Investing domestically will remain challenging until we have a more pro-capitalist government
The re-election of Donald Trump as US President has reinforced American stock market exceptionalism and will serve to further highlight the abject failure of the European economic model.
At the time of the financial crisis in 2008, standards of living in the US, UK, France and Germany were roughly comparable. Since then whilst GDP per capita in the US has risen from $48k to $78k, standards of living have now remained stagnant for 15 years in Western Europe.
Fig.1 | GDP per capita ($)
Perhaps we should be copying America? Instead, whereas Trump promises further business deregulation, smaller government, lower taxes and cheap and reliable energy, in an act of economic euthanasia, policies in the UK and Europe continue to advocate the exact opposite, its political class doubling down on failure.
After many decades of globalisation and economic convergence, fund managers often now say that they invest in companies rather than countries. But this world of low political country risk is already behind us. We are about to witness an economic boom in the US at the same time as a bust in the UK and Europe.
Investors might think crisis will be a catalyst for positive policy change. But since Europe’s mainstream political parties remain clueless about the causes of the malaise, never mind having the backbone to effect change, no such solution will be easily forthcoming without new political parties offering a complete rethink. Before things get better, we might worry instead about higher political uncertainties around currencies, tax, capital controls and ultimately property rights.
Investors would do well to consider “Wriston’s Law” whereby capital (both human and financial) “will go where it is wanted and stay where it is well treated”.
That is Trump’s America, but not the UK or Europe today.
Big Government Crowds Out Capital
Trump has a credible economic plan to reduce the US deficit from 7% to 3% of GDP and further reduce US corporation tax (from 25% to 19%), which if the Laffer curve is to be believed may pay for itself.
Inspired by the “chainsaw deregulation” of Argentina, where President Milei has cut government spending in real terms by one third in just 12 months, the new Department of Government Efficiency will, according to Elon Musk, target $2 trillion (7% of GDP) of US federal government budget cuts (though this figure has subsequently been pared back to an initial $500bn).
That America should be making such economies when its total government spending is by European standards a relatively modest 35% of GDP (the federal budget is just 24% of GDP whilst state spending is an additional 9%) puts UK, German and French state spending at 46%, 50% and 58% of GDP respectively into its truly ruinous perspective.
Fig.2 | Government Spending as % GDP
However, Europe’s profligate public spending does not extend to its military, where it remains dependent on US support to defend the continent against the military might of the pigmy Russian economy. Yet whilst it overlooks the first duty of government as the defence of the realm, our political class are happy to extend the role of the state without limit, so that instead of doing a few things well, it ends up doing everything badly.
As Ronald Reagan, the 40th US President, identified, the “nine most terrifying words in the English language are: “I’m from the Government and I’m here to help.”
Labour’s October budget increased public spending by £70bn and tax by £36bn per annum, taking government and tax as a percentage of GDP to its highest level outside of world war and the COVID pandemic.
After a decade of Thatcherism in the early 1990’s the UK private sector was about twice the size of the state. Under Labour they will be roughly the same size. This is an economic millstone around our necks.
Fig.3 | Size of UK Private Sector Relative to Public Sector
Britain’s swollen and entitled public sector will continue to crowd out real-world growth, as it becomes an even bigger burden that the private sector, like Atlas in Greek mythology, must carry on its shoulders. But capital can just shrug and move elsewhere.
It is also worth considering that unlike the private sector which must earn a profit to survive, the state has no natural incentive to improve its productivity.
Through the granting of huge public sector pay rises and a four-day week for nothing in return, Labour has shown itself an enthusiastic promoter of this two-tier economy.
In contrast to Trump’s deregulatory instincts, the Labour agenda will only accelerate the reallocation of capital in the UK from the productive to the unproductive economy, with the result being economic paralysis.
Energy Policy
Britain currently has the highest electricity prices in the world, some three to four times those in the US.
It is not hard to identify the problem: their electricity grid is powered by cheap and reliable gas, ours by expensive and unreliable wind.
The Shale Revolution began in the US in 2007 and is now responsible for 64% of all US crude and 78% of natural gas production, meaning that the US is currently the world’s biggest oil and gas producer.
This abundance manifests in Henry Hub gas (the benchmark price for US natural gas) currently trading at $3 per gigajoule (GJ). This compares with TTF gas (the European benchmark) at $13/GJ and crude oil at $12-13/GJ. By contrast, the 2024 UK offshore wind CFD auction was done at an energy equivalent of $28/ GJ (subject to upwards only price revisions over the course of the 15-year contract)!
Fig.4 | Energy Equivalent ($/GJ)
Let me repeat. Whereas America powers its electricity grid with $3/GJ natural gas, the UK’s “Net Zero” plans are powered by offshore wind which is currently not only more than eight times more expensive ($28/GJ) but also weather dependent, therefore not able to match demand, thus incurring additional eye-watering storage costs to be economically useful.
At the time of the 2008 Climate Act (which committed the UK to reducing CO2 emissions by 80% by 2050) the UK domestic electricity price was just 12p/KW/h. By the time of the 2019 amendment, which committed into statute “Net Zero” by 2050, the UK domestic electricity price was 18p/KW/h. Today, it is 36p per KW/h.
Fig.5 | Domestic Electricity Prices
Looking at it another way, before 2011, when the UK market share of “Renewables” first increased to above 5%, the average annual price increase for UK electricity over the previous 91 years had been just 2% per annum.
The “Renewable” UK market share has subsequently increased to a reported 42%, whilst the average annual price increase since 2011 has been over 10% per annum (five times the average of the previous century). As the share of “Renewables” continues to increase so too will our electricity prices.
Fig.6 | UK Electricity Price vs. Renewable Share
UK consumption of electricity has already decreased by 26% from its 2005 peak and on a per capita basis is back at the same level as 1972.
Given the strong historical link between per capita energy use and GDP per capita, is it any wonder that UK standards of living have remained at the same level since 2008, when the Climate Act was first introduced?
Fig.7 | UK Electricity Consumption vs. GDP (Per Capita)
The UK’s solution to this energy crisis is to keep fracking banned, tax North Sea oil and gas out of economic existence and to build 3 to 4 times more offshore wind which is guaranteed to only turn up when it is not needed.
It is a policy of breathtaking stupidity.
Europe is equally clueless. In a recent 432-page report on the EU’s lack of competitiveness, its top technocrat, Mario Draghi, suggested that productivity problems could be overcome by Brussels bureaucrats being allocated €800bn per annum to pick winners in promising “green technologies”, as if Europe’s leading fund managers hadn’t tried hard enough to create a silk purse from a sow’s ear.
Contrast this with Trump’s deregulation of US energy policies which will provide a significant boost to the US natural gas industry, where difficulties under the Biden administration in building further pipeline infrastructure and the moratorium on further LNG exports previously prevented its monetisation.
Whilst European politicians have foolishly been content to see our industrial base shrink as manufacturing has been outsourced to China, the new Trump administration is also proposing to return to a standard Republican policy from the 19th century of using trade tariffs to protect manufacturing (a 10%-20% across the board tariff and 60% on China).
Such a move is likely to incentivise companies to own manufacturing assets in and increase capital flows to America, whilst also resulting in Chinese exports being dumped in Europe, hastening the process of European deindustrialisation.
Whilst our policy makers have been neglectful of our industrial base, they are typically more enthusiastic about associating themselves with futuristic technologies such as Artificial Intelligence (AI).
The biggest bottleneck to AI computing currently is its non-linear demand for reliable power.
OpenAI is talking about building 5GW data centres. If all of Britain’s electricity were used exclusively to power 5GW datacentres, the UK could manage to power just 6 ½.
With UK industrial electricity prices, the highest in the world and four times those in the US, it’s hard to avoid the conclusion that most of the world’s AI data centres will be built in the US and hardly any in the UK.
Capitalist Culture
A recent stock market study has demonstrated that America has 242 companies less than 50 years old with a current market value above $10bn, grown from “scratch” without major acquisitions. Europe (including the UK), by the same criteria, has only 15.1
America celebrates its entrepreneurs, seeing their success as a triumph of free will.
In the 19th century Britain similarly celebrated its engineers who facilitated the Industrial Revolution in the same way as it had previously toasted its “sea dog” privateers and navy admirals.
But big government has since spawned a dependency culture which has drained us of our national vitality.
We are now more inclined to see virtue only in victimhood - and frown on entrepreneurial success as exploitative - with the increased power of the state justified as a unique mitigator of “can’t do” fatalism.
I am often astonished as to how many fund managers today don’t seem to believe in capitalism and profit, leading to disastrous results for their investors and ultimately society; reminding me of the fictional conversation in Ayn Rand’s “Atlas Shrugged” between heroine industrialist Dagny Taggart and failed investor turned government bureaucrat Eugene Lawson:
“I am perfectly innocent, since I lost my money, since I lost all of my own money for a good cause. My motives were pure. I wanted nothing for myself. I’ve never sought anything for myself. Miss Taggart, I can proudly say that in all of my life I have never made a profit!”
“Mr. Lawson, I think I should let you know that of all the statements a man can make, that is the one I consider most despicable.”
Prime Minister Starmer and Chancellor Reeves seem to have some understanding of the importance of investment as an engine of economic growth. They seem desperate for the validation of large multi-national corporations to announce inward investment into the UK.
But crucially, they do not seem to appreciate that it is indigenous businesses run by small-scale entrepreneurs, who risk their own capital in profit seeking investment, that drives economic growth and innovation. And that unlike charity, the nature of investment is reciprocal: capital demands a return in the form of profits.
And in their words and actions, the new Labour government has already created the impression that the UK is now a non-profit organisation.
Investors are constantly being told – mostly by UK fund managers - that the UK stock market is “cheap”. It is likely to remain so under the current political regime.
But after 5 years of hard Labour, we might just decide that the economic model that post-Brexit Britain should copy is Trump’s America rather than failing Europe.
Until then, and when considering the additional burdens placed on capital, investors – like Rand’s Atlas – should just shrug and invest in Trump’s America instead.
Barry Norris
London, Jan-25
