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They speak French!

Beaumarchais

When he ran for president in 2004 John Kerry was mocked by opponents for his ability to speak French, with ‘Monsieur Kerry”, “Jean Chéri”, or “Jean-François Kerry” amongst the favourite catcalls of Republicans. Imagine the fun they will have with the new Biden administration – not only Kerry speaks French, but Anthony Blinken was educated in France and Michele Flournoy is a Francophile too.

Mike Pompeo has conjured up images of highly educated, high minded members of the Biden cabinet jaunting around European capitals debating the finer points of diplomacy with Europeans, while Marco Rubio – who has found his voice given Donald Trump is on the way out of the White House – paints the Biden team as elegantly presiding over American decline. It’s an interesting image of Biden’s team – effete, be-wigged and decked in frock coats, conversing in French. But then, so did Beaumarchais and Lafayette and they saved America.

The ‘French speaking men and women in frock coats’ are a key part of Joe Biden’s Restoration (https://thelevelling.blog/2020/07/18/the-restoration/). They will restore order, harmony and morale to institutions like the State Department, and I would not be surprised to see a senior diplomat be given the specific role of rebuilding it from the inside out.

However, if the Biden team, many of whom worked in the Obama administration, think they will find the world as they left it four years ago with America effortlessly slipping into the top seat in world affairs, they are mistaken. China has grown much more powerful and assertive (note the way it treats Australia), Turkey is an engine of geopolitical chaos (as we noted last week), and even Europe is striking out on its own path. What’s worse is that like half of the American population, the rest of the world worries that Trump (or someone like him) might be back in four years’ time.

This should impart some urgency to the Biden team. Integrating climate problems into foreign policy is a welcome start, as there is common ground with both China and the EU here, but given the need to restart economies, it is hard to envisage what meaningful measures can be introduced to curb climate damage in the near term.

The bringing together of climate policy with foreign affairs is a sign of things to come, specifically that many issues will intersect. For instance, a key part of Janet Yellen’s role will be the international diplomacy associated with the Treasury, and in particular trying to align economic policies in Europe, America and parts of Asia so that they all move in the same direction. 

A much bigger challenge is the integration of indebtedness into the strategic rivalry between the US, China and Europe. Each region, in different ways, has run up record levels of debt such that the sum total of world debt (per GDP) is pushing levels not seen since the Napoleonic Wars. The Chancellor of the Exchequer’s spending review last week underlined this. If we accept that overindebtedness can act like a financial handbrake then, whichever region can most quickly reduce its debt burden will have a head start in the strategic race to lead the 21st century.

The lesson for Blinken and colleagues is that balance sheets rather than space wars are the most important tools in the diplomatic contest. They should study the role the Bank of England played during and after the Napoleonic Wars and the financial reforms that were made in the UK in the early nineteenth century that contributed to Britain’s rise as a world power.

One implication as far as the economic debate in the Democratic party is concerned is that there may soon be a sharp divide between foreign policy aware policymakers who wish to curb debt issuance (and keep a steady dollar), versus those (MMT – Modern Monetary Theorists amongst them) who believe that the USA can and should issue debt ad nauseum.

The same focus on the mixture of finance and diplomacy is relevant with respect to American policy towards Russia, a subject where nearly all the Biden team are united in their distrust of the Putin administration. I suspect that policy towards Russia will initially at least, focus on money flows (Catherine Belton’s book ‘Putin’s People’ is very good on this).

Even if American foreign policy becomes more foreign policy driven, I do not expect a mothballing of expensive fighter jets and aircraft carriers, not least as there are some conflicts internationally where America may re-engage.

In general, I have Africa in mind and specifically Ethiopia, which like many other countries is falling into the investment orbit of China. The contentious lesson from the Obama era is that a lack of aggressive action by the United States across the world has opened up theatres like Africa to Russia (now building a naval base in Sudan) and China. To that end American foreign policy may take on a more activist stance and, historians will look back on Donald trump as the ‘Pacifist President’.

Have a great week ahead,

Mike

Zero Problems with Neighbours

In the past week Peru has had three presidents, and it seems that America is still unsure how many it will have in January. Such political volatility is not new, but a greater awareness that the destiny of individual countries is in play, is. The end of globalization and the stress test of the coronavirus crisis have sharpened the sense that some countries are stronger (Germany) and more resilient (Norway), whilst others may be in decline (possibly the Anglo-Saxon world).

Investors – in both stocks and bonds – who are used to parsing the world according to investment styles (growth versus value, new versus old economy as per last week’s note) should pay more attention to the country effect, which historically tends to be greater in periods of economic stress.

If they were to search for a case study of how the financial fortunes of a country are driven by its politics, institutions (or the lack of them) and geopolitical power, they should look no further than Turkey.

Some ten years ago, in the aftermath of the Arab Spring I conducted a survey of policymakers in countries like Egypt as to what model their countries should follow in order to strike a prosperous post-Spring path. The resounding answer was Turkey.

Its economy was seen as having a secular society, a strong economy that had benefitted from both the economic medicine administered by Kemal Dervis in the early 2000’s and the prospect of EU membership. Its foreign policy was characterized by the phrase ‘zero problems with neighbours’. All this has changed, Turkey has problems with everyone.

Turkey has become a geopolitical balancing act between an increasingly capable and active military, and an increasingly volatile economy. Turkey’s military was for a long time the guarantor of the Ataturk model of a secular society in the context of a largely Islamic population. Since the coup in 2016, the army has been unleashed – for instance it now faces off against Russian troops in three different theatres (Libya, Syria and on the side of Azerbaijan), has forced France to deploy military assets to the eastern Mediterranean, rankled Israel and caused palpitations in NATO headquarters in Brussels.

Another contradiction, which the Biden administration will have to deal with is Turkey’s use of American fighter jets on one hand, and the highly sophisticated Russian S-400 surface to air missile system on the other.

All of this is the doing of the Turkish President, who while allowing his military to take a much more active role, is hollowing out Turkey’s civil society and economy. The sacking and imprisonment of teachers and judges was a start, the rise of corruption, stark inequality and manipulation of the banking sector followed, and then came the masterful stroke of placing the President’s son in law at the head of the central bank (that has not happened in Peru or the USA). The collapse in the lira over recent months is clearest sign of the diplomatic and economic chaos unleashed in Turkey. It has recently been brought to a halt by dramatic action by the new central bank governor, but this may only be a respite.

Sadly, Turkey is dropping backwards in terms of the quality of its institutions and any sense that the economy is marshalled by a rule of law (ironically, two of the finest economists to work on the link between institutions and growth, Dani Rodrik and Daron Acemoglu, are Turkish). The risk now is that a step too far militarily, or a mis-step economically could trigger a full blown crisis, where most of Turkey’s neighbours and former allies now have an interest in seeing it (or rather its president) fail.

So, while the current trend points to a Turkey centric crisis, the lessons from it for other countries are a more worthwhile focus. One is that, in emerging markets at least a country’s currency is a telling barometer of its institutional quality. Another is that to be really powerful, a country’s geopolitical and economic power have to advance together. Notably, another lesson is that the ‘strongman’ political method has limits, and arguably these limits are costly the greater the interaction that country has with its hinterland.

To round out the thought experiment, in 2021 we should keep an eye on the dollar, especially relative to a basket comprised of the florint, rouble, lira, brazil’s real and the Mexican peso – to name some of the more liquid ‘strongman’ currencies’.  

Have a great week ahead,

Mike

New Economy, Old Wit

Winston Churchill came upon George Bernard Shaw at a cocktail party and greeted him by saying ‘Looking at you, one would think there is a famine in England’. Shaw, whose 1926 Nobel Prize was awarded for ‘stimulating satire’, replied ‘looking at you, one would think you caused it’.

While Churchill and Shaw were never close enough to constitute a literary Laurel and Hardy, they enjoyed a respectful and very witty acquaintance. This kind of relationship made me think of the bifurcated nature of markets – where since the coronavirus crisis ‘new economy’ (essentially anything tech) stocks have been lavished with capital, while those in the ‘old economy’ (banks and energy companies) have been starved of it.

Like the clever repartee between Churchill and Shaw, last week saw a quick twist and turn in the performance of ‘technology’ stocks relative to ‘old economy ones. For the sake of background, the shift in the relative performance between the two styles of investment flipped at a magnitude of ten standard deviations, according to some metrics.

The reason for this sharp change in investor mood was the release of vaccine test results from Pfizer/BioNTech, following on the news that Joe Biden had effectively won the title of President-elect. The Pfizer result (note that the company’s CEO sold nearly USD 6mn of stock on the result) is a manifest pivot point in the coronavirus crisis, not just for markets and the economy, but for the way people will lead their lives in the next year. Mentally, it has the effect of splitting the horizon into ‘the near future’ and the ‘longterm future’.

For the ‘man and woman in the street’ the ‘long future’ becomes rosier, and enhanced visibility will allow many the chance to think of travelling and socializing freely again, a la my ‘Roaring ‘20’s’ (Oct 17, https://thelevelling.blog/2020/10/17/the-roaring-20s/) thesis.

The (health) risk is that the promise of a vaccine (it will be a year before most people in developed countries are vaccinated) will lead many to change their ‘near future’ behavior such that the positive effect of lockdowns will reverse and healthcare systems will be further overwhelmed. The sad and unnecessary effect of this will be more fatalities and deeper lockdowns (I expect Europe and the US to impose ‘decisive’ lockdowns in early January). To this end, policy makers should play down the vaccine news.

Ideally, the Biden administration whose economic mission is to ‘reflate, repair and redirect’ (as per my recent FT Wealth article, https://thelevelling.blog/2020/11/13/reflate-repair-and-redirect/) would coordinate an international coronavirus (and vaccine) response. This would involve Europe, Japan and maybe China, that would also incorporate how best to manage an internationally integrated stimulus plan. For the next two months however, we can fantasize about this.

Back to markets where the vaccine news is, across the board more unambiguously positive. The arrival of a vaccine gives markets greater clarity as to when sectors like cinemas, airlines and hotels can return to normal. For business people in these sectors there is now also a degree of clarity as to when to restart investment.

With respect to sectors like banks and energy, which have been starved of capital, the market rebound has a reflexive element in that it removes the stress of an existential risk. Some companies in these sectors are very cheap historically and may now have a catalyst for better performance. The irony is that for younger investors, who appreciate the transformative power of technology and the importance of environmentally and socially responsible investing, it is really only fusty, old world industries like banking, mining and oil that can deliver the returns necessary (assuming their valuations revert to historical levels, i.e. their prices rise) to adequately support their pensions.

It is a bitter investment pill to swallow, more so if the valuation of technology stocks has now peaked. I am not sure that it has, but the last time we saw such wild swings between the yin of ‘old economy stocks’ and the yang ‘new economy/tech’ ones, was in early 2001. We know what happened next.

While we wait for the market dust to settle on the vaccine news, let’s consider another exchange between Churchill and his Irish friend in 1923. Shaw wrote to Churchill ‘Am reserving two tickets for you for my premiere. Come and bring a friend—if you have one.’ Churchill replied ‘Impossible to be present for the first performance. Will attend the second—if there is one’.

Have a great week ahead

Mike

Reflate, repair and redirect

One of the telling quotes in ‘The Art of the Deal’ (Tony Schwarz and Donald J Trump) goes ‘You don’t reward failure by promoting those responsible for it, because all you get is more failure’.

That might also be the view of the American people, though given the very close-run Presidential election, it is hard to know what is on their minds, and what they define as success or failure. If the COVID-19 outbreak hadn’t happened, we might easily have seen a robust victory for Donald Trump.  

Previously, in the aftermath of contested elections – from 1876 to 2000, a sense of compromise has eventually prevailed. In previous elections, the vanquished candidate respects the ‘majesty of democracy’ as George H Bush put it. This time, as they say, might be different.

There is a small but appreciable risk to markets that the Trump administration and some emboldened Republicans try to thwart the orderly transition that President elect Biden might ordinarily enjoy. If this is so, it may derail the prospects for a generous fiscal stimulus, something that in the short-run could take the steam out of the recent market rally.

Beyond that the Biden team will bring a decisive change in style, that itself will transform the policy landscape and by extension, market trends.

The first of these is that Biden’s presidency will be a restorative one in that it will reintroduce the thread of Democratic policy thought (through Obama to Bill Clinton), and very importantly would restore the competent workings and full staffing of institutions like the State Department.

The idea is that the American machine of state would once again purr into action, and credibility, predictability and technocracy will be restored to the execution of policy. On geopolitical issues such as relations with China and Iran, as well as the potential for a healing in trade relations with Europe, policy will be more clear and closer to orthodoxy. Broadly speaking, this means that policy volatility should fall. This should make the ‘big picture’ less cloudy.

One area where there may be a discernible improvement on the economic side, is international collaboration. Whilst the new administration’s hands may be tied by the Senate, there is enormous scope to re-engage with other countries and to restart collaboration on economic policy. One example might be coordinated action with the EU, Japan and even China, on a global fiscal stimulus program. Ideally, this would fast forward new trade rules and structures (including appointing a chief at the WTO), better organize the distribution of vaccines around the world, and underpin central bank policy on reflation.

Another trend that will soon come more closely into view is values-based policy making. In financial markets, ESG (Environmental, Social and Governance) led investing is short-hand for this. The Biden administration, again mirroring the EU, will likely would likely focus much of its stimulus effort on infrastructure, particularly so in the ‘green’ economy.

The success of Biden’s campaign and the tenor of his potential presidency will rest in good part on the extent of the economic damage ahead. If high unemployment and bankruptcies are a reality into the first half of 2021, notwithstanding the promise of a vaccine and possibility of a fiscal stimulus, then tone of economic policy will tilt much more towards social justice.

What is much less clear is the extent to which they would consider rejigging the tax system to place a greater tax burden on wealthier Americans and corporations. Whilst this will be contested by Republicans and as a policy issue will form the basis for the 2024 presidential election it prefigures an international revolution in tax policy vis a vis global corporations, wealthy individuals, and more specifically tax breaks or asset classes like private equity. The effects of this debate will ripple through the wealth management industry from 2021 onwards.  

Overall, the task of the new Treasury Secretary, and colleagues in the Labor, Commerce and State Departments, not to mention the White House is daunting, but will be best described by – reflate, repair and redirect. Reflate the global economy, repair economic and diplomatic relations and redirect investment to the ‘new economy’.

The Art of Politics

The Future?

One of the telling quotes in ‘The Art of the Deal’ (Tony Schwarz and Donald J Trump) goes ‘You don’t reward failure by promoting those responsible for it, because all you get is more failure’.

That might also be the view of the American people, though given the very close-run Presidential election, it is hard to know what is on their minds, and what they define as success or failure. If the COVID-19 outbreak hadn’t happened, we might easily have seen a robust victory for Donald Trump.  

Previously, in the aftermath of contested elections – from 1876 to 2000, a sense of compromise has eventually prevailed. In previous elections, the vanquished candidate respects the ‘majesty of democracy’ as George H Bush put it. They are then praised, and in some cases such as Jimmy Carter to George W Bush, their reputation rises the further out in time they go from their time in office. This time, as they say, might be different.

It is hard to see how Donald Trump’s reputation can acquire a rosy hue, but at the same time he has stamped his mark on American politics, and it is now clear that his election in 2016 was not an aberration.

Trump will not leave the political scene in the way other presidents have – I suspect he will continue his presidency virtually through twitter and a tv show, and his daughter may soon, in the fine tradition of dynastic America politics, run for high office.

The telling factor that supports the case that Trump will not ‘go away’ is that he has established a new political method and has transformed the political landscape in the USA. This is not to be confused with the notion of a ‘school of thought’ or political philosophy, but rather an approach or what we might call ‘art’ of politics.

It has several elements, which may well be adopted by aspiring and incumbent political practitioners across many countries.

One pillar is ‘to break things’. Trump has a gift for zeroing in on derelict institutions, political opponents and viciously undermining them. His international political legacy has largely been to nobble many of the institutions of the twentieth century – NATO, the WTO (World Trade Organisation), WHO (World Health Organisation) and the UN, to name a few. In this respect his place in history will have been to bookend the closing of the period of globalization by attacking and neutering the institutions of the ‘globalists’.

While Trump is not a builder of institutions, I feel that lily livered, liberal politicians of the centre should more actively question the relevance of bodies like the WTO, and at very least repurpose them. NATO and the EU both need to review whether the composition of their membership makes sense in the light of the behavior of countries like Turkey and Hungary, respectively. German politicians in particular need to put on the ‘Trump hat’, even momentarily, and question the world around them.

One lesson from the Democrat showing in the election is that there is a strong appetite for change, and in some cases reform, across America and that this needs to be met by what politicians offer to the public. This is just as much true for Europe as it is the USA.

This is about as far as I would go in demanding that mainstream politicians emulate Donald Trump.

He has other gifts though – like Herbert Hoover with radio, Reagan and Kennedy with tv, Trump has a gift for (social) media. That social media is setting the rhythm of political cycles is not a new thought, but Trump’s successful banalization of the political world through it is.

In a recent note (‘Democracy’s Depression’, 24 Oct) I wondered if better policing of social media content, more reliable internet user identity checks and improved filtering of facts should make social media richer, and a better platform for discussion. Europe and a Biden administration might even work together on this. The cohabitation of a Democratic President and Republican Senate make policy avenue an unlikely one however.

Trump also it seems has the ability to set people free – from laws, common sense, decency and reality. In this regard he is a masterful populist.

The great danger for politics in general and democracy in particular, is that other ‘sorcerer’s/sorceresses’ apply Trump’s tricks, without his profane charm. This will lead to a degradation of society, and commensurately places a high bar on what Joe Biden and Kamala Harris need to do to repair America. What has troubled me most in recent years, is the ease with which democracy and the rule of law has been eroded in the US and other countries.

The risk now is that it may require even deeper divisions and then younger generations (I am thinking of ‘Ivanka ‘24’, ‘Pete ‘24’ and ‘AOC ’24’) to banish the spectre of Donald Trump.

Have a great week ahead

Mike

What a piece of work is man

Our world is stressed

In last week’s note I referred to a study that showed that people are the most dissatisfied with political systems over the last forty years, especially so in the two chief Anglo-Saxon countries. Mindful of the Shakespeare quote in Hamlet that ‘When sorrows come, they come not single spies, but in battalions’, more bad news has arrived.

A study from Carbon Brief that has collated data from six different research groups (e.g. NASA) to show that 2020 is the ‘hottest’ year in centuries, the Vix index of stock market stress reached highs only surpassed on a handful of occasions in the last forty years and, two academics in the US (Peter Turchin and Jack Goldstone) have recently highlighted that their political stress index is at a multi decade high, something they feel portends imminent revolution in the USA.

Add to that the re-imposing of lockdowns across Europe and a wave of savage terror attacks in France, and it is all, frankly, too much. I sense that a great many people are truly fed up with 2020.

The outlook might brighten on Tuesday, in the shape of a dashing political cavalry charge by Joe Biden and his team to re-take the White House. If this happens in a convincing way, stock market volatility will be crushed, America might tackle COVID better, the green economy should flourish, and we may even see a sense of collaboration between Washington and Brussels to produce better coordinated recovery plans across the ‘Old World’. Any result other than an emphatic Biden one will likely see us confined to stress-ridden purgatory.

I am not going to spend any more time trying to predict the US presidential election but rather want to focus a little on the nature and consequences of such a stressed world.

One is the propensity for people’s view of the world to be conditioned by stress – in general there is a tendency towards short-termism in the sense that we lose sight of longer term trends, and in addition a tendency to over emphasise dramatic outcomes. It strikes me that the media has been more than usually coloured with warnings of a repeat of the ‘2016 election surprise’, a ‘1987 market crash’, ‘1918 level health emergency’ and impending cyber wars, to note just a few examples. We need to keep at least an eye on the longer term outlook, as outlined in ‘Roaring 20’s’ (17.10.2020).

A more serious side-effect is the way in which this epidemic and its consequences will condition behaviour and mindsets. There is a growing body of research that shows that deep financial crises produce political aftershocks (for instance the ifo Institut has produced research linking the rise of radical and populist parties to financial crises).

In the same way, waves of lockdowns and economic damage will trigger shockwaves in mental health. In previous notes I have suggested that mental health will be one of the major policy issues of the 21st century to the extent that it becomes a pillar of healthcare. This crisis will accelerate that.

In the short-term it’s hard to know what policy makers should do, and it must be appreciated that many of them are under great physical and mental stress. For instance, Emmanuel Macron, having given a very clear and important address on Wednesday evening, found himself in Nice some ten hours afterwards, making sense of yet another terror attack.

One suggestion is that with political classes in both Washington and Brussels having failed to agree a second fiscal stimulus (in the case of the US) and the implementation of the first package (in the EU) that fiscal packages be amended to devote greater resources to mental health (a few countries already incorporate the idea of Wellbeing into budgeting) and the reconfiguration of health services around this, especially if Europe at least will endure a third wave of COVID 19 after Christmas. In this way, longer term societal damage can, to an extent, be avoided.

Another proposal is that as the risk that we suffer repeated, though shorter lockdowns rises (as brakes on the impact of the virus on health systems) the way governments structure these lockdowns and communicate with citizens will change. Future lockdowns – to be glum about it – will need to have a different mix of attention to the economy, focus on mental health and the wellbeing of the vulnerable.

One example is a recent radio advert from Health Ireland that recommended ways in which people can be aware of their mental health, and keep their minds agile by reading and perhaps, learning languages. In that respect it might be that the next stimulus package comes with free access to a language course or subscriptions to online books.

Returning to Hamlet, who stated that ‘What a piece of work is man’, it is becoming clear that this health crisis will be as much about our minds as our bodies.

Have a great week ahead

Mike

Democracy’s Depression

Last week’s note (‘The Roaring ‘20s’) I invoked the possibility that maybe in 2021 the world might party with an end to the coronavirus crisis in sight, and that a range of new, positive trends may also take hold. For the time being, partying is off the cards as governments respond to the second wave in COVID with new restrictions. For instance, Ireland is unfortunately now entering a six-week lockdown.

One of the threads to have been made very clear by the crisis is the importance of civic society, competent government and the way in which different political systems have dealt with the crisis in disparate ways. In this light, an excellent piece of research by Cambridge University’s Bennett Institute for the Future of Democracy caught my eye.

Their contribution has been to build a panel of data on citizen views of democracy (which they take to be the functioning of political systems) going back to 1973. To this end they have time series data that allow them to map satisfaction (or not) with democracy across countries.

In the context of a world turned upon its head, it is not a surprise that dissatisfaction with ‘democracy (political systems)’ is at an all time high (58%), with that dissatisfaction prominent in developed countries like the US and UK. The Cambridge figures confirm the view of political scientist Larry Diamond that we are in a global political recession.

Some developed countries – notably small advanced countries like Norway, Denmark, the Netherlands and Switzerland do not suffer from this and have near record levels of satisfaction with political systems (as noted in ‘Micro-powers’, 26 September) – they however are the peak of the democratic pyramid here, accounting for only 2% of the world’s population.

Parts of Eastern Europe and Asia are also ‘happy’ with their political systems. In time it may be that political systems in larger countries need to devolve power – in France to its regions, in the UK through Scottish independence and perhaps even more to its regions as politicians such as Andy Burnham are stressing.

There is a lot to dig into beyond these results – the apparent demise of democracy hand in hand with that of globalization, the growing perception that the Anglo-Saxon countries and their political economic model are failing (i.e. inequality), and the allure of less or un-democratic political systems that marry social control with economic growth, notably in China.

My own ‘Levelling’ view is that the end of globalization, the diminished credibility of some political systems, falling productivity, rising indebtedness and climate damage are closely linked causes and effects (they feed off each other) of the end of an era in world affairs. Righting them will require a hugely ambitious program of investment in human development.

What is more curious is the response to disenchantment with political systems. It is easy to think that populism is the beneficiary of dissatisfaction with political systems, though the coronavirus crisis must now surely have disabused populists of the view that government is easy (dissatisfaction with politics is at an all time high in ‘populist’ countries – US, UK, Mexico and Brazil). What is surprising is that there has not been a counteraction to populism (even in the US with a crucial election in view, turnover will still fall below 60%).

One reason is supply of labour. Participating in political life is physically demanding, vexacious in terms of trial by media and often frustrating in terms of what one can achieve. My sense is that countries that want to attract new blood into politics will require less strident media, better political financing laws and more ‘decorum’ in political debate.

At the present time, this is a tough ask, and for me the key trend to watch is the evolution in the relationship of ‘big tech’ with public life, a titanic struggle that has been expertly laid out in Shoshana Zuboff’s book ‘The Age of Surveillance Capitalism’.

Better policing of social media content, more reliable internet user identity checks and improved filtering of facts should make social media richer, and a better platform for discussion. This is one policy task of a potential Biden administration, where they may well work closely with the European Commission.

Another important job will be to limit the apparent ease with which other states can financially influence political figures, and more so, curb their advance in ‘information wars’. I am not quite sure how this is to be done, and the absence of free and fair elections in countries like Russia and China makes any retaliation harder.

A final point. One development that, in the two Anglo-Saxon countries (US, UK) has surprised me in the light of record levels of dissatisfaction with political systems is the persistent of two party systems, and in particular of their parties (Republicans and Democrats, Tories and Labour). My overly rationale view of politics is that the failure of these parties to address the deep seated issues facing their countries might result in their extinction (like Pasok in Greece, Socialists and Republicans in France). Instead these hoary old vessels remain unbroken. Young aspiring politicians still see them as obvious channels to power.

In that respect, and in the light of my ‘Roaring 20’s’ thesis, the challenge is either for the Millennial generation (and younger) to seize one of these parties as a vehicle that can represent the issues they worry about (high asset prices, inequality, climate change, mental health) or to successfully establish a new party that does this. The Cambridge survey showed that 55% of Millennials (as opposed to 45% of Generation X) are dissatisfied with political systems. Let’s see if Millennials have a revolutionary spirit.

Have a great week ahead,

Mike

The Roaring 20’s

Let’s avoid Gatsby this time

The parties were bigger. The pace was faster. The shows were broader. The buildings were higher, the morals were looser and the liquor was cheaper’

This quote from F Scott Fitzgerald’s ‘Great Gatsby’ is the antithesis of the COVID stricken world, though might also describe what many now yearn for. And, despite the onset of more severe lockdowns, a new, maybe more sober, roaring 20’s could be upon us.  

We need to first get through the US presidential election. One underestimated gift a Biden victory can give is calm, a diminution in political noise that allows the contours of a post-COVID world to become clearer and that potentially helps to channel the enormous frustration and stress that billions have experienced into something positive.

When, together with Barack Obama, Joe Biden left the White House just less than four years ago, globalization was alive but ebbing, democracy had its integrity and America was troubled though still widely respected.

Today, these ‘pillars’ of the last thirty years are cleaven down, and the rhyme between the world of today and previous, similar periods in history (i.e. 1910’s) is deepening. The lack of collaboration between governments during the coronavirus crisis is a particular cause for concern here.

We should not however lose sight of the fact that this great trial of humanity has also given cause for optimism and that it will have exciting consequences, not unlike the ‘roaring 1920’s’. Many of the innovations of the 1920’s happened in human areas – culture, media, the role of women in society. In the 2020’s the great innovations may occur in ethics, values based policy making, mental health and finance – all areas to have been stress tested by the coronavirus crisis.

For example, the health sector is ripe for a revolution in at least three respects. Economically, it is enormous – for example health spending accounts for 18% of US GDP. Yet, the coronavirus crisis has uncovered a wide variance in the quality of health care systems, though a resulting universally held admiration for health workers. In 2021, governments – aided perhaps by the OECD – should perform a post mortem on the policy aspects of the coronavirus crisis and the lessons to be learnt, especially for health.

One outcome is that the delivery of health care can be changed in radical ways. Another lesson that may become manifest in 2021 is the importance of mental health, and the need to uncover the links between stress, life cycle events such as retirement and conditions like heart disease and incorporate this better into health practice. Health may be further revolutionized by virtue of having attracted the attention of capital markets during the crisis, and it may well be that we see the reemergence of a biotech bubble, and that health care stocks edge out IT companies in quality growth portfolios.

The intersection of healthcare, technology and finance shows how fields are increasingly overlapping. One such overlap is the novel encroachment of values into policy making. The EU is an example – during the period of globalization it was a creature of economics and geography (it added 14 new members since 2004, most of whom are in Eastern Europe).

Now Europe is slowly and so far unconvincingly embarking on a values based approach whereby aid to the likes of Hungary is tied to that country’s respect for values such as democracy, the rule of law and the role of the LGBTQ community in society. In time, a values based approach to politics will give the EU more coherence and the focus to become a leader in environmentally friendly technologies.

Another way values based policy making can be expressed is through taxation, where initiatives on corporation and digital taxes suggest a tax revolution is building. Part of this might incorporate an approach to tax workers according to the social contribution of their role, reflecting one of the lessons of the coronavirus crisis.  In that way the taxation system may adapt to a changing age.

Similarly, we may find that ethics, philosophy and new laws need to spring up to marshal the impact of social media on politics, of genetic editing on society and to better police ‘total’ forms of conflict between nations.

One presumption of a ‘roaring 2020’s’ outlook is that all of the change takes place in Berlin, New York and Shanghai. This time it might be different. The countries with greatest potential in terms of large, growing populations and scope to build economies and societies are the likes of Indonesia, Ethiopia, Nigeria and Brazil.

The challenges they face – sustaining economic productivity, designing urbanization and building household wealth are well known, and the best way to face them is to focus policy around human development. The decisive factor for governments in these countries is the extent to which they create societies that like Europe are free or that like China, are controlled.

Back to F Scott Fitzgerald. The Great Gatsby ends badly, with the American Dream and Gatsby himself tarnished. It may well be that near record indebtedness and climate damage might do the same for the 2020’s, but the great surprise may be that longevity, political entrepreneurship and the blossoming of large emerging societies are what end up distinguishing the 2020’s.

Have a great week ahead,

Mike

In the LongRun

Tylers are still going

The Long Run

Two weeks ago, Lyon Tyler Jr. passed away in Tennessee, aged 95. He is survived by his brother Harrison, aged 92. The two Tyler brothers are remarkable because they are the grandsons of John Tyler, US President from 1841-1845. When President Tyler was 63 (in 1853) he conceived Lyon Tyler, the fourth son of his fifteen children. Then, in 1925, Lyon at the relatively ripe age of 72, fathered Lyon Tyler Jr, and then Harrison Tyler in 1928.

President Tyler is generally seen as occupying a low rank in the league table of great Presidents. His Presidency was not a success – his nickname was ‘His Accidency’. He took over the role in 1841 when President William Harrison died, only 31 days into the start of his term (Tyler was his Vice President).

Given then that Tyler’s Presidency is synonymous with Presidential ill health and poor stewardship, and of course longevity, his example echoes today in the light of the US Presidential election. It also serves to show how relatively young America is and we might also draw the conclusion that one firm trend through the lives of the two generations of Tylers above, the USA has generally seen steady upward progress, something that may now be running out of steam.

At this stage – and granted we have already had a couple of October surprises – it looks highly likely that Joe Biden will be President. In a recent note (July 18, https://thelevelling.blog/2020/07/18/the-restoration/), I have predicted that his Presidency will be a ‘restorative’ one – re-establishing order in government and allowing capable people back in control of the likes of the State Department. It is however doubtful that a Biden Presidency will automatically reset the damage done by President Trump, notably in relations with Europe, though Russia will come under much greater pressure.

In other parts of the world, the reality on the ground has changed. For instance, Turkey is emboldened, nurturing a growing arms manufacturing sector and replacing its former foreign policy maxim of ‘no trouble with neighbours’ with ‘trouble in the neighbourhood’. More importantly, China has grown its navy and has become manifestly more belligerent with its neighbours, especially those that like Australia and India are democracies.

In the eyes of Europeans and surely many Americans, the risk is that Biden merely slows the forces acting to pull America apart (Trump accelerated them) and that in four year’s time, they manifest themselves – in speculatively, a more extreme election contest between a hard right Republican ticket of Tom Cotton and Josh Hawley, versus an Elizabeth Warren/AOC (Alexandria Ocasio Cortez) ticket.

For now, the best that Biden can give the world is calm. A sense that we will no longer be disturbed by tweets, that violent extremists will no longer be egged on from the White House, that diplomatic relations will no longer be torn asunder on a whim and that greed and corruption will no longer be rewarded.

More broadly, Biden’s potential role, and I feel I am exaggerating a bit here, is as a Gandalf type President, who can take the new, younger generation (people in their 60’s?) to the start of a new path. If his presidency is to be remembered as one that will have a long run appeal, he can perhaps do at least three things.

The first is to delve beyond the idea of a ‘Green New Deal’ and craft a long-term policy program that targets a sustained improvement in human development (healthcare, education and civil society). A ‘New American’ rather than ‘new deal’ program may well touch a chord with the lives and problems of Americans and would help reverse the deterioration in human development that has been witnessed across the US in recent years and that clearly, has produced political dislocation.

A second theme might be to launch a strategic competition with China (and Europe) on reversing climate damage and investing in transformative environmental technologies. Framing the race to repair the climate vis a vis China (whose commitment to be carbon neutral by 2060 has perhaps not got enough attention) will help build momentum and coherence to the US’s commitment on climate change.

A third way in which a Biden presidency can have a long lasting impact is to reclaim its geo-political hinterland. For many years now, Latin America has been the ‘Forgotten Relationship’ in terms of the relative lack of attention that American politicians and policy makers have paid to Latin America. Washington needs to refresh its engagement and relationship with Latin America, from an economic, security and political point of view. The region is crucial in terms of food security, demographics, and the encroachment of China’s Belt and Road strategy and deserves greater policy energy from the next occupant of the White House.

Given expectations that a Biden presidency might only be an ‘interregnum’ the challenge to him is to sow the seeds of policies and structures that will carry America through the next fifty years.

Have a great week ahead

Mike

God’s Work?

A little misunderstanding

One of the more interesting events of the past week was the sacking of Cardinal Giovanni Becciu, who amongst other duties was responsible for the Vatican’s ‘sainthoods and beatification department’. He was, as a circuit court judge might put it ‘no saint himself’, and despite his pleadings of innocence that it was all ‘a misunderstanding’, his involvement in a number of dubious property transactions was enough to end his career.

This is not the first financial scandal in the Vatican to put it mildly, and in general the relationship between finance and religion is usually not a close one (relatedly German academics have found an inverse relationship between trustworthiness and willingness to work in the financial services industry).

Apart from the pronouncement by the former chief executive of Goldman Sachs that the bank was doing ‘God’s work’ there are few people who think religion and finance go hand in hand. One exception was Sir John Templeton, whom I had the honour to meet a number of times.

However, the idea that finance can do good, and shape the world in a progressive way has gained some credence with the rise of ESG (Environmental, Social and Governance) investing. Together with the fast growing ETF (Exchange Traded Fund) industry, ESG is now one of the hottest areas in investment management (ESG ETF’s are therefore very hot).

The premise of ESG investing is to better direct capital away from ‘sinning’ companies (e.g. tobacco companies, miners, weapons manufacturers) and towards those who behave in a socially responsible way. In practice, investors use ESG ratings to score companies according to their ESG contribution, and in most cases avoid companies with poor ratings. In reality however, this does not work that well.

First, ‘sin’ companies tend to have a very good performance track record. The work of academics Elroy Dimson, Paul Marsh and Mike Staunton shows that the tobacco and alcohol stocks are amongst the very best performers over the past one hundred years. Secondly, many companies are adapting to ESG ratings and in some cases, can appear superficially ‘ESG’ friendly whilst their underlying instincts do not change much.

Thirdly, the age of QE (quantitative easing) has lowered the cost of capital for companies, so that in a market climate of plentiful liquidity, there is arguably less of a penalizing effect from ESG active investors. Facebook for example, does not have a good ESG rating, but as a mega sized social media company with high expected earnings growth, it is in the ‘fashionable’ part of the stock market.

So, if finance is to steer capital in the right or ‘good’ direction, ESG as an investment style needs to acquire ‘teeth’ or real impact. There are several emerging avenues here.

One relatively strict approach is to forgo the prospect of decent returns on ‘sin’ stocks and restrict the universe of stocks in a portfolio according to certain criteria. Islamic Sharia based portfolios do this, as do portfolios owned by various branches (i.e. Germany) of the Catholic Church. Practically these portfolios would exclude stocks in sectors like weapons, mining, alcohol etc.

Another approach that is slowly on the rise is ESG activism, where an activist fund will take a position in the security of a company with the aim of campaigning to make its business better in terms of governance, less environmentally unfriendly and more socially responsible. If and where these activists are sincere about improving corporate behaviour, there is scope to find mechanisms where passive investors can pledge the voting rights of shares they hold to be voted in an ‘ESG friendly manner’, especially in areas like executive compensation.  

A third more telling reform, would be for central banks to adopt a very strict ESG approach to their asset purchases, in the manner of the ‘Quid Pro Quo’ this note had discussed in March (https://thelevelling.blog/2020/03/22/quid-pro-quo/).

In the light of the finding by the US Select Subcommittee on the Coronavirus Crisis found that that ‘383 companies whose bonds were bought by the Fed paid dividends to their shareholders, including 95 that also conducted layoffs, and 227 companies had been accused of illegal conduct sometime in the past three years’, central banks in general and the Fed in particular have room to make a significant impact on corporate social responsibility by only buying assets of firms who have credible ESG credentials.

If they were to do so, and technically there is no reason why not if they follow clear data based ESG frameworks, it would be a corporate game changer. In reality many regulators are well behind the curve here, if the behavior of BaFin (German financial regulator) in the face of egregious corporate governance breaches at Wirecard is anything to go by.

So, there is an enormous public policy opportunity, which is to make finance more values based. There are already echoes of this in the debate amongst EU countries to tie aid to member states to their adherence to its values (notably in the case of Hungary and Poland). If such a trend does materialize, then it will be one of the positive changes in the post globalized world order.

Have a great week ahead,

Mike