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Crisis, What Crisis?

After an absence of over eighteen months, I made it across the Channel to the UK. Such has been the barrage of Brexit bad spirit from political marauders like David Frost and tales of fuel, labour and food shortages, not to mention rising COVID cases, have been so apocalyptic that I worried I might not make it through the Channel tunnel. Thus, expecting to perform a Bond like infiltration behind enemy lines, I, passenger locator form between my teeth, turned up early at the Gare du Nord Eurostar terminal.

The great surprise was that the trip through both passport controls took a total of three minutes, tribute less to my Bond style skills of evasion but more to the robots manning UK passport control. This speedy passage set me wondering whether the UK’s budding Winter of Discontent is just a political mirage or, as some hold, a building economic catastrophe.

My own experience, limited to central London, was that prices were considerably higher than I could remember, staff shortages were evident across the board (coffee shops closed early, a restaurant booking was cancelled because of lack of staff, and the passport control at St Pancras exit poorly manned). Plenty of anecdotes were passed to me regarding petrol shortages and general blockages in freight and goods.

In the markets, short term bond rates (two year gilts) have rocketed from 0% to 0.60%, investors are pricing in very high inflation in swap markets together with a rate increase this year from the Bank of England. Taken together, it does not auger well for post-Brexit Britain, and I suspect that as winter approaches, more and more commentators will trot out the ‘Winter of Discontent’ headline.

There are appealing parallels between the situation today and that of the late 1970’s ‘Discontent’.

For example, a lorry driver strike during the winter of ‘78/’79 is matched by the current Brexit induced lorry driver shortage, and in the 1970’s food shortages and high inflation led to misery (though far more pronounced than today).

Famously in early 1979 the then prime minister Jim Callahan returned from an international political summit in the Caribbean, joked about having swum in the warm sea there and then blamed the media for exaggerating the chaos gripping Britain. The next day he was greeted by a headline in the Sun that went ‘Crisis, What Crisis?’ and thus his political demise accelerated. Fittingly, Boris Johnson has spent much of the week in Marbella, though so far, he has the media on his side.

He and colleagues will blame inflation and shortages on international supply chain issues, though he has so far done a very poor job of mastering and marshalling the economic side effects of Brexit. The fact that Northern Ireland has had far fewer supply chain and labour market issues, and has seen trade with the Republic pick up noticeably, suggests that Brexit rather than global supply chain problems are provoking discontent in England.

The lesson I take (a few weeks ago I wrote on the political volatility that higher inflation would create, A Face in the Crowd) from the late 1970’s winter of discontent is that it produced a political revolution – Callahan, the unions and the Labour party were discredited, and this prepared the ground for Margaret Thatcher to come to power. In that light the question is whether, following the shock of Brexit, another political revolution is brewing.

Two avenues present themselves – there is much chatter about Boris Johnson’s reluctance to remain in Downing Street for long, and the Labour party has shown itself incapable of scoring into the open goals that the post Brexit environment has provided. This opens up the way for new leaders to come through on the left and centre – though I am hard pressed to identify many candidates.

Having written much about the rigidity of the two-party system in the UK, and the failure of political entrepreneurship (a few recent initiatives to launch new political parties have fizzled out). If there are to be revolutions I suspect that the middle ground of the Tory party is one place to watch, the possibility that moderate parties in Northern Ireland like the Alliance and some independent candidates gain in popularity, and of course that Scottish independence reshapes the political dynamic and power of Britain.

While it would be tempting to conclude that Britain is a Brexit basket case, my long running theory is that politically Britain is a crucible for many of the forces that have driven globalization and that are now undercutting it. In that framework, Brexit was simply the first major rupture in the beginning of the end of globalization, and by extension, the rule is that what happens in Britain will later reverberate across other countries.

The risk then is that we have a global ‘winter of discontent’. There are some signs of this – coal prices have quadrupled in China, cargo ships are blocked up around the coast of the US where amongst other effects meat prices are rising, and Congress woman Alexandria Ocasio Cortez has been tweeting in favour of ‘Striketober’. The only comforting observation I have found is that the front page of the Economist talks of an energy crisis, which according to my ‘Economist frontpage’ rule of thumb, signals the end of the crisis.

The broad risk, to draw all of these strands together, is that the rise in prices of food, labour and energy proves to be more enduring than transitory. Central bankers have largely read prices rises as ‘transitory’, but a research paper from an important figure in the arcane world of central banking (Jeremy Rudd) suggests that central banks are complacent about inflation. If interest rates have to rise more quickly that households are ready for, a rise in the price of a pint of beer will be the least of our worries.  

Well Sealed Windows

When Willy Brandt came to power (as German Chancellor) in October 1969 his first speech to the Bundestag (then in Bonn) contained phrases like ‘we want to dare more democracy’, ‘we want a society which offers more freedom and requires more shared responsibility’, and ‘we want to be and to become a nation of good neighbours’.

Brandt was one of maybe five prominent, respected and enduring Chancellors (starting with Adenhauer, Schmidt, Kohl and of course Merkel – with apologies to Gerhard Schröder who doesn’t make my list) who brought stability to Germany and who managed to fulfill Brandt’s desire of being a good democracy (to the extent that when asked a few years ago what she associated with Germany, Angela Merkel replied: well-sealed windows). 

As I write, Olaf Scholz has a chance to join this list because the arithmetic of the recent election dictates that he will most likely head a new coalition government, which some describe as a traffic light government (SDP in red, Greens and FDP in yellow). One might also think of it in terms of an ESG government in the sense of the responsible investing terminology (Environment, Social and Governance). Unlike many other European countries, there seems to be a willingness amongst these three parties to put together a workable government.

Yet, if Scholz does indeed lead the government, he may immediately suffer from two political curses.

The first is what I call the ‘curse of political giants’, which also holds across football and industry and highlights that whenever a dominant leader retires (think Merkel or Sir Alex Ferguson) there is a messy interregnum, usually involving several short lived leaders, until a new leader proper with his or her own ideas comes along. Football fans will get the analogy if I say that the risk for Scholz is that he is the David Moyes of German politics rather than the Juergen Klopp! (Armin Laschet is the Mourinho of German politics?)

The second risk is what I call the ‘curse of NO’. Someone on the European political stage (I think it was Enda Kenny) wittily described European political summits along the lines of ‘everyone agrees….and then Angela Merkel says ‘no’.

Merkel’s long won stature as a leader and the economic power of her country gave her immense power. Scholz will, like most political mortals, lack this magic power, and will also have to contend with some strong personalities in his cabinet (I have already written on Annalena Baerbock).

Some commentators may argue that this adds up to a recipe for introspection and inaction on the part of the next German government, and that the atrophying of Germany’s already modest army is just another sign of its weakness (a popular view in the AUKUS countries). In fact, it may well be that Germany represents the future – a progressive country where the Greens are an increasingly normal (than fringe) party.

Indeed, taking the triumvirate of the three large European countries – France, Germany and Italy one could and should hold that they stand in very good political health compared to the large English-speaking countries.

They are led by able, serious people – in sharp contrast to Boris Johnson’s ‘managed chaos’ (this week he stumbled over basic economic concepts of ‘real wages’ and productivity), and who at least in the cases of Macron and Draghi have visions of what they want to achieve.

In addition, the three countries have in their own ways vanquished political extremists and have relatively healthy democracies. In contrast, with trials of perpetrators of the January 6 attack on Congress still ongoing, 56% of Americans think that their democracy is under attack according to a survey for CNN.

If my rosy view of Europe is correct, one looming question is whether (assuming Scholz becomes Chancellor) the leaders of the three large countries can work together and more specifically what are the issues upon which they might choose to collaborate.

The obvious area is economic growth and the stalled plan for a broad fiscal stimulus to relaunch Europe’s recovery. Each leader has a personal interest in the more efficient workings of the euro-zone financial system, and this may well spur capital market and further fiscal reform. Germany has a substantial deficit in terms of required investment in energy, telecoms and defense investment. At the same time, European foreign policy will still be driven by the French, with a more active contribution from Rome.

Another area, which is again becoming topical given the recent judgment by Poland’s top court that the Polish constitutions supersedes EU law, is to clarify further the idea of European values, and to take tangible actions and exert political force to ensure that the likes of Hungary adhere to them. It is not inconceivable that the great test of the political will of the ‘triumvirate’ will be to prune the EU down to 26 nations and force the ejection of Hungary, and in so doing, in Willy Brandt’s words to ‘dare more democracy’.

Have a great week ahead,


Out Foxed

In 1933 President Franklin Roosevelt appointed Joe Kennedy, patriarch of the Kennedy clan and father of the future President, to be the first head of the SEC (Securities and Exchange Commission). The odd, and subsequently effective rationale for this was only a fox could ‘out fox the foxes’. Kennedy was well known at the time as a speculator and to put it politely ‘entrepreneur’. When he left the SEC in 1935 (by which time his net worth was close to USD 4 billion in today’s terms) his work there was widely praised, and he even made the frontpage of Time magazine.

What is worrying today is that if Kennedy took the path from ‘rogue’ to regulator, the events of the past week suggest that the heads of many of the important institutions are taking the opposite path. Note that in the past week, two of the more experienced regional federal Reserve chiefs (Eric Rosengren in Boston and Robert Kaplan at Dallas) have ‘retired early’ following the revelation that they engaged in large security transactions in recent years.

I am surprised that this news has not received greater attention, especially when seen in the context of reports that Fed Chair Jerome Powell has a very large securities portfolio (reportedly over USD 50mn) and reports that senior American politicians like Nancy Pelosi actively trade securities and derivatives. More than any time in history, the Federal Reserve is the key to the path of the bond and stock market moves (at record high valuations by the way), and the fact that senior members of the Fed’s monetary policy committee have traded speaks less to complacency and more to weak standards and vastly diminished credibility.

Add to this the scandal embroiling the head of the IMF Kristalina Georgieva (whilst at the World Bank she allegedly manipulated the findings of a study to show China in a more favourable light) and the ongoing travails of WHO chief Tedros Adhanom, and a picture build of rudderless, increasingly corrupted world institutions of the twentieth century.

One might say that this has always been the case. Take the IMF for example – the three former heads have been involved in scandals – Christine Lagarde (the Bernard Tapie/French government), Rodrigo Rato (fraud and embezzlement) and of course Dominique Strauss Kahn.

Then in Europe, where few if any central bankers have any banking or markets experience and thus a penchant for trading (thankfully), senior ECB officials Philip Lane and Benoit Coeuré have ‘steered’ hedge funds and investment banks towards the ‘correct’ views of ECB policy in private meetings, thus helping those investors make large profits.

So, if the IMF has form in the area of corruption, it has not been the case for the Fed. I cannot think that recent Chairs (Yellen and Bernanke) would sanction securities trading by senior colleagues. In my view, and consistent with the overall ‘Levelling’ thesis, we are at a point in history where evidence of the degradation and obsolescence of the institutions of the 20th century is piling up. Within that thesis a number of things are increasingly clear.

First, as the world becomes multipolar, it is now nearly impossible for international institutions like the WHO, WTO and IMF to straddle the breakdown in relations between China and the US, and the competing demands that each country will place upon them. As a result we will likely see more regional institutions develop than international ones – the Asian Development Bank being an example.

Second, in a hyper financialized world it seems that the trade-off between good governance, probity and exemplary leadership on one hand, and large financial rewards is just too much for some.

Third and relatedly, one of the issues that is increasingly debated in the corporate and venture capital world is the need to attract and keep top talent. If world institutions are to attract people of experience and quality (which seems to have been a problem at the IMF for example) then they will likely have to change remuneration structures (Mark Carney’s tenure at the Bank of England is an example).

For the time being, these scandals raise doubts about the operational capability and credibility of the institutions I have mentioned. At a crucial point in the monetary cycle, when inflation is showing signs of a durable pickup, the strength in depth of the Fed is severely weakened, and in my view opens the risk of a monetary accident. Jerome Powell’s prospects of being reappointed Fed Chair have taken a knock, and Lael Brainard may well take his place.

With regard to other institutions – the IMF in particular, it has changed its policy view so many times in recent years and has repeatedly been shown to have adopted the wrong policies, that it is near defunct. I feel that there is too much policy time and energy spent on chattering about reform of bodies like the WTO (according to Bloomberg, the new WTO head has already threatened to resign), which at this stage are beyond reform in that they cannot be repurposed to address the challenges of the 21st century.

We should rather spend time thinking about the problems that lie ahead and think about the rules and institutions that can be crafted to tackle them, in the context of a world where the large nations at least, are unable to cooperate. It’s a job for game theorists, historians, systems experts and psychologists, but not central bankers. 

Have a great week ahead,


Under Water

For sale?

A memorable childhood event of mine was a tour of a French navy submarine in Cork Harbour. At the time, the Cold War meant that the contours of the world order were rigidly set. Today, the debacle over the cancelled sale of French submarines by Australia, and the creation of a new military alliance AUKUS (Australia, UK and the US) illustrates the rapidly changing world order, and the many dilemmas this will present for Europe.  

For the second time in weeks, the US has enacted a strategic decision (the exit from Afghanistan being the first) that has been motivated by a need to face down China, that has left transatlantic relations in tatters, and whose execution has been careless.

The US led move to coral Australia and the UK into ‘AUKUS’ is yet another event that unambiguously heralds the end of a globalized world, and the formation of a multipolar one. In the globalized world the US was the singular power, it didn’t need to fear China and so dominant it provided a military comfort blanket for Europe. Now, in a multipolar world, where at least three large regions (US, China, EU) do things in very different ways, new geopolitical gangs are springing up.

For instance, the English-speaking geopolitical world will now give greater credence to the Five Eyes intelligence gathering alliance (UK, US, Canada, New Zealand and Australia). In addition, the Quad Alliance of India, Japan, Australia and the US has taken on added importance though India is getting much less out of this than Australian in terms of hardware. AUKUS builds on these relationships and helps the UK by giving it a risky geopolitical role it could not have conceived by itself. Standing off against them is the Shanghai Cooperation Organisation (SCO) whose principle active members are China, Russia and Pakistan.

More specifically, submarines have often had a costly political impact – they have for example been the centre of corruption scandals in Greece, Portugal and Pakistan/France in recent decades. The Australian decision to renege on the contract with France’s Naval Group was not without warning, but apparent assurances from Australian and American officials to French counterparts in recent weeks has understandably produced an apoplectic reaction in Paris. France may ultimately not regret losing the chance to pit itself against China in the South China Sea, but it is upset that its stock of power in Washington has been diminished.

If France feels aggressed by the Australian-US move, think of how China may react. The underlying threat behind the US deal to sell submarines to Australia is that, as some speculate, nuclear weapons might follow. Indeed, the blueprint for the next development wave of the US navy, called BattleForce 2045, is heavily focused on manned and unmanned submarines, at a huge financial cost.  By 2045the plan is that attack submarines will be the largest component of the US navy, with dozens of Extra Large Unmanned Underwater Vessels (XLUUV’s ) buzzing the seafloor.

As it stands, China has a numerically larger navy than the US, but a far less proficient one.

The kerfuffle that the AUKUS announcement has created diminishes any sense of surprise – China has at least a decade to prepare for the arrival of Australia’s nuclear submarines! It can do several things – for example shift trade and financial flows away from Australia, build more island bases in its maritime hinterland and invest more in hacking naval vessels (see Admiral James Stavridis recent book ‘2034’).

What military strategists may be missing is that by the time Australia takes delivery of its new American nuclear subs, the demographics of China will have dramatically changed in that there will be many older, retired people, and as the recent case of Evergrande suggests, China could have suffered a sharp economic downturn (which would also sink the Australian economy). Both trends suggest that economics rather than submarines will determine the outcome of the strategic contest between the US and China.

The result of this deepening rivalry, and apparent estrangement of Europe by Washington should convince even the most naïve European leaders that they need to work very hard to make Europe a relevant geopolitical player. That France is the target of the latest snub speaks to its role as the most significant military player in Europe, and still underlines the reality that Paris (though Macron) is the source of political energy across Europe.

So, for Europe that challenge is to now make a credible effort to build and exercise its own power, or what Macron calls strategic autonomy. Tangibly it points toward an EU army. Europe’s ‘power’ does not need to be conceived of solely in military terms, but can be financial, diplomatic and institutional.

A range of factors will shape this. Ideally, French diplomacy will become less introspective, and would also take heed of the views of other European nations, especially Poland and the Baltic states as regards Russia. Much will also depend on the identity and views of the next German leader, but it is very clear now that Europe needs to commit greater economic resources and political energy to the many aspects of what constitute ‘security’ – from energy to cyberwar to immigration policy to heavy military transport.

The repercussions will ripple far and wide. For instance, this week Ireland chaired the UN General Assembly, and for it the AUKUS spat is the equivalent of Ireland’s cousins attacking its new best friend.

I haven’t even mentioned Russia. Perhaps they will buy the French subs!

Have a great week ahead,


Is Evergrande the End of the China Dream?

On Monday morning, Evergrande Group China’s second largest property development group will likely find itself unable to make the interest payments on a series of loans to China’s banks and will technically likely default, with trading in many of its onshore bonds already suspended. A key test will come on 23 September when the company is due to pay a coupon on a USD-denominated offshore bond.

With September being a seasonally choppy period in markets and the echo of the Lehman collapse (September 2009) audible, many will extrapolate the failure of Evergrande and talk of a coming market collapse, with contagion rippling across the banking sector. I am not so sure about this (just yet).

Most investors have had ample warning of the implosion of Evergrande (it has been paying liabilities with cash from pre-sold apartments that are not yet built), and to a degree market prices reflect this – Chinese junk bond yields are trading at 14%, the highest since onset of the coronavirus crisis (Evergrande accounts for nearly 15% of junk issuance).

While it can’t be ruled out that on Monday morning stockbrokers will circulate lists of companies that have exposure to Evergrande and the broader Chinese property market, the central expectation I have is that the Chinese authorities will permit a controlled, cushioned collapse of Evergrande where banks provide liquidity for viable projects and others are parceled off to other developers.  

This approach may also see the arrest and denunciation of its executives, the restructuring of the company (though no state bailout) and the injection of liquidity into the financial system. China is unique amongst major economies in that it has plenty of scope to stimulate its economy.

What will be far more interesting and instructive than chatter about a ‘Lehman’ moment, is the insights the collapse of Evergrande will give us into the principles and durability of the China that Xi Jinping is trying to build.

The Chinese authorities, having carefully studied how Europe dealt with its financial crisis, will not want three things to happen – that the government takes more debt onto its balance sheet, that there is widespread unrest (which unusually we have already seen last week), and that as a result, the China Dream is derailed. 

If I am correct this gives a clue as the iteration of the Chinese model (what to Westerners can be described as the ‘social democratic’, without the democracy) that Xi Jinping has manifestly been shaping since the start of this year, marked notably by crackdowns on business leaders, strategic industries and economic activities that might harm social cohesion (such as video games and private tuition), will fare. Its guiding light seems to be to avoid anything that harms or distracts the ‘common good’, and by extension the Communist Party.

To that end we can expect the authorities to respond by allocating as much financial and social pain as possible on the owners, executives and promotors of Evergrande and other property firms, plus investors in the company’s offshore bonds to avoid moral hazard.                                                    

In the context of Xi Jinping’s dictum that ‘houses are for living in’ I don’t expect a broad bail out of investors, but the authorities may either invest more in social housing, or once prices have adjusted, aid younger families to buy a home (housing affordability is just one reason for the low birth rate). The exposure that many have to property related wealth management product and to property itself partly reflects China’s under developed savings and pensions industry, and this is one area where we may see policy makers pay greater attention (in The Levelling )

If there is unrest in parts of China because of the turn in property investments, I am unsure how the Chinese authorities will deal with it. While there is currently an effort to dampen and shape reporting of the fallout from Evergrande, social media networks across the country are animated by the topic.

Given that the contract behind the China Dream is founded on the exchange of liberty for prosperity a negative wealth effect may result in a more angry populace. A wise way to deal with this would, as above, for the authorities to double down on the idea of the social welfare safety net, wiser still if Evergrande is just the first in a range of economic shocks.

Just over a decade on from the global financial crisis it is hard not to write about a credit event like Evergrande without conjuring the spectre of debt crisis past. It should be a reminder that with world debt to GDP at near record levels, the prospect of an international debt crisis awaits us at some stage. My thesis (in The Levelling) is that it happens in 2024 on the centenary of the 1924 debt conference. One of the ways I distracted myself during the early part of the coronavirus crisis was to sketch a script as to how the politics of the 2024 world debt conference might play out, though I suspect it has little chance of making it to Netflix.

Neither do I think that we are now on the cusp of a 2021 debt crisis – China has too much monetary and fiscal space, and the central banks of the developed world are hard wired to meet any market risk with more and more liquidity, until they do too much and cause a monetary accident.

The greatest near term risk is that, having avoided a major (domestically inspired) recession for a considerable period, China now suffers a simple, negative demand shock, that dents the post COVID recovery but that also removes inflation as a concern for markets (and thus interest rates remain low).

Let’s see what Monday morning brings.

Welcome to the MetaVerse

In this note, I often write about faraway places – most of which I have visited. COVID has deprived me and many others the chance to add to my list of ‘rare places’ but it may well have enabled a new land called ‘the Metaverse’. The Metaverse is something – socially and economically – that we will hear a lot more about in the future, and one that many people will struggle to comprehend. A sure sign of its arrival is that the likes of Facebook and Microsoft are pouring billions into the building out of this virtual reality universe.

To start with, I confess I have little direct experience of the Metaverse, so I write about it somewhat uneasily, but like bitcoin some five or so years ago, it is popping up on the radar in numerous blogs and newsletters and there is a sense that the metaverse itself is becoming better organised and notably, developing its own economy.

As I see it, the rise of the Metaverse is the product of technological (blockchain, virtual reality) changes as well as social ones – most of which I have found bizarre but that more oddly have been sanctioned by the social side-effects of the coronavirus crisis. They include online funerals, the virtual work phenomenon and contactless dating (there is a section on this in Chen Quifan and Kai-Fu Lee’s forthcoming book ‘AI2041’).

The Metaverse then, to have a go at defining it, is where people enjoy digital experiences (driven by augmented and virtual reality) that are real to them in the sense that they involve activity, interaction and emotion, and that are increasingly anchored by infrastructure like the digital economy, digital identities and decentralised forms of organisation.

To clarify this a bit, some examples of the Metaverse or ‘mirror world’ are online video game Fortnite, virtual reality design tools for architects, social media tools like SnapChat’s Lens Studio, augmented reality tools that superimpose an interactive virtual world on a real one like a street map (on a car windshield for instance) that has pop ups signs customised for the user, and of course the growing ‘esports’ and virtual sports industry.

To give a sense of the amplitude of the MetaVerse, in China 10% of the population (i.e. more than 100 million people) use the online game (or mobile multiplayer battle arena!) Honor of Kings on a daily basis.

So, the Metaverse is catching on. It might be cruel, careless and complacent of me to portray it as one where unhappy people in windowless rooms leap to the MetaVerse where they are happy, fulfilled and rich. I am perhaps only revealing how old fashioned I am – most of the things I like reading, travelling, running and the odd drink, are real rather than virtual experiences. For instance, a virtual marathon is nothing like a real one.

Beyond my own crude view of the MetaVerse, its growth will highlight a number of new trends and sources of friction between the real and virtual worlds. This is often the case when new eco-systems grow, let alone new universes or ‘shared-worlds’. One area of contention is identity.

In the real world our identities are largely set by factors like birth, geography, culture and education, and are largely known to the extent that they are captured by passports and id systems and by our interactions with other humans. In the MetaVerse, one can construct a new identity, which is free of geography and social ties (theoretically a more egalitarian setting), and potentially very different to the user’s real-world identity.

One lesson we learn from social media is that people behave differently online to in the real world and are often badly behaved given the cloak of a twitter handle. The MetaVerse is likely no exception, and apart from scoring systems and digital contracts on blockchain, is hard to police.

This also opens the intriguing question that, if the Metaverse does grow in terms of enjoying hundreds of millions of active participants, who governs or polices the MetaVerse?. The idealist’s answer is that it is uniquely organised through decentralised contracts and relationships, and that various avatars have their own codes of value. They may also be established by the programmers of online games and engineers at Facebook, betraying the reality that the organisation of the MetaVerse reflects the nature of those who build it.

A backlash against aspects of the MetaVerse has already begun. This is partly because in some countries – notably Japan where 40% of millennials reportedly are virgins – the use of social media and prevalence of fantasy based augmented reality, diminishes socialisation. In China, there is a backlash against the overuse of video gaming, screens and social media by the young, to the extent that last Thursday the share prices of ‘metaverse infrastructure’ providers Bilibili Inc. and Kuaishou fell by about 8%. It is an interesting, and open question as to whether the desire by the Chinese authorities to control the internet more tightly, pushes Chinese people towards the MetaVerse or limits their access to it.

One area where the MetaVerse is indubitably on the rise is the economy. NFT’s (non-fungible token) are a component of the MetaVerse (Sotheby’s announced on Thursday that two ‘Bored Ape’ nft’S sold for USD 24.4mn), and we might say that the main commodity of the Metaverse is Ethereum which effectively fuels the construct of many of the elements that make up the MetaVerse.

The Metaverse economy – where people for example buy real estate in virtual reality games or sponsor avatars – will, if futurologists are to be believed – be a big thing. Predictably we will see MetaVerse investment funds and maybe even specialist corporate finance boutiques for Metaverse assets.

What is not yet clear is the extent to which the growth and inflation of MetaVerse assets is a function of the record levels of liquidity in the global financial system – I suspect that this is the case, and the real tests of the MetaVerse may come when, and if, the Federal Reserve raises interest rates.

Have a great week ahead,


They Speak French, Part Deux

Last year, following the election of Joe Biden as President of the United States I wrote a note on his diplomatic and security team entitled ‘They Speak French’, the aim of which was to contrast the feckless Trump foreign policy team with the erudite (French speaking), principled Biden team, made up of the likes of Tony Blinken.
The hope, I thought at the time, was that the (Jake) Sullivans and Blinkens of the world would restore order and prestige to the State Department, thought the risk was that they would spend too much time debating policy papers and speaking French. This is not regarded as a positive in American politics as catcalls (‘Monsieur Kerry”, “Jean Chéri”, or “Jean-François Kerry”) to John Kerry have shown!
In the context of the fiasco of the Afghanistan withdrawal, the Blinken team is chastened, though still united (unlike the Trump crew). True to the title of my earlier note, Blinken gave several interviews to French media during the crisis but failed to heed the recommendations of the French intelligence service to start the pull-out in May. On the face of it, the USA has suffered diplomatically, and sadly has also borne a human cost, as have many Afghans.
Too many people, some of them military and security experts, have analysed the faults of the withdrawal, and here I have little new to contribute.
From a different, finance led angle, one might say that Biden is doing the right thing in finally withdrawing, and so ‘taking the loss’ as traders say, and ignoring ‘sunk costs’ as accountants say. If there is a failure, it is a deep seated institutional one – of the military industrial complex as Eisenhower termed it, though recent readers may be aware of my upgrade of the term to the Military Industrial Financial Data complex.

I suspect that much of the commentary around the withdrawal will continue to swirl around banners such as ‘American decline’, ‘end of empire’ and so on. I am not so sure about this train of thought but would also point to some of the other, potentially profound geopolitical implications.

To start in Afghanistan, the Taliban are likely wiser and more politically sophisticated than the savages that took Afghanistan in the mid 1990’s, but not by much. Their immediate aims will be to avoid international controversy (in terms of not instantly clamping down on foreign workers and Afghans with foreign ties), subsume the Afghan state or what is left of it. An economic and financial crisis may be their first challenge.

To this end, China may provocatively become more commercially involved in Afghanistan – it can source commodities such as iron, copper and niobium and may also seek to edge the Belt and Road project into Afghanistan in terms of providing physical infrastructure. Such a move would constitute a fillip to the West but China has already been warm in its diplomatic response to the Taliban. To that end the war on terror has not ended but is shifting location, whilst the ‘Great Game’ between the US and China is now well underway.

In the broader region, there are at least three broad concerns. The first is the relationship between India and Pakistan. It is widely believed that Pakistan is the progenitor of the Taliban, and while not controlling them, can certainly coordinate with them. The cold reality of this may finally break the political relationship between the USA and Pakistan, to the advantage of India.

India is a member of the QUAD grouping of countries (with the USA, Japan and Australia) and it may now deepen ties to the USA which in turn would mark the rivalry between the QUAD and the SCO (Shanghai Cooperation Organisation – largely Pakistan, China and Russia) as the one to watch in the 21st century.

The second regional implication relates to Islam itself, the perception the West has of it, and the geopolitics of Islam. To many who do not understand the intricacies of the Islamic world, the Taliban represent a severely negative view of Islam, to the extent that they discredit it, and some may use the existence of the Taliban in the debates that Europeans and Americans have on issues like Islam and immigration.

To that end, Sunni Muslim countries like Saudi may publicly at least feel a need to put distance between themselves and the new Afghan government, though this will likely drive internal tensions with their Wahabi population.

As far as Shia Islam is concerned, Iran had come close to an outright war with the Taliban in 2000 and will regard them with great distrust (so far there have already been attacks on Shia Muslims in Afghanistan), notwithstanding the way in which the Taliban have embarrassed the United States. The geopolitical implication for Iran is that it now has marginally more power in terms of its dealings with the US, and dangerously, it may feel that the power of insurgent style warfare is validated, as far as Lebanon and Syria are concerned.

Thirdly, terror groups across the world will be watching the way the Taliban have acted – their gruesome, savage tactics, their strategic patience and the ways in which they have used the vulnerabilities of Afghanistan against it. My worry is that Africa is at risk in this respect – from Mozambique to Nigeria to Ethiopia to Mali – where efforts by the US, British and French to train locals to fight are bearing little fruit and where the institutional quality of these countries is very poor. Counter-insurgency strategists and security services will have to carefully calibrate not their tactics, but strategies for fighting terror groups in these countries. 

That leads me to the issue of the strategic direction of security strategy in Europe. In the UK, which has put much into Afghanistan, the lesson is that it likely needs to become closer to key European countries (Netherlands, Norway, Sweden and especially France). From a military point of view, the irony being that despite Brexit, Britain and France are operationally very close.

The other related trends to watch for are the debate on military spending in Europe, and the emergence of a bigger, more robust European army from the cloak of NATO. Even in neutral Ireland, which has a small army in absolute terms, the Afghan crisis has triggered a debate on military hardware, and the necessary security it should adopt (there is a review ongoing). Much the same will happen around Europe, and the stance of the next German Chancellor on this area will be crucial if other countries are to step forward and match the military capabilities of France and the UK.

As a last word (I realise that this note is already longer than the usual 800 words, but I have been ‘off’ for the past two weeks), the underestimated element in the Afghan withdrawal is that it allows the US security establishment some clarity on its true objectives – countermanding Russia and limiting China. I suspect that in coming months the Biden team will take a much more aggressive approach to these countries, potentially in the form of a fulsome cyber retaliation on Russia, and the export of high-level military technology into Asia.

Have a great week ahead,

End of the EM Dream?

Since the COVID-19 pandemic began, I have periodically tried to assess what type of country, political system or culture has best dealt with the crisis. In general, while I biased to think that smaller advanced economies have done well, the only workable rule of thumb I can find, is that once a nation thinks it has triumphed over COVID, it immediately suffers a nasty reversal – the quick spread of the Delta variant across the USA and June’s outbreak in the Netherlands are two good examples.

Other people have done a better job than me at delineating the way governments have dealt with the coronavirus. One of the better explanations I have heard is from David Skilling who makes the distinction between liberal market economies (LMEs) and coordinated market economies (CMEs).  LMEs use decentralised, competitive and flexible market mechanisms; CMEs rely more on established informal, relational arrangements between a range of stakeholders. In that context, the liberal market economies were initially quicker to organise supplies of vaccines and to distribute them. In both models, anti-vaccine protests are on the rise, as we noted last week.

A new helpful study from Australia’s Lowy Institute adds to the debate. They have produced a COVID Performance Index which analyses data across 100 countries to determine how they have responded on economic, health and other criteria. Interestingly it shows that authoritarian countries have performed better than democratic ones, and more encouragingly that states with competent institutions, medical expertise and higher levels of trust in government have performed well. Many Asian countries have performed well, given they possess the above characteristics and potentially granted their prior experience with SARS. In addition, islands appear to do relatively well also. What is striking is that there is little difference in ‘COVID performance’ between developed and emerging countries.  

I found this interesting because I have a sense that for the first time in over twenty years, the pace of development of emerging economies is being checked, and manifestly slowed. There was a time when emerging market growth and the evolving consumer behaviour that accompanied it was one of the most exciting themes in financial markets, and for a spell, emerging markets easily outperformed developed ones (in the very long run there is little to separate them performance wise).

This is beginning to change and my sense that there is a gap opening up between the emerging world (outside China) and the developing world. The availability and roll-out of vaccines is one such marker (Ireland has a vaccination rate of 80% which contrasts to a rate of 3% across Africa).

In addition, in many of the exciting themes I have covered in recent notes, such as the race for rare earths/materials/places, the importance of cybersecurity, the premium on innovation and the scarcity of democracy, most emerging nations are far behind Europe, the US and China. There are exceptions of course, as the excellent Emerging World daily highlights (such as growing urbanization and the rise of ‘unicorn’ companies in South Korea and India), but my sense is that as the new, decisive trends of the 21st century are concerned, the emerging world is dropping off the pace.  

One notable indicator of this is interest rates. Developed world central banks continue to whirr their printing presses, amidst mild mannered talk of a ‘taper’. At the same time, 50% of emerging market central banks have raised interest rates, notably Brazil did so recently by a full 1%. The sense is that the emerging world is operating into a financial headwind, much of which is its own making. Turkey is a prime example of how a leader can destroy institutions, talent and the stock of economic potential.

Much of this is reflected in financial market prices, the performance of emerging market equity indices relative to developed markets is still close to the lows of the year, and both a stronger dollar and a ‘taper’ of asset purchases by the US Fed (tune into the Jackson Hole monetary policy offsite on 26th August).

The notion that the emerging world is now less speedy in terms of its growth outlook than the developed world is reinforced by GDP forecasts from the IMF which expects the economic rebound in Russia, Nigeria, Brazil and South Africa to tally at 3%, 2%, 2.6% and 2.2% respectively in 2022, as opposed to 4.2% for ‘sick economies’ like France and Italy, and 5.8% for Spain.

If my intuition is correct this means we may see greater economic, financial and political volatility across emerging markets, especially if interest rates continue to rise, and if in the near term Asia suffers a ‘delta’ led economic slowdown (lead indicators in China and Indonesia for example are dipping).

There are two more profound implications, both of which involve a breaking of steadily built expectations.

The first is that many emerging nations are held together socially and politically by the sense that they are on a path of improvement and prosperity. If that contract is broken, as it is manifestly in South Africa, this will produce greater political volatility.

The second relates to the relationship between the non-China emerging world and the developed world, to the extent that most developed world leaders recognize such a relationship. There are not many instances of the emerging world checking the power of the developed countries, but my feeling is that we will see both a growing dissatisfaction with world bodies (UN, IMF) and efforts to create new alliances between growing, populous countries from Rwanda to Nigeria to Bangladesh.

This might herald a new era where populous emerging nations seek to become more independent from the Western world (and potentially the China centric world), and by necessity seek to improve the quality of institutions, governance and transparency, all of which are lacking.  This will be a very long term project, but logically could well be the ‘next’ phase of the emerging world’s development path.

Have a great week ahead,


Gold Card Politics

Donald Trump, remember him? He recently asked his supporters to help choose the design of a ‘Trump card’ which they would carry as proof of their allegiance, and of course, their patriotism. Following several failed projects (blogs, radio shows) this lurid tactic represents the further gamification of politics and reflects Trump’s instinct for marketing and his aim to turn politics into a consumer goods subsector. No doubt donors of differing levels of generosity will be offered platinum and gold Trump cards.

There are two other, more serious implications. The first is that such a move, together with recent eye-popping fund-raising rounds by Trump, will deepen the divide in the Republican Party, and set the political agenda for the next midterm elections and 2024 presidential race. The first and main issue any Republican candidate must make is how to position vis a vis Trump (the Missouri Senate race for Roy Blunt’s seat is a case in point).

The second is that in the post COVID world (we are slowly getting there) we are seeing a range of new markers of political behaviour and values. The most striking and deadly is the difference between those who wish to get vaccinated and those who do not (sadly many in emerging countries don’t have this choice).

I have seen many versions of a chart that plots the proportion of people in each US state that have been vaccinated together with the predominant political affiliation in that state – Republican states have low vaccination rates whilst those in Democratic states have a much higher rate. I presume that any of those who will carry the Trump card, do not have a vaccination pass.

Similarly, in France vaccinations have become a political issue but what is not generally remarked on is that the number of people who have signed up to be vaccinated following Emmanuel Macron’s speech (where he declared cinema, restaurant going conditional on the production of a vaccine certificate) vastly outnumber those who protest against vaccines. What is now interesting is the way in which this ‘marker’ or divide is quickly becoming institutionalized  – many companies will only allow vaccinated employees to return to their offices and governments across a range of countries are tilting incentives towards those who are vaccinated.

I don’t disagree with this and think that as regards the COVID pandemic it is for the good. As a policy exercise it has lessons for how governments can shift, or ‘nudge’ to use the popular term, popular behaviour in positive ways. At the same time, it has obvious dangers in the sense that some governments may take the vaccination template and replicate it for other problems. Will it for example be applied to healthcare where those who drink, eat and smoke too much will be denied state funded healthcare or forced to pay a higher price for it?

What is equally interesting is the way in which the political climate will be shaped by the policy response to the COVID pandemic and the various trends (i.e., digitization) that it has set in motion. In short, what I have in mind is that healthcare related choices like vaccination have become markers of political identity, in the same way that at a country level a government’s stance on LGBT rights has become, in my view, a marker for broader qualities such as a country’s openness, the quality of its democracy and its ability to innovate.

If willingness to become vaccinated against COVID-19 is a marker of political disposition, what might others be?

Keeping with the idea that digitization is growing, one of the developments we may see in the future is the digital passport, effectively a key that can reliably identify someone and link their identity to a national database (i.e. social security). This development may become necessary as part of the roll out of digital currencies, as part of the broad initiative on cyber security and, to an extent, to police anti-social and illegal behaviour on the internet (note that the EU plans to have such a digital identity in operation by 2030).

As these measures come into place they will create political friction, and in particular a group of people who choose to be ‘outside’ or against the system. Other key and emerging issues will become political markers – an awareness of climate damage is now coming into mainstream politics, with Germany a lead test case, and the emergence of crypto and digital currencies will also test the sense that ‘with/against the system’ will become an axis in political debate that may supplant the traditional left/right.

Trump should have gone for a ‘Trump digital wallet’ rather than a gold card.

Have a great week ahead,


Is China going Communist?

Zhou Enlai, one of the founders of the Chinese state and its first premier, is at the centre of an often used misquote. It is reported that he was asked (during the 1972 Nixon visit to China) for his assessment of the 1789 French Revolution and that he replied, ‘Too early to tell’. In fact, the question had referred to the 1968 student riots in France, and the translator had succumbed to the temptation not to let the truth get in the way of a good story.

Similarly, with the Hang Seng index and the more specific China technology indices down 10% at the start of the week, it is ‘too early to tell’ if this is the beginning of a China led financial market and economic crisis of the type that we witnessed in 2014/2015 and to a lesser extent in 2018. A China crisis proper is high on the list of my ‘things that could go wrong’, but so far China remains the ‘country that has failed to fail’.

The collapse in Chinese equities, especially those in the social media and education sectors owes much to weighty government regulation. In the education sector, the authorities have declared that the rise of private education companies is warping the public education offer and creating inequalities in access to public goods. I generally agree and would suggest that the same is true in Western countries such as the UK and US (ironically there are hundreds of thousands of Chinese students in British and American universities). Most economists will agree that cheap or even free good quality education is the basis of a civil and innovative country.

Where China is different is in the force of its policy making. It has imposed harsh restrictions on its education companies, including a proviso that they cannot make a profit. As a result the price of New Oriental Education fell from USD 8 at the beginning of July to below USD 2 last Tuesday. Equally the share prices of social media driven companies from TenCent to DiDi to Alibaba have also fallen as the Chinese government has also looked to exert a heavy hand over the use of consumer data. They have bounced back somewhat but the credibility of the Chinese market is still at stake.

In the West, these moves will cause some confusion and alarm, not least amongst those who think China is a lesser version of the West. In my view, China is the most successful developmental story of our time, and one where policy (unlike the West) follows a textbook approach, and is importantly, guided by the goal of keeping the ‘Chinese Dream’ on track.

In China, the idea of the ‘rule of law’ is quite different from the way Westerners interpret it, and rather means rule from above, or by the central authority. Here the calculation in Beijing, is that short sharp shocks to certain industries will limit greater socio-economic imbalances and thus avert a larger, existential crisis later.

There are also strategic elements, both for the Communist Party and its leaders, the need to shake up dominant layers and drive investment to other sectors (i.e., semiconductors), and the need to, like the EU, take a lead in forming data regulation.

To that end, investors should view this sell-off, which has pushed Chinese equities into a bear market, as tactical, especially if in coming days it is accompanied by measures to support credit growth in the Chinese economy.

There is a risk of contagion, and there are plenty of ingredients for this. For example, margin debt on trading accounts in China is very high, Chinese high yield bond spreads are the highest they have been in five years (except during the initial COVID sell-off) and economic momentum is sluggish.

In this context, a revolt by investors – both domestic and international – who fear that the Chinese government is going ‘all communist’ would trigger a more prolonged sell-off. In particular, there is a risk that international investors increasingly demand a ‘government intervention’ premium for Chinese assets.

Signs to watch here are weakness across the Chinese credit complex, rising government bond yields and a dip in the yuan, as well as in other cyclically sensitive Asian currencies and international equity indices (e.g. DAX). More broadly a ‘China scare’ for markets would quickly reverse the reflation trade and see fear mongers talk of a demand shock. It might yet be ‘too early to tell’ but China is set to become the driving story in the marketplace.