Added to which, in the US there is a short-term and unique complicating factor affecting US Treasury yields: the Debt Ceiling, the annual political argument in Washington about the permissible parameters of the government’s debt burden. This year there is the added frisson that with Joe Biden losing the House of Representatives, it is brewing into a first-class row with the Republicans politically gluing themselves to the road and refusing to budge until Biden meets their demands for lower public spending. The Debt Ceiling agreement carries a date stamp and in the absence of it being renewed in time, the government cannot continue spending and the public sector grinds to a halt: government employees don’t get paid, benefits are frozen, the bins aren’t emptied etc. Left unresolved and taken to its ultimate extension, as the Congressional Budget Office conceded, what it really says is that it is a choice between paying federal wages or distributing coupons to bond holders: you can do one or the other, but you can’t do both. Brutally, the government can pay its employees but the country is bust because it technically defaults on its loans and risks a systemic financial melt-down, or it keeps its creditors (i.e. its bondholders) at bay but it has riots on the streets. It’s Hobson’s Choice with knobs on.

The Debt Ceiling is a self-imposed limit, currently $31.4 trillion, a sum which was breached on January 19th. There is an emergency contingency under which the government is now operating, however it is strictly limited both financially and in terms of time. But the ceiling itself is arbitrary; that is why it is annually up for renegotiation and usually ends up being raised. It is a very different system from, say, Germany, where the ‘debt brake’ regime implemented in the wake of the Global Financial Crisis dictates that it is illegal for the government even to present a budget that involves a deficit. The German system might be inflexible (indeed that is exactly the point!) but it is clear and unambiguous, and it prevents the problem arising in the first place, though occasionally it is tested beyond its limits as last year with Olaf Scholz’s intra-year €200bn electricity price-cap policy. But without that discipline, in the US the resulting horse trading leads to endless compromise and fudge, almost invariably meaning the ceiling is pushed up. And suddenly it has a debt/GDP ratio at 130% and they wonder where it came from. It is a distinctly uncomfortable and expensive position in which to be when interest rates have gone from zero to 4.75% in less than a year and still have further to go. No doubt it will be resolved, even if it goes right to the wire; even hard-line Republicans are not so obtuse as to be responsible for a potential systemic collapse in international bond markets (as if the UK’s episode last October was not enough of a wake-up call), nor would they wish to alienate millions of public sector workers with a Presidential election now within view.

But stand back from the hum-drum day-to-day squabbling on Capitol Hill about what among public services and wider government spending might or might not be pared back; all this is window-dressing at the margin. The essential truth is that the US is not only living beyond its means, it is serially fiscally incontinent. Indeed, it has been without a break since 2000, the last time the US produced a government surplus. Reaganomics put the US finances on a sound footing and the deficit/GDP ratio reduced almost every year (the 1991/2 recession caused a small setback) from 1983 (5.7%) to 2000 (surplus of 2.3%). Since then, it has been downhill all the way and although it has bounced back from 2020 and the pandemic (14.9% deficit), the deficit is now 5.4% and back on the deteriorating trend line. Regardless of who has been in power, Democrat or Republican, that is the cumulative effect of two decades of lazy Keynesian fiscal policy (exacerbated by the government response to the pandemic), aided and abetted by a compliant central bank prosecuting a prolonged ultra-loose monetary strategy, and complicit markets. It is the type of unchallenged, consensual economics the IMF wholeheartedly approves of. Here in the UK, we have no cause to gloat: even if not at 130% geared (we are nevertheless approaching 100%), ours is a depressingly similar habit.

The Jupiter Merlin Portfolios are long-term investments; they are certainly not immune from market volatility, but they are expected to be less volatile over time, commensurate with the risk tolerance of each. With liquidity uppermost in our mind, we seek to invest in funds run by experienced managers with a blend of styles but who share our core philosophy of trying to capture good performance in buoyant markets while minimising as far as possible the risk of losses in more challenging conditions.