Lexicon Financial Group Weekly Update — September 3, 2025
“If you can’t explain it simply, you don’t understand it well enough.”
From the desk of Craig Swistun, CIM, MFA-P, Portfolio Manager, Raymond James Investment Counsel, and Wayne Hendry, Client Relationship Manager, Raymond James Investment Counsel
ISSUE 194
Looking Around
One of the things we try to do with each weekly (only you, dear reader, know if we are successful) is to eliminate some of the jargon that plagues our industry and acts as a barrier to understanding financial concepts. If more people did this, maybe there wouldn’t be so many people who think that tariffs are paid by foreign governments. But we digress.
In the early 20th century, few industrialized countries had large fiscal deficits. This changed during the First World War when deficits grew, as governments borrowed heavily and depleted financial reserves to finance the war and their growth. (1)
Today, most governments operate on a deficit. They spend more each year than they take in through taxes and other sources of revenue (like tariffs paid by domestic consumers). This enables them to invest in a wide range of functions such as infrastructure (required to keep the economy and society growing and safe), social protection (retirement and unemployment benefits), health and education, and public services such as defense and public order, and economic affairs. Deficits require governments to borrow today and pay later, which is why they are looked at as a way to make future generations pay for improvements made today. The cost of doing this is the interest rate that is paid over time.
As individuals, we do it too. We borrow to buy a vehicle or take out a mortgage to buy a home by spending more on the property than we earn in salary. The cost to do this is that, over time, we pay more because every month we’re hit with interest charges.
Governments essentially do the same, albeit for much larger amounts. They will borrow money from investors, by selling bonds into the marketplace. A bond, as you may know, is a promise to pay the lender back their full investment with interest.
Traditional fiscal conservatives have long rallied for reduced government spending as a way to reduce deficits and pay down debt. Spend less. Liberal governments are often seen as trying to raise more revenue through higher taxes or tariffs. Combined, these strategies are a traditional way to pay down debt and reduce the amount of money required to simply pay interest to your lenders.
But imagine for a moment that the U.S. government has the ability to create an infinite amount of money. As a sovereign nation, they absolutely have that right. This is an alternative theory called “Modern Monetary Theory” (MMT), which members of the Trump administration seem to favour.
MMT advocates suggest that countries cannot “run out” of money – they can just print more. No taxes or borrowing is required to fund government programs, as governments can just print money they need. Taxes and tariffs become a policy decision as a way to control inflation and influence behaviour. Because without some controls, an infinite supply of money could result in rapid inflation. This could leave U.S. equities caught in a crosscurrent. In the short term, fiscal stimulus and artificial intelligence-driven productivity gains are supporting earnings and GDP growth. Over the longer term, higher inflation and rising long-term yields could decrease equity valuations that are currently at very elevated levels historically. Rate-sensitive sectors such as technology and real estate may underperform, while investors shift toward inflation-resilient businesses and real assets. (2)
History,however, provides concerning lessons about the dangers of fusing fiscal (spending and borrowing) and monetary policy (tinkering with money supply) under a centralized authority. After World War 1, the German government printed money to pay war reparations and fund deficits. Hyperinflation spiralled out of control, prices doubled every few days and the German mark ultimately collapsed.
Recently, President Erdogan of Turkiye insisted that low interest rates would reduce inflation, defying economic orthodoxy. They didn’t. The Turkish central bank lost independence and inflation soared to 85 per cent. The Turkish lira collapsed and even after orthodox reforms were introduced, investor confidence remained fragile. (2)
Standing in the way of this radical change is, of course, the Federal Reserve (Fed). The Fed is an independent organisation charged with the responsibility of creating a stable and healthy economy by managing the nation’s monetary policy.
Since coming to office, Trump has launched repeated attacks on the Federal Reserve's chair, Jerome Powell and last month, he tried to fire one of its governors, Lisa Cook. He has regularly made it clear that he wants to see big cuts in U.S. interest rates, which he hopes will boost economic growth and lower the U.S. government's own borrowing costs. Currently, the Fed’s target for its main interest rate is 4.25 per cent to 4.5 per cent but Trump wants it reduced to less than one per cent.
Christine Lagarde, the head of the European Central Bank (ECB), hinted that if Trump undermined the independence of the Fed, it would have a "very worrying" impact on economic stability. (3)
This situation makes people nervous and uncertain. And, as we’ve written before, markets are much more volatile during periods of economic uncertainty. Going forward, we will do what we always do. We’ll monitor what is happening and make changes as needed to ensure portfolios remain aligned with your signed Investment Policy Statement. We won’t make predictions, we’ll make preparations.
One of the best ways to prepare for uncertain market conditions is to continue to hold a well-diversified investment portfolio of assets across a wide range of countries and sectors.
Read and Watch
Want deeper insight into topics in your Weekly Update? Then, read and/or right click:
Current Policy Is Destabilizing What Had Been A Stable U.S. Economy
Visualizing the European Union’s $19 Trillion Economy
Japan's trade negotiator cancels US visit over tariff deal snag
Looking Back
Last week, Canada’s main stock index, the S&P/TSX composite index (TSX) closed at a new record high on Friday due to gains in gold shares and renewed bets on an interest rate cut by the Bank of Canada (BoC) following weaker-than-expected domestic GDP data. The TSX rose 4.8 per cent in August – its fourth straight monthly gain. Year to date, the TSX is up 15.5 per cent. (4)
Most U.S. equity indexes ended down last week on relatively light trading volumes as markets headed into a holiday weekend as well as the unofficial end of summer. U.S. economic news was relatively light last week and most of the focus was on chipmaker NVIDIA’s earnings release after the market closed on Wednesday. The world’s most valuable company by market capitalization reported results that generally beat FactSet consensus estimates. These numbers appeared strong enough to ease some recent concerns around the artificial intelligence-driven rally that has helped propel indexes to all-time highs this year.
Heightened fears about the potential erosion of the Federal Reserve’s independence also garnered attention last week, following Trump’s announcement that he would be firing Fed Governor Lisa Cook on the allegations that she had committed mortgage fraud. Cook filed a lawsuit seeking to block the firing last Thursday, and a Fed spokesperson said the central bank will abide by any court decision.
Inflation in the America held steady month over month in July, according to the Bureau of Economic Analysis’s (BEA) core personal consumption expenditures (PCE) price index—which excludes food and energy costs and is the Fed’s preferred measure of inflation. The index showed a 0.3 per cent increase in prices from the prior month, roughly in line with June’s reading and consensus estimates. The BEA also released a second estimate of gross domestic product (GDP) growth for the second quarter, which showed that the U.S. economy expanded at an annual rate of 3.3 per cent, which is up from an initial estimate of three per cent. Higher business investment and consumer spending were the primary drivers for this upward revision.
In Europe, the pan-European STOXX Europe 600 Index fell 1.99 per cent amid worries about the independence of the U.S. Federal Reserve. Renewed tariff uncertainty, political instability in France, and fading hopes of peace between Russia and Ukraine also weighed on investor sentiment. Other major European stock indexes fell as well. Preliminary inflation data from major eurozone economies added to the case for no change in the ECB’s monetary policy next month.
Japan’s stock markets ended the week mixed as profit taking tied to month-end portfolio rebalancing by institutions seemed to favour bonds more than equities. Trade talks with the U.S. were further delayed after chief trade negotiator Ryosei Akazawa canceled a trip to Washington at the last minute, apparently due to unresolved issues that stand in the way of finalizing an agreement. Expectations have risen that the Bank of Japan (BoJ) is moving closer to hiking short-term interest rates, as data showed inflation in Japan remained above the BoJ’s two per cent target and an unexpected drop in unemployment.
Mainland Chinese stock markets extended a recent rally by continuing to advance. Many analysts believe that ample domestic liquidity, rather than a strong economy, is fueling the rally, as cash-rich households in China seek higher returns amid low interest rates and a lack of compelling investment options. On the economics front, China reported that industrial profits fell a less-than-expected 1.5 per cent in July, as strong tech sector earnings outweighed weakness in industries straining under weak demand and deflationary pressures. Other indicators released earlier in August revealed that China’s economy lost momentum in July as retail sales, factory activity, and fixed asset investment disappointed. Many economists believe that data in the coming months will confirm China’s growth slowdown and lead to officials rolling out more stimulus, possibly as soon as September, to cushion the impact of the U.S.-sparked trade war. (5)
The opinions expressed are those of Craig Swistun and not necessarily those of Raymond James Investment Counsel which is a subsidiary of Raymond James Ltd. Statistics and factual data and other information presented are from sources believed to be reliable, but their accuracy cannot be guaranteed. It is furnished on the basis and understanding that Raymond James is to be under no liability whatsoever in respect thereof. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities. Raymond James advisors are not tax advisors, and we recommend that clients seek independent advice from a professional advisor on tax-related matters.
Budget Deficit: Causes, Effects, and Prevention Strategies, The Investopedia Team, Investopedia, February 29, 2024
Three powerful forces that could destabilize financial markets, Martin Pelletier, Financial Post, September 1, 2025
US Fed loss of independence a serious danger, says Lagarde, Theo Leggett, BBC, September 1, 2025
TSX closes at record high, boosted by gold stocks and rate cut bets, Nivedita Balu, Reuters, August 29, 2025
Global markets weekly update - U.S. inflation maintains pace in July, T. Rowe Price, August 29, 2025
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Looking to Learn?
If you want to know more about some of the topics we wrote about this week, just click on the links below:
8 Bits of Financial Jargon That Must Go — But Won’t
Posthaste: The path for Donald Trump to take over the Fed is more plausible than you might think