In a move that has left markets oscillating between bemusement and opportunity, President Trump today vowed to proceed with a colossal UFC venue modelled on the Eiffel Tower. The structure, a garish monument to mixed martial arts and American exceptionalism, has sparked a scramble among British engineering firms for a slice of the construction contracts. For those of us who view the world through the prism of the bottom line, this is a textbook case of capital chasing yield, even if the asset is a steel behemoth in the Nevada desert.
Let us first consider the fiscal absurdity. Trump, a man who never met a grand gesture he didn’t like, is doubling down on a project that would make Pharaohs blush. The estimated cost? North of £2 billion, assuming the steel prices don’t spike further. And they will. Whenever a government pledges to build something iconic, the private sector sees an opportunity to extract rent. The gilt market, already jittery on inflation fears, will take note. If the US Treasury is forced to backstop this folly, expect yields to rise. Higher yields mean higher borrowing costs for everyone, from homeowners to SMEs. It’s a tax by another name.
Yet the market has a short memory. British engineering firms, having suffered through years of austerity and Brexit uncertainty, are desperate for a big ticket project. Balfour Beatty, Laing O’Rourke, and others are sharpening their pencils. The promise of a “landmark” structure, one that will plaster their logos across global broadcasts, is too tempting to resist. But here’s the rub: these contracts are often awarded on a fixed price basis. Given the current volatility in commodities, from coking coal to copper, any fixed price bid is essentially a bet on future stability. A bet that history suggests often loses.
Then there is the question of capital flight. If the US begins to look like a fiscal banana republic, where presidential fiat dictates infrastructure spending, foreign investors will start to question the safety of dollar-denominated assets. The UK, for its part, stands to gain if capital seeks a safer harbour. But our own fiscal indiscipline, with a debt to GDP ratio approaching 100%, hardly makes us a bastion of prudence. The pound may strengthen temporarily on the back of engineering contract wins, but the underlying current is one of concern.
Central banks, meanwhile, face a dilemma. The Federal Reserve, chaired by Jerome Powell, must balance the inflationary impulse of such stimulus against the risk of a global slowdown. If Trump’s arena becomes a symbol of American profligacy, the Fed may be forced to tighten faster, crushing risk appetite. The Bank of England, trapped in its own cycle of rate hikes, cannot afford to be left behind. Expect a period of monetary tightening that will cool the housing market and dampen consumer spending.
But let us not be entirely cynical. There is an argument that this project, however frivolous, will create jobs and stimulate ancillary industries. The construction sector in the UK, which has been haemorrhaging skilled labour since Brexit, could use the work. But the devil is in the details. Will the contracts require using American steel, as Trump has historically demanded? If so, the balance of trade will worsen, and the pound’s purchasing power will take a hit.
As a veteran of 20 years in the City, I have seen such follies before. The Millennium Dome. The Berlin Brandenburg Airport. Each was a monument to hubris, paid for by taxpayers and bondholders. The difference this time is the sheer scale of the bet. A UFC colossus in the desert, funded by debt, promoted by a polarising figure. It is a short seller’s dream.
For British engineering firms, the advice is simple: demand an inflation clause in every contract. For investors, steer clear of construction equities until the details emerge. And for the rest of us, watch the gilt yields. When they start to spike, you will know the Eiffel of Vegas has become a weight on markets.
