Wall Street Earnings, Inflation Headwinds & The Rise of TWACO

Hello and welcome back to the Market Maker podcast, and we have quite a busy episode ahead because we are going to talk about bank earnings. Earnings season in the US is underway and traditionally always kicks off with the big bulge bracket banks, which I know our audience are very keen to hear the latest because a lot of them are thinking about potentially working for these firms in the future. And I think their earnings give a really good insight as to what's below the bonnet so you can really stand out when you go through that application interview process. So we'll break those down. We're also going to talk about inflation, namely CPI unexpectedly rose in the UK earlier today. What does that mean? Does it complicate the picture for the Bank of England? What was fuelling, a little bit of a hint there, what was fuelling the inflation rise? So amongst food prices, petrol prices, we'll have a look at. And then also we've had inflation metrics out of the US as well. So has the dial shifted and what's the macro and monetary policy feed-through effect in terms of what markets are with Fed rates. And then finally, Trump. I see you've squeezed this one onto your notes again, Piers, trying to talk Trump's book about his successful escalate to negotiate strategy. But we'll see, maybe there's repercussions for his uptick that he's had in terms of the amount of money the US is generating here from custom duties. But yeah, maybe we could start then Yeah, with the big banks, I know we've had JP, GS, MS, Citi, BlackRock. Where do we start?

Well, we start with just the overall fact that they've absolutely smashed it. These banks are delivering very, very spicy numbers and predominantly, well, let's talk like the kind of investment banks, let's talk about, let's say the Goldmans and the Morgan Stanleys first, like JP Morgan, it's more of a universal bank, right? I had the JP Morgans, I put slightly separate, but all of them were done really well. There's a very common theme and that is trading floors have delivered record ever revenues. And that's if you think about it in quarter 2, right? This is, remember earnings for quarter 2, April, May, June, 2025. What happened in markets? Well, as some of your stats you were throwing at me a few weeks back was about, oh, the biggest ever sell-off and recovery in a single quarter. And I was making the point that that's because just coincidentally, the timing of Trump's tariff war liberation day was the 2nd of April, the second day of the whole quarter, which then triggered this monster sell-off in markets. S&P dumping 20%, but now it's rallied 30%. The point is these kind of investment bank trading floors, their job is to help their buy-side clients, hedge funds, asset managers, whoever, right? Whoever's investing is to help them facilitate trades. They then generate revenues from providing that service. So the amount of revenues, the fees and the commissions and the spreads that they earn is a function of primarily the volume of trades that comes through their floor. That to an extent is, to an extent is out of their hands because it's about the macro situation and how active are these buy-side institutions being in the markets. Is there a reason to be buying or selling? Well, yeah, there was a massive reason to sell start of April and then there was a massive reason to buy mid-May 'cause of the TACO trade. I'm going to introduce a new concept in the second part of this pod when we got onto Trump. I'm going to introduce the twacko trade. You've, I'm coining this myself.

I thought you were going to say something else there. I was like, wow, this is really getting, as you said, a bit spicy, but okay.

I've coined this term myself.

Yes.

It's, it's, I'm confident you're going to like it anyway, just for now, right? Loads of trading going on. Perfect for trading floors. So when Goldman's deliver their top-level numbers, they're like, profits jump 22%. Okay. Obviously very strong, beating expectations. Primarily that's the trading arm of Goldman's that's delivered here. So to throw some numbers, even though they had a net income overall for the whole business of $3.7 billion for that quarter, which is up from $3 billion in the same quarter last year. But the equity traders, particularly at Goldman's, absolutely smashed it. They generated $4.3 billion in revenues in 3 months, in 90 trading days, they delivered $4.3 billion. Their fixed income arm, they delivered $3.5 billion. And so these are record ever numbers. So the trading floor is just having a whale of a time here. Now you've got to think ahead though, because have things calmed down a little bit? Yes. You know, this fine, obviously we'll talk about Trump and doing deals with the likes of Indonesia and so on. But look, that whole risk has been punted into the long grass and so trading volumes have slowed. So do understand these banks are going to have a worse, well, I mean, I don't know, we're only halfway through the first month of the quarter. I don't know yet, but at the moment it's looking like this is going to be a much slower quarter for trade volumes. So we're going to probably see these record-breaking numbers come off in Q3. So that's One reason why maybe some of these share price reactions, I'm looking at Morgan Stanley, they're down 4% today even though their earnings report was awesome. So maybe people are just kind of, this is all in the rearview mirror obviously. But look, back to Goldman's, obviously trading, the trading floor's not the only part of the bank. So the other key piece, and historically I would say the piece they're most famous for is that investment banking division. And That has been a real drag on the bank performance over the last couple of years, right? We had a mega monster year for M&A deals, IPOs back in 2021 where the fees they generated were, well, just disgusting to be honest, but huge, right? But ever since then, it's just been a kind of, it's, we've been in the desert for deals and everyone was really confident. Trump's coming in, deregulation, let's go. And everyone thought, right, deal flow's deal flow was going to really ramp up. It just didn't happen in Q1 and everyone was like, oh God, okay, another whole year then of no deals. Okay, let's like hunker down. However, one of the key surprises out of these earnings reports is actually deal flow, particularly back end of Q2, is actually starting to pick up some momentum. So Goldman's delivered a really surprising $2.2 billion in investment banking fees over the quarter, which was much better than what was expected. And some of the deals they've been involved with, I'll just list out a few here. Like on the M&A side, Abu Dhabi National Oil Company and Carlyle, $24.4 billion takeover of Santos. Okay, that was a big deal they were involved with. Blackstone acquiring a company called AirTruck. That was a $16 billion deal. So these are some of the big M&A deals. On the IPO side, things are ticking along as well. And actually Goldman's was number one in the APAC equity capital markets, and that's actually APAC's been where the IPO ramp has really kind of taken off. And so Goldman's positioning themselves quite strongly in that region. That's where they've kind of really benefited. So yeah, for these kind of straight up investment banks, the likes of Goldman's and Morgan Stanley, the trading floor's absolutely destroyed it. And a surprise pickup in deal flow has just added to the coffers.

One point then is that just to add a bit of context, when you, so there's 3 major pillars of Goldman Sachs as an organization when you're looking at by net revenues by segment. Decoded, the company has 3 areas. And so these 3 areas are global markets and banking, which is what you were describing, trading and investment banking, all housed in one. Division. There's Asset and Wealth Management, and then there's something called Platform Solutions. To give some context here, they made, I think you said, $14.5 roughly billion in revenue for Q2. About three-quarters of that revenue was Global Banking and Markets. Yeah. Tiniest sliver was Platform Solutions, and the rest was Asset and Wealth Management. So they really are a powerhouse. Really very much, I guess we'll go on to talk about more diversified peers within their class like JP Morgan. But one thing here is then let's go down another layer. And so investment banking fees were $2.2 billion, as you said, but with equities and FICC. So just to get some terminology jargon down, you've got FICC. So what is FICC? And then FICC in itself was almost, you know, almost double what investment banking fees were, just FICC. Yeah. Equities was more than double what investment banking fees were put together. Trading, you know, you're talking almost $9 billion against $2 billion. So the banks, that goes to show how much the revenue on the trading side has dwarfed that. But my question as well is, not just to explain what FICC and equities are and why they're treated separately, but why does equities outperform revenues against FICC as well, do you think?

Yeah, good question. So FICC then, fixed income currencies and commodities. So they kind of, and then you got equities, it's just kind of splitting up the asset classes, right? So when you're thinking about a trading division, so your job is to facilitate or help clients trade, right? Well, who are the clients, right? Let's maybe categorize them because, you know, you've got to divvy up responsibilities here. You can't have just one person, you know, covering too many clients, otherwise the service you're going to be able to provide will deteriorate. So you've got to divvy them up. So you would certainly do that geographically. Of course, you'd certainly then think about that from an asset class point of view. And look, some of your clients will be specialists in a certain singular asset. You might have a, a hedge fund that only trades fixed income, for example. So, but obviously then you're going to have other clients that are monstrous in size. You might have a big like BlackRock asset management firm that's obviously trading everything. But the second thing to say is how these assets trade varies. So you got stuff like, you know, vanilla stuff like equities that fine trade on exchange. Okay. That does mean, by the way, that your client could trade directly on exchange. You know, why come through me, the investment bank, to place this trade when they've got a license for the, the NASDAQ? They can do it themselves on their computer screen, right? But here it's about liquidity risk and it's about market impact. And so if your clients are making massive trades, yes, they could do it themselves on the exchange, but it would be a really expensive way to execute that really big trade. So they're coming to us, the investment bank, to facilitate that trade Off exchange is called over-the-counter, and this is where us, the investment bank, are doing the trade. The investment bank's the counterparty for your buy-side client, the hedge fund, and you're doing a trade that way, right? But equities generally are exchange-traded, order-driven markets. But then you've got other, like fixed income isn't trade, you know, have you ever heard of a bond exchange? Obviously there's the London Stock Exchange, the London, the New York Stock Exchange. There's no London Bond Exchange. It's 'cause bonds and fixed income, they don't trade on exchange. So there's a different, it's just a different way. Market structure that these get traded. So you'll have different specialists on the Goldman's trading floor that are dealing with a different assets, but also that idea that the kind of functionality of the kind of infrastructure of how these markets operate is different. And why have equities smashed kind of the other side? Well, to a degree, it depends on the bank. Because Goldman's have a, just a bigger trade, sorry, equity trading division. I was looking at Morgan Stanley just as a slight comparison and I had some stats. So Morgan Stanley, for example, I've lost my numbers now, but their trading division, have you got their equity or their fixed income trading division fees? I can see their net income was $3.5 billion. I don't know if you can help me out here, but Morgan Stanley, their fixed income division performed better from a fee generation point of view than Goldman's. So I think Goldman's just have a lean towards equities as a kind of focused sort of asset class specialty.

I've got a few numbers here. So I was looking, I just brought up their Q2 Report. Just making sure definitely got the right one. Yep. So investment banking revenues were down 5% and equity net revenues were up 23%. Fixed income net revenues were up 9%. So equity net revenues reflected increases from a year ago across business lines and regions on higher client activity, as you described, robust results in prime brokerage.

Yeah.

So what's that last component that they're talking about?

Yeah. So Prime Brokerage is normally, well, first that's a division that kind of sits within the kind of trading side of the operation and their sole job is to service hedge fund clients and serve and provide services right across the whole spectrum. A lot of that is trade facilitation. It's kind of lending stock. So that hedge funds can go short. It's financing kind of leverage so these hedge funds can take on leverage positions. But often, certainly at Morgan Stanley, I think the prime brokerage division sits within the equities side of the trading division, for example. So yeah, look, I would say it's probably fair to say that the equity markets were more volatile in Q2 than the other asset classes. And so as a function of that, trade volumes were bigger there, which is why the fee generation's been bigger. So I think that's the kind of overarching simple point. But I will go back to say that these banks do specialize, and so Goldman's have a particularly strong equity trading presence.

So is there any parallels, any differences when we talk about the likes of JP Morgan and BlackRock?

Yeah, well, if we talk JP Morgan first and actually go back to investment banking, because there's quite a cool chart you can maybe throw up, which is just comparing the big banks. And so like the top 5 American banks, JP Morgan, Goldman's, Morgan Stanley, Bank of America, Citi, and looking at their investment banking kind of fees and looking at the actual fees compared to what was estimated. And they've all just smashed the estimate. So they've all performed much better than expected. But there's a big hierarchy where JP Morgan, you know, they always sit top of the tree pretty much in terms of investment bank fees generation with normally Goldman's 2 and then Morgan Stanley normally 3. So the usual state of affairs is the case. Bank of America And then Citi round off that top 5. But it's always interesting, you know, Citi produce like less than half of the fees in investment banking than JP Morgan do, for example. But JP Morgan, well actually maybe go back to Morgan Stanley for a sec. 'Cause when you were talking about Goldman's, you were saying, right, they've got their investment banking side and then they've got their asset management side, right? But asset management's very small for Goldman's. Actually, Morgan Stanley are one of the leading kind of big investment banks for their asset and wealth management. Management division. Okay? It's way more mature than Goldman's. And actually what was interesting out of the Morgan Stanley report was just how well that part of their bank has performed here. So for example, the bank's unit serving high-income clients pulled in $59 billion of net inflows during the second quarter. What does that mean? That means that their clients have given them $59 billion extra money to manage on their behalf. So this is assets under management. Inflows is when your assets under management are going up. Outflows is obviously when it's going the other way. And so they've had some phenomenal inflows here and that part of their bank, well apparently there's, yeah, so the bank has said its wealth management business, which is, it's got about $6 trillion in assets under management now, by the way, which is like seriously getting up the league table here. And yeah, it was obviously boosted by higher levels of client activity during the quarter, but their revenues from that division was up 14% to $7.8 billion for Morgan Stanley, which is actually bigger than, well, it's certainly comparable to their kind of trading revenues and yeah, destroys anything Goldman's producing from that part of their bank.

Can I ask a question then? Because I think with wealth management, perhaps that's a not as explored area of finance that people might think of, certainly in early careers. So I'm assuming to initiate more inflows is a combination of research, sales, relationships. What am I missing? And are all these individual roles that people could have within a wealth management function?

Yep. I mean, this is the thing. It often gets overlooked, this part of the bank from a sort of careers perspective, but I think it's really cool and it's a growing, it's an ever-growing part. And Morgan Stanley, as I've said, they've done this so well to now create an absolute huge, and it's like diversification, right? It's diversifying your kind of business. But yeah, roles, you know, why it, roles within here are certainly marketing. Obviously you've got to have a good performance. As a wealth management operation, if you're delivering for your existing clients and you can then package and, you know, get a marketing pack where you're packaging up this performance, right, into some nice slick visuals, then you need an expert in all of this, an expert in the bank's products, an expert in markets and macro and commercial awareness, and an expert in relationship management and talking and sales. and they're the ones out on the road who are A, sort of going to visit their existing clients saying, hey, you know, any more spare change you found down the back of the sofa, sling it our way because look how well we're doing for you with the money you've given us already. But then obviously it's about hitting up new targets. And so yeah, absolutely sales, marketing is a huge part of this. Obviously then there's the, you know, a big part of that is investment management. So there's a whole, you're managing their money now. So this is like a buy-side operation. Where you are now managing portfolios, investing client money, maybe your big net worths, maybe they're doing their own trading. So you might provide a kind of agency trading service where they'll have their money on account with you, but they'll just call up when they want to place a trade and they give you the instructions of what they want to trade and then you execute it for them and so on. But then there's like wealth management stuff around estate planning, you know, tax efficiency around, you know, inheritance and capital gains and all the rest of it, right? So that's also a kind of big part of it.

So one thing we haven't touched on yet, so we kind of, that was cool 'cause we got to mention wealth management a little bit more, which we've, you know, we probably could do talking about more often to shine a bit more of a light, but we haven't talked about more like commercial banking, corporate banking. Yeah. So is this when we start to bring in JP then?

Absolutely. And so JPMorgan are that kind of big universal bank, meaning they service individual retail customers. So retail banking. So that's just your everyday Joe on the street who's got a bank account or a credit card or a mortgage, right? So that's your consumer banking or your retail banking. Then you've got commercial banking. This is then servicing companies as your client base, and that can be both from that same stuff, bank accounts, you know, payment cards, credit cards, and so on. But it's also then about financing. So overdraft facilities, revolving finance facilities, and so on. But then it's about when your clients are getting a bit bigger, it's about, right, helping them raise capital. And that can be through bond and share issuance. And this is where you're getting into then your ECM and your DCM, your equity and debt capital markets. And this kind of moves into the investment bank part, right? So you've got your, yeah, you've got your retail bank, you've got your commercial bank, and then you've got your global markets division, which is then what we've been talking about with all the trading stuff where your clients are financial institutions. JPMorgan do the whole lot and they're the biggest on the planet. Now the thing about JPMorgan, obviously they've benefited from this spike in trade volume. Their trading floor smashed it. They've begun to really nicely start to benefit from the pickup in deal flow on the M&A and IPO side. What they're also benefiting from is on their loan book, so their net interest income, because interest rates have stayed relatively high with still a resilient economy. And so this is perfect if you are in the business of lending money because you're able to charge higher rates and your customers are still able to afford the higher rates. That's proven by the fact the economy's still resilient. And so they're still profiting from their loan book in this high interest rate environment on top of the smashing it on the trading floor. And now a nice little pickup on the deal flow side. So for JP, yeah, this is starting to really look pretty spicy on all fronts.

Just before we move on to BlackRock, so you said universal bank and JP is one of those. Who else would you put in that bucket of familiar names that might resonate with people. So who would be your more pure-play markets banking? Who's in universal bank status?

Yep. So universal banks would be the big guns like JP Morgan, Bank of America, Citigroup. You've got to think about, so they're obviously the American ones. So here in the UK, it'd be Barclays, be HSBC, although HSBC are really pulling back from the kind of investment banking piece. But HSBC and Barclays historically are the kind of big two here in the UK. So is anybody like, one way of thinking it, which of these big banks that you know of from an investment point of view, which ones do you see have high street outlets? 'Cause they're the ones then that have a retail banking arm. And obviously here in the UK we don't see so much a JP Morgan, you know, high street banking outlet. But you know, over in the US you obviously do.

Okay. So it's a little bit different then. Is asset management and BlackRock. So yeah, you were talking about inflows flushing into, sloshing into the MS account. What's happening? Because I know obviously assets under management is a key component of managing management fees at BlackRock. What did that look like in Q2?

A bit of a rollercoaster because the assets they have under management Yes, are a function of inflows and outflows, right? Which is how good your performance is and how good your marketing and sales is. But it's then also a function of what's the value of the assets that you've got under management already. And the value of those goes up and down with the markets. And they've got a huge amount of like stock ETFs, for example. So if stock indexes go up and down, well, they're at the value of their assets under management goes up and down, which of course has a direct impact on their revenue and their fees. 'Cause their fee generation as a company is a percentage of assets under management. So obviously if you think about Q2, markets collapsed at the start so that the value of assets under management dropped sharply, but then obviously it's all recovered and now up at, you know, new all-time highs, right? So it's been a real rollercoaster. What I was reading, which was a bit more interesting than the usual, they actually had to come out and say, look, our assets under management are worse than maybe what you'd expect because we had a one-off situation where we had one single client based in Asia that withdrew $52 billion during that quarter. They were quick to point out, 'cause then you think, well, why? Hang on, why are they withdrawing $52 billion? The BlackRock were quick to point out that even after that withdrawal, they're still managing hundreds of billions of dollars from that same client. But still, and they were saying that actually most of that money they withdrew was coming out of the lower fee paying index investments. Yeah, exactly. So they're like ETF sort of products that generate the lowest fees. Apparently most of it came out and then you gotta start to think, they didn't say who it was, but you gotta start to think, well, hang on, are they calling the top here? Are they, are they getting out of their ETF positions? 'Cause they think it's the top. I mean, I don't know.

That's a scenario where a lack of visibility on who that is can quickly start the rumor mill flowing.

Yep.

Which can manifest and human behavior would dictate that when something like that's happened, we side on the, we err on the side of caution.

Yeah.

But an interesting lesson there as you were describing it as the way that BlackRock have tried to communicate, which is the other part I think of people don't necessarily think about. 'Cause we're sitting here talking about numbers of what happens in Q2. What BlackRock are trying to do here is massage the future and manage their outward-looking guidance as to get ahead of this rumor mill and be as clear as possible. And again, from a role perspective, you would have advisors for this type of stuff. I would imagine people who are strategically placed on the comms side to help support the CFO, the management team to convey and alleviate any tensions or anxieties that might come from a moment like this. They would've known that client's done that. I'd imagine they would've spent a few weeks trying to engineer the best guidance around it. So yeah, interesting.

Yeah. And one other couple of other points, just, we always often just bang on about equities, but so BlackRock, it was actually their inflows were strongest across their bond ETFs. So actually that attracted in just a tad under $44 billion in the quarter. I got a friend who runs, I mean, like you do, a friend who runs an asset management firm who's a fixed income asset management firm. I was talking to him over the weekend and he was saying that they're, so they have a, so the way these businesses operate, they have their targets each month are right, we target to try and attract in we want X amount of inflows this month, and that's our marketing and sales strategy is to generate that amount. And so that's how they benchmark and measure themselves, how they're performing, right? In June, he was telling me they attracted in triple their forecast. So they brought in like $750 million. It's obviously a much smaller fund compared to obviously the super giants of BlackRock, but they attracted in $750 million. Their target for the month was 250. So something's going on here on the fixed income side. And he was saying that basically, well, A, you've still got high interest rates. B, you've still got huge amounts of cash sat on the sidelines and some of this really short-term money market stuff. And then maybe you've got concerns still about sustainability of the economic momentum and obviously Trump and all the rest of it, right? So at the moment he's saying actually, No matter where you look, there's an attractive story you can tell to come and park some of that cash of yours over in the fixed income space. So that was interesting that that was their strongest sector for their inflows.

Finally, crypto, 125, baby.

Crypto and digital asset ETFs was another strong part. So they attracted in 14 billion of inflows. And that was pushing Bitcoin obviously to record highs. But yeah, that part of their, you know, 14 billion now, I mean, fixed income was 44 billion of inflows, right? So 14 is just from that crypto space, which is quickly becoming, you know, it's actually becoming a thing that kind of moves the needle, which I thought was interesting.

And without going in too much detail, there was some meaningful movement on Capitol Hill and it was the Clarity Act and the Genius Act. Yeah. The Clarity Act, Digital Asset Market Clarity Act, aiming to resolve regulatory confusion defining whether digital assets are commodities and under whether it's the CFTC or the SEC. So a lot of this is to do with oversight. And then the Genius Act is Guiding and Establishing National Innovation for US Stablecoins Act. So it's really interesting because I was listening to the FT talking about this. They were talking about what's fueling the leg higher is legitimacy coming from it being more actually involved into the traditional system, which is more oversight rather than it's perhaps the initial I guess the people who were involved a few years ago and what their initial mission statement might have entailed. So it's getting that second leg now of legitimacy, and that's definitely evident from that $14 billion inflows that you mentioned. Well, look, we've done half an hour of deep diving. Let's come up for air and let's do a bit of a summary then of the inflationary situation in the UK and the US, and then touch on Trump.

Yeah. Well, you kind of want to start UK. I mean, you'll know more than me here, but the headline is that inflation went up 3.6% in the month of June, which was higher than expected. We were expecting it at 3.4%. This now, if you look at a chart of UK CPI sort of annualized, we've got like, I mean, it's getting on for almost 12 months of uptrend now. We kind of hit a low sort of quarter 3 of last year below 2%, like super briefly for one month. But ever since then, sub-2, ever since then it's just been trending higher and now we're up to 3.6. Obviously it's nothing like the 10+ percent we had during the inflation spike that topped out in 2022. So we're obviously not going back there. That inflation crisis post-COVID isn't going to happen again, but it's just, this is a real pain in the ass for the central bank because they want to cut rates, but they kind of, well, can they? I mean, we're expecting them to cut rates. That's the Bank of England now at the next meeting. But this data again just makes it more difficult for them to get away with it. Now that said, it's food and fuel that is responsible, and you could certainly put forward a really strong argument to say, well, central bank interest rates pretty much have zero effect on fuel and food prices. You know, if you've been watching Clarkson's Farm Season 4, then you'll know the harvest last year was shocking. So, oh surprise, there's not enough wheat. Knocking about. So bread prices have gone up, right? So this is what happens, and so fuel prices have crept higher in the month as well. So if the central bank cut or hike rates, it's not going to impact the weather and it's not going to impact the supply of oil. So you could say that this stuff that's driving it higher, maybe the Bank of England should look through, which is why we often look at the core inflation reading instead that takes out food and energy. There though, that was up as well. So here was the kind of the main point. Core inflation was at 3.7%, up from the previous month, 3.5%. And this is because services inflation crept higher and well remained actually growing at 4.7%. So that services inflation component of the basket is still staying stubbornly high. So yeah, I mean, what do you think? Are they, can the Bank of England hike? Can the Bank of England cut here?

Well, first things first, I'm certainly not going to shed a tear for Jeremy Clarkson. That's first thing. Perhaps, look, let me put a couple things on the table then, and then we can work through it. So the economy has been slowing, right? In the UK, inflation's going up, economic activity is slowing. The likelihood, it looks like, that the Labour Party are going to have to increase taxes. So let's, what we've had 2 months of negative growth. She is forced to raise taxes. What does that mean then for economic growth? Probably slows.

Bad news.

What does that mean for inflation?

Yeah, well, so here it is. You're kind of getting right to the meat of it here. So the economy's slowing, right? And look, you could even argue part of the slowing growth is because of the risk that Labour might increase taxes in the future. So it already influences behavior around spending if you are worried taxes are going to go up right now, whether they hike taxes. Well, that looks like they're going to have to, so that will just double down on being a negative effect. Why is that negative? Well, the Connection of course is that if you are taxed more, well then you have obviously less disposable income. Less disposable income means consumption drops and look, 75% of GDP is consumption. So that's the kind of connection, right? So, but you are right to say, well, if then consumption's going to drop, well isn't that disinflationary because the demand for goods and services drops? And so yes, you would expect inflation to dampen. If economic momentum slows except for the stuff in the basket where it's more about supply that is controlling price. So food and energy is the supply side, which isn't really connected with economics. It's connected with things like the weather as I was just discussing, right? So there's that caveat. So at the moment it's hard to really know how and why is this services inflation. Staying stubborn, now feeding tariffs. Is the tariff situation with the US, is that now feeding into companies having to put their prices up? This is your worst case scenario cocktail where companies are forced to put their prices up because of things like tariffs. You got food and energy costs rising because of supply. You've got taxes going up weakening the economic situation even more. The Bank of England's stuck in the middle because, well, hang on, do we cut rates to try and stimulate growth and get people spending more? But hang on, inflation's already too high. So if we stimulate the economy, is that going to create another inflation crisis? So they're kind of just wedged between a rock and a hard place here, which is why I think the odds on a rate cut, which was really nailed on, the odds on a rate cut at their next meeting that has actually crept a little lower now.

Okay. And then what, and let, so let's move to the US. Is it same or different?

What's going on there? Well, it's inflation went up. So it was 2.9% on the headline, so it's lower than the UK, right? But actually that's been the way of things throughout this whole inflation crisis. UK inflation has generally been slightly higher than the US situation. So it's 2.9%, up from 2.8% the previous month. Okay. What's interesting about this report, you're starting to see some evidence that tariffs will impact inflation. That's been one of the positive things that's led to some of this rebound rally in May and June. It's like, well, look, tariffs aren't producing any inflationary problems. You're just seeing in this report some signs of that happening though. So some of those products like household appliances, you know, your, what, how much does a washing machine cost? Or your clothing, you know, or your furnishing stuff that generally most of it is imported. So any goods, the majority of the supply is imported. Those goods are, the inflation rates are going up faster than the goods that aren't so reliant on imports. So But it's really small, but it's there. There is now a little divergence. So that is to say that maybe this tariff thing could lead to a more meaningful positive input to inflation, which is obviously not a good thing. But luckily to counterbalance all of that, one of the stubborn elements of the basket that's stayed really high has been shelter costs. That's continued to drop quite sharply. So that's why the inflation situation in the US is much better than it is in the UK. I would say generally. Generally speaking. So can the Fed cut? Well, obviously it just comes back to the same old stuff, politics, tariffs, all the rest of it, right? But I'll finish with TWACO. Yep, you heard that correctly. So taco is something everyone's familiar with. Trump always chickens out. But actually here we've got now TWACO, the world always chickens out. You see what I've done there? The world, because actually it's everyone else chickening out, not Trump. Indonesia being quite salient point here. So they've just done a deal with Indonesia where they've agreed tariffs at 19%. So on Liberation Day back at the start of April, Trump threatened 32% tariffs Unless you come to the table and negotiate. Well, they've come to the table and negotiated and they've got it to 19. It basically was zero before, right? Now it's 19% on all goods from Indonesia and Indonesia have agreed to buy more American oil, more American airplanes, and more American farm goods. So I mean, come on.

Can I get this straight?

That's a pretty damn good deal that Trump's done there.

Yeah. Let me just double-check something just because, you know, like a verification check. So at the weekend you were having dinner with this fixed income hedge fund, this asset management guy and Trump, or was it one of Trump's advisors?

Look, I've, look, me and Donald, I'm not going to, I don't want to talk about our personal relationship. But look, stuff's happening. And actually I mentioned a couple of weeks ago just about tariff revenues. So now we've had a full quarter since Liberation Day. So actually it's quite interesting. Their tariff revenues for the quarter were 20, or sorry, for June alone was $26.6 billion. For the quarter it was $64 billion revenue from tariffs. Same quarter previous year, guess how much? So $64 billion this year. What do you think it was in 2024?

Yeah, like a fraction, a quarter of that.

17 billion. Yeah. So look, they're $47 billion better off. That's going straight into the treasury. Now it's small fry when you look at their debt levels, which are whatever they are now, I lose count, 38 or 36 or 7 trillion. So $47 billion doesn't touch the sides, right? But If you have that amount of tariff revenue increase, then you kind of extrapolate that out across a decade. Well, then actually it does start adding up to something that's interesting. So can they get out of their debt problem through increasing revenues from tariffs without kind of derailing the global economy in the process is the economic experiment that's playing out in front of our eyes.

Okay. And on that conclusion, we'll wrap it up. So please do let us know. Did you have any questions, comments, agreements, disagreements on the show? If it's on YouTube or Spotify, I know you can leave a comment. If you're new and you enjoy the conversation, remember to subscribe, hit the bell icon to be notified when future episodes come out. Thank you as always, Piers, and thanks everyone for listening.

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