sitting on a debt bubble that is ready to blow sky high… run by people who benefit from inflation and deficits.

There’ is a peaceful, ‘soft landing’… bringing debt under control without a depression… avoiding a meltdown and controlling inflation.

Javier Milei, in Argentina, seems to be headed ‘there.’ Inflation has been reduced by 90%. Government payrolls have been trimmed by 30,000 employees. And the nation ran its first budget surplus in 123 years.

But Milei did not start from ‘here’… he started from a much different place, with 250% inflation and half the population living in poverty.

It would be nice to think that earnest leaders could follow him. But things do not happen just because you want them to.

Empires, for example, rise and fall. There are no exceptions. They get ‘good’ leaders… and ‘bad’ leaders… but mostly they get leaders who do what they have to do to take the Empire where it needs to go.

The Roman Empire was the most successful political organization since humans left Olduvai Gorge. It lasted 450 years. Emperors generally expanded the reach of their power until Trajan died in 117. Thereafter, the best they could do was to hold it together… which… finally, they couldn’t.

The big loss was obvious. The Visigoths sacked Rome in 410… 66 years later Rome was finished.

Where was the Big Gain?

Broadly, the center of gravity for Western Civilization shifted to Northern cities – first to those of north Italy – Florence and Venice… and then over the Alps to Paris… London… Amsterdam… and New York. A tiny patch of ground in Manhattan, not worth anything in the 15th century, today sells for millions…

But we don’t have a millennium for our investment guesses to play out. Our look-ahead period is only ten years. And to make a guess about where you’re going… according to our cosmology… you have to know where you are now.

And here in the USA, 2025, things are getting weirder and weirder… but not yet desperate.

We saw on Friday how non-weirdness works. Asset prices go up. Then they go down. The Primary Trend gave us only three major highs in the 20th century – ’29, ’66, and ’99. Each one was followed by a predictable sell-off. Up, down, up again; that’s the way it works.

But after a short collapse in 2000-2003, stocks went into a weird and unnatural phase. They dyed their hair green and said they were neither bull nor bear…but something preposterous and strange. They were ‘market fluid,’ they said, asserting a right to use whichever bathroom they wanted.

After the huge run-up of the stock market – 1982-1999 – the logical, historically determined, Primary Trend should have been down…and should have taken the Dow all the way to five ounces of Dow/gold.

Instead, the Fed manipulated interest rates – cutting 500 bps to try to reverse the sell-off – and managed to get stocks moving up again. Thence, the trajectory was up… up… up… with only a brief pause in 2008… followed by another 500-basis point cut… and more than ten years of negative real interest rates (below the rate of inflation).

Real interest rates—the Effective Federal Funds Rate minus the official year-over-year change in Consumer prices, have been negative for most of the 21st century.

During that period, too (2000 to today), the feds added over $30 trillion to US debt – the biggest stimulus ever. Even those extreme interventions could not stop the Primary Trend… which, in terms of gold, cut the value of the Dow stocks in half. But in trying to stop ‘normal’… the feds made things very weird.

As Tom says, it was as if they had suspended gravity. Asset prices floated freely, untethered to the real world of the main street economy, goods and services, earnings, or costs.

Without maps or compass, investors got lost. They didn’t know if they were coming or going… climbing up or tumbling down. Cryptos, NFTs, fractionalized assets… and then came MicroStrategy (whose only real value is the bitcoin it owns… but whose stock price suggests its BTC is worth twice its real market value)… Fartcoin… and even a new coin from a dead man, John McAfee.

And who would have imagined that a man preparing to take on the gravest responsibility known to humans would launch a new crypto currency named after himself, just hours before taking office? You’d think he’d have other things on his mind.

The Fed inflated asset prices. Then, the inflated assets created distortions of their own. At current prices, stock owners feel they have gained nearly $50 trillion worth of stock market capital so far this century (US stocks had a total market value of $15 trillion at the end of 1999… and close to $63 trillion today). And out of the blue, crypto holders have a claim on another $3.3 trillion.

There is little connection between this new wealth and any real earnings in the real economy. But having made so much, they are eager for more, awaiting the next Fartcoin like children watching the chimney on Christmas Eve.

Regards,

Bill Bonner
Contributing Editor, Fortune & Freedom

For more from Bill Bonner, visit www.bonnerprivateresearch.com