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The Great Regression?

The front page of the latest edition of Time magazine carries a warning that we are at the ‘End of humAnIty’ in the sense that AI will take over the world and potentially exterminate the human race. The good news is that Time magazine covers tend to be contraindications, and I am closely watching the share price of AI mania stock Nvidia to see if its share price is going to peak on the publication of the Time cover story.

Regular readers will know that we have treated the dangers of AI on a number of occasions (The Final Problem, Talos, and LevAIlling), and I suspect that the ultimate effect of AI could ultimately be to lengthen human longevity. However, while we sit and worry about AI led drone strikes on our cities and being chased by drone swarms, we underestimate the effect of machines on our bodies and importantly, on our sociability. I had two reminders of this last week.

The first was hearing social historian Miriam Nyhan (formerly of NYU) describe the transition in the economy of Cork from one dominated by Ford to Apple (6000 employees).

While Ford’s initial contribution was to change the way we worked (I have had the benefit of a tour of the Dearborn factory, the most impressive element of which was to see robots making cars), the automobile industry has also changed the way we live – notably in terms of how cities are structured and the amount of exercise we get. Then, Apple and social media in general have changed commerce and entertainment but have also left us with physical contortions (the hunched phone user) and even worse, social deformities in the sense that for the first time ever, humans no longer interact with each other in a solely human way.

The second insight was from Prof. Rose Anne Kenny (author of the excellent ‘Age Proof’) the founder of  TILDA (The Irish Longitudinal Study on Aging) that has tracked nearly 9,000 adults aged fifty and older, and covers all aspects of life — from sex to food, to physical and brain health, genetics, childhood experiences, friendships, finance and much more — to fathom how and why we age, and to resolve how we can live longer and better.

When we combine the changes to our lives from technology, with changes to identity and acts such as drug taking, we are on the cusp of the most dramatic change in human behaviour ever. We can live for longer, but in many instances, we are not living better. What is clear is the degree of flux around our bodies and minds – from longevity to the atomization of societies, the diffusion of identity, and radical changes in average body shapes.

I don’t have a clever name for this epochal transformation – perhaps  ‘The Great Regression’ – but we might date it as having crystalised in the post COVID period when the combined results of all of these factors came together.

This is characterized by a number of factors – generalized longevity across the world with worrying regressions in life expectancy in specific economies owing to a combination of obesity, cardiovascular diseases, drug dependencies and depression. The US stands out here where life expectancy has dropped (see America’s periphery problem) precipitously to 76 years, its lowest level in over two decades (for reference Canada is 82 years and Japan 85).

In the future, these changes will be complicated by a range of factors, notably where morality and money are concerned. Wealthy people will try to access longevity (but perhaps not happiness) and advances in genetic engineering may open up an entirely new vista for the rich to grow and transplant organs or to design their ‘next generation’.

Then, AI broadly has the ability to help diagnose many illnesses depending on countries’ ability to collect good data, but where it is introduced into social welfare systems, may act in a cruel way to exclude people with say cardiovascular complications from getting insurance or social welfare.

As a final point, the striking aspect of Rose Anne Kenny’s work is that healthier and happier, long lives are essentially a function of good design – of cities and towns, healthcare provision, social education and diet (note that the journal Public Health Nutrition shows that ultra-processed food makes up over 45% of household purchases in Ireland, the UK and Germany as opposed to less than 14% in France, Italy and Portugal).

For that reason, I have a lot more confidence in the future of European democracies than autocracies or the Anglo-Saxon socio-economic model to successfully manage the enormous changes taking place in our bodies and minds.

Have a great week ahead,


Old Democracy, New Economy?

I was once told a story by a reliable source (the story is too good to bother verifying) that in the late 1980’s at a summit of European leaders, Greek prime minister Andreas Papandreou arrived by car in the courtyard of a sumptuous hotel. As he stepped out of the limousine, the windows of a suite on the fourth floor of the hotel were flung open and appeared Charles Haughey, Taoiseach or prime minister of Ireland, who at the top of his voice declared ‘Andreas Papandreou, you are my hero!’.

In many respects, Haughey was right, he and Papandreou were very alike – clever and corrupt, leaders of large grassroots political parties (political scientists compared Fianna Fail and Pasok, the party Papandreou founded, as the most enduring political machines in Europe).

Haughey and Papandreou both had interesting personal lives and tastes – Haughey in his grandeur sent the bill for 14,000 pounds (a lot of money back then!) worth of Charvet shirts to the Irish state. Papandreou had been the Dean of the economics faculty at Stanford, but couldn’t manage the Greek economy, and later couldn’t manage his personal life. I had the pleasure to spend a lot of time in Greece in the late 1990’s, when the behaviour of Papandreou’s third wife ‘Mimi’ provoked a lot of debate.

Both men, it could be said, opened up the way for their countries to perform into the early 2000’s but both also sowed the seeds of the downfall of their economies in the post 2007 period. In both cases, what were dominant political parties have been reduced to much smaller players.

This much was evident in last week’s Greek election – while the share of the vote that Pasok held rose to 11% from 8%, it is a shadow of the machine it was. Kyriakos Mitsotakis the son of Andreas Papandreou’s political rival Konstantos Mitsotakis, has won an impressive victory and will likely do even better in a second election at the end of June, such is the apparent desire amongst Greeks for prolonged economic growth.

 As an aside, recall that in the dynastic environment of Greek politics George Papandreou, son of Andreas, took over Pasok as Greece headed into the euro-zone debt crisis – and to reinforce the notion of dynastic politics, George Papandreou was also the room-mate at Amherst of Antonios Samaras – New Democracy prime minister from 2012-2015!.

Having gotten to know Greece very well in the 1990’s I visited there during the ‘Troika’ period. There is simply not enough recognition of the devastation of the Greek economy and of its society, by Greece’s own excesses, the euro-zone crisis and the medicine applied by the IMF and EU. For a country that suffered the worst depression in modern history to now begin to enjoy consecutive years of strong growth is a very good thing.

Greek society and the way the country is run have changed though there are echoes of some of the things I recall from the news in the 1990’s – corruption in procurement and transport (witness the causes of the trains crash in northern Greece in February) and there are still bugging scandals.

The great challenge for Mitsotakis now is not so much to prolong the uptick in the economy – investors are already re-rating it (bond yields are below Italy and the UK) but to make decisive departures with the modus operandi of the past in terms of the way the state is run. The other glaring (to my experience) area for reform is education – notably in creating a much better secondary and tertiary education system so that young Greek people are happy to remain in Greece for their education and to then work there.

A new development for Greece is a change in the fortunes and behaviour of its larger neighbour. In the 1990’s there was constant tension between Turkey and Greece over both Cyprus and the small Greek islands close to the Turkish coast, resulting in frequent close contact between the Greek and Turkish air forces. Recyyp Erdogan took power just before Greece hosted the Olympics and for a long time the performance of the Turkish economy, the scope of its infrastructure building and its growing role as a model for Middle Eastern states put Greece in the shade.  

Turkey’s progress has been squandered, and its economy is now not far from a crisis. The worry for Greece is that Erdogan tries to create tension with Greece as a distraction from the consequences of his own long term in office. While the Greeks are used to this (both Mitsotakis and Alexis Tsipras have handled relations with Turkey well), it could be an unnecessary complication just when things are going the right way.

Have a great week ahead,


The LevAIlling

I want to get rich, powerful and famous so I have changed the name of The Levelling to ‘The LevAIlling’, to reflect the growing mania around the deployment and power of artificial intelligence (AI). Readers can rest assured however that all the output on these pages is organic (I had tried ChatGPT a few months ago but was not impressed).

AI has been around for a while, as have its many dangers. In ‘The Levelling’ we wrote about how algorithms were both causing and provoking inequalities and social injustice. Last summer we flagged the very sinister example of how the Spiez Laboratory in Switzerland (see the Final Problem) one of whose specialisations is the study of deadly toxins and infectious diseases (located not too far away from the Reichenbach Falls), where scientists performed an experiment where they deployed an AI driven drug discovery platform called MegaSyn to investigate how it might perform if it were untethered from its usual parameters.

In short, MegaSyn produced nearly 40,000 designs of potentially lethal bioweapon standard combinations (some as deadly as VX). It is an excellent example of machines, unconstrained by morality (humans have willingly crossed this moral threshold), producing very negative outcomes. In another recent note ‘Talos’ we explored some of the emerging philosophical issues around AI.

Two aspects of the AI story that we have not yet mentioned are the stock market and the labour market, both of which will be greatly impacted by AI.

A sure sign that AI has arrived is that it is creating a stock market bubble. Since the start of the year, ten companies have driven the performance of the S&P 500 index, nearly all of whom have some form of AI business.

 In particular, Nvidia which seems to have been at the centre of multiple market bubbles (bitcoin, gaming, semis) is the lead play in the AI investment trend. From a valuation point of view the price of the company’s stock trades at 30 times the value of its sales (for normal businesses 3 times is quite pricey), which is not far off the valuation levels that have marked the top of ‘fads’ or bubbles. What we do not yet have is a broad AI bubble in the sense that even companies with a passing association to AI and its necessary infrastructure trade at bubble valuations. Similarly, markets have not priced in the intensity of competition between the big AI centric technology firms (Microsoft versus Google), not the disruptive threats they face from open source AI projects.

Much the same is true in the venture capital world, where AI funds and companies are one of the few ‘hot’ areas in VC. The popular ‘discovery’ of AI by the media is having a sizeable impact on the VC world in terms of providing the catalyst for funds to deploy cash to AI centric projects. Notably a whole range of companies is now touting their AI credentials, and slipping the AI moniker into their business description, in the same way that in 1999 companies adding a ‘dot.com’ surged in value.

In addition, companies reporting earnings, discussing their earnings on conference calls or even those appearing on financial TV (i.e. CNBC) will slip the phrase ‘AI’ into their dialogue so that this is picked up by AI driven analytics that in turn feed into stock buying programs.

If one popular reaction to a new innovation is that it will drive an investment bubble, then another is that it will fatally disrupt the ‘old world’, in the way that bitcoin was supposed to supplant the dollar and euro. In the case of AI, the promise is that it will cost us our jobs.

Labour markets have already been softened up in the past five years from ‘stay at home’ to the ‘great resignation’ to the ‘digital economy’, and they (in the G7) have arguably never been as robust. While there are some fields that are being disrupted by AI (the EU no longer needs 17% of its translators apparently) the best examples I have come across are where high performing humans – from surgeons to soldiers – use robots and artificial intelligence to do their jobs better.

While there is now a growing consulting trade on the future of the labour market (the WEF Future of the Jobs market 2023 report is a good starting point). One of the areas that is missed by many such studies are emerging market workforces -where regulation, social welfare and training levels are not at all as developed as they are in Europe for instance.

In some of the large emerging nations like India, training and education can be formulaic (I am not a fan of Byju as a firm) and could well expose knowledge workers in those countries to disruption by artificial intelligence. I belief that this is the great faultline of AI as it concerns labour, because if the effect of artificial intelligence on work is as great as many say, it could slow the natural path towards productivity and higher incomes of many emerging nations, the vast majority of whom do not have the industrial/capital base or expertise to build their own AI platforms (as Google is doing).

As it stands, there is also very little policy coordination between emerging nations, which again leaves them vulnerable in the face of AI. AI versus EM might become one of the great contests of the 21st century.

Have a great week ahead,


Wrestling with debt

A friend of mine has a very attractive theory about stockbroking, which is that the interaction between the investor and the salesperson is like the World Wrestling Federation (WWF), where like the professional wrestling matches everything is done for entertainment.

In stockbroking, fantastic stories are woven to investors in order to get investors to part with their capital, and impressive as the marketing performances are – it is generally understood by both sides that tales of ‘blue sky’ profits or impending doom are a fiction. It is of course easier to go along with this fiction when the (institutional) investor is investing other people’s money and not his/her own.

The WWF analogy, where colourful characters appear to do each other great harm is a generally very useful one, and specifically apt in the light of the debt ceiling debate that is warming up in the USA.

The debt ceiling stems from a provision in the constitution that states that only Congress can authorize borrowing on behalf of the US, and a 1917 act stipulates a limit on this debt (today’s limit is USD 31.4 trillion), that can be adjusted by consent of Congress. Today, higher rates complicate matters – the US spends more on interest payments than defence.

Presidents with a friendly Congress (for instance George W Bush received eight debt ceiling increases) do not need to worry much about this fiscal hurdle, however it becomes weaponized in the face of a ‘cohabitation’.

A good deal of the weaponization follows the WWF script, both sides huff and puff and take each other to the limit of pain, whence a deal is arrived at. Donald Trump, as an impresario (he was close friends with boxing promotor Don King, and at times part of the WWF theatre) understands this, recently telling CNN ‘the US should default….the Dems will probably cave’.

The debt ceiling debate has gotten a little out of control before. Memorably for investors in 2011 as the deadline approached, the US debt was downgraded by S&P from AAA to AA+, provoking a slide in markets. In 2013, the debt ceiling debate ran right to the limit, the personal highlight of which was when the late Senator John McCain tweeted a piece of research I had authored about wealth inequality (in Russia – he was spot on then).

There is no reason for the debt ceiling to be a market issue, except for perhaps four questions – the willingness of markets to participate in the WWF like theatre, the historic levels of bitterness across the American political spectrum, an amalgam of economic faultlines the most pressing of which is weakness in the US regional banking sector, and the venality of US Congressmen and women.

In short, we have the tinder and the sparks for this to go horribly wrong over the summer. The timing of any debt ceiling imbroglio will depend on the exact moment that the treasury runs out of money. Janet Yellen has stated that this could happen in early June but interest rate and money market pricing suggests close to July for a default event.

First, let me sketch three broad scenarios

Bi-partisanship (15%) – President Joe Biden, when he was a senator, was renowned for his bi-partisanship and the friendships he cultivated on both sides of the House. That era is gone now, and American politics is radicalized. Under current party structures, there is no incentive – absent an external threat – for politicians to come together and pragmatically pass a ceiling increase. That is why I grant this ‘grown-up’ scenario a low probability. Indeed, the only thing that might send the Democrats and Republicans rushing into each other’s arms is a banking crisis.

Chicken (70%) – in this scenario the Democrats and Republicans bicker till the last minute, with the Republicans trying to curb the spending power of the administration as a quid pro quo for voting the debt ceiling increase. The important element here is how complicit markets are – if we see a spike in equity volatility, a deepening of the credit crunch and loud warnings of the ‘end of the dollar’ and American financial hegemony, then a ceiling rise will be passed.

Having spoken to many people in Washington, I find them overly focused on the debt ceiling and not some of the underlying stresses in the US financial system – namely a credit crunch and a periphery crisis in banking. The risks could very easily become the real problem and dwarf the ceiling debate. Two other factors to note here are that a drawn out ceiling debate will result in less market liquidity in Q3 and an eventual deal might produce a minor, negative fiscal shock.

Cliffhanger (15%) – the risk here is that enough Republicans (i.e. McCarthy) are in thrall to Donald Trump that they are willing to do to America’s financial reputation what he has done to American democracy, and that a historic default becomes likely. Such a scenario is not as wild as we might have thought six years ago, but it would likely be preceded by the enacting of Treasury emergency financing plans and stern words from the Chair of the Federal Reserve. A formal default may not just happen, but it could come close.

In the context of the WWF thesis, the middle scenario is the best one – we all have a fright, are fantastically entertained and enjoy a happy ending. Financially it is the best one for politicians. Members of Congress face little to no restriction on stock trading and some of them (e.g. Dianne Feinstein and Nancy Pelosi have better trading records than many hedge funds and are known to be very wealthy).

For instance, a New York Times report found that between 2019 and 2021, 97 senators and representatives or their family members bought or sold stocks in sectors that could be affected by their legislative committee work. Readers might think this is an all too cynical approach on my part to suggest that Congress members have an interest in market volatility, but it does nonetheless accord with the WWF thesis!

As it stands, few have an incentive for the debt ceiling to pass quietly, and many want and need a spectacle. Prepare to be entertained.

America’s Periphery Problem

In the next few weeks we may see headlines like ‘Is America Greece?; ‘is it Italy?. The headlines won’t refer to wine, food and culture but to banks, because America now has a periphery bank problem. In the past three months the index of America’s regional banks has nearly halved. The speed (witness the demise of Silicon Valley Bank) and scale of what is happening is worrisome. At the height of the global financial crisis some 150 financial institutions – with total assets of nearly USD 500 bn – ceased to exist, though today a handful of American banks have expired, with assets of close to USD 600 bn up in the air.

With politicians and policymakers in Washington focused intently on the debt ceiling, the risk is that a periphery (regional and community banks) banks crisis overwhelms the debt debate and produces the sort of crisis that is consistent with the end of every Fed rate hiking cycle. My ‘breaking things’ thesis on the Fed remains intact.

The regional banks crisis is largely one of confidence (most bank crises historically have been), of monetary policy and of banking practice. In all too simple terms, banks have taken in deposits and matched these by placing capital in the Treasury market. As interest rates and inflation rose, the value of these Treasuries fell, thus reducing the capital available to banks should depositors want their money back.

The problem now is that depositors want their money back. Some of this is flowing to money market funds in order to avail of high interest rates that the banks do not offer. Social media and financial cable tv have not helped induce a sense of calm either.

Europeans of course have seen all this before, though our problem was one of the structure of the monetary system, in the context of a brittle banking system. Since the euro-zone crisis, a good deal has been done to bolster the euro-zone monetary system, but very little to advance capital markets and banking union. Looking at the USA, Europeans will also recognize the brutal way in which market stress leads policymakers to reverse policy rules put together in calmer times, to rush to provide market liquidity and to predictably blame speculators (they are not without blame but are not the root of the problem).

From here there are two risks for America. The first is that many of the policy measures that should induce some faith in the banking system (generous deposit guarantees, a liquidity provision mechanism (the BTFP)) are already in place, so that in the absence of a new broad program of support for the regional banks (that would break many of the rules of financial policy making), the pressure on the banking system persists and could unravel into a full-fledged crisis. Some of the underlying conditions in the US banking sector – such as a weak commercial real estate sector and a sharp drop in lending are a concern.

What is more worrying are the enduring effects of the decimation of America’s periphery banking system – there is a credit crunch going on in Silicon Valley and beyond that will also lead many venture firms to write down the value of investments. Then, in other parts of the US, individual states will be hit by the consequences of weaker regional banks, the shift of deposits towards behemoths like JPMorgan may mean that the costs of banking are higher.

This shift in capital from periphery to core mirrors a deeper trend in the US, which is that in terms of its society, economy and financial system it is becoming pyramidical, with a successful core at the top of that pyramid and a very large base or periphery.

Wealth in the US is highly unequal – 35% of all wealth is held by the ‘top 1%’ a high for the developed world and a figure that is exceeded only by emerging nations (India, Russia and Brazil). For comparison, in Canada the top 1% own 25% of total wealth. The wealth outlook in the US reflects in part the growing concentration effect in the stock market (the top five technology companies make up close to 25% of the market capitalization of the stock market), and now in the banking system.

It may also reinforce a narrative that American politics has become a system that favors insiders (core) at the expense of outsiders (periphery), and in terms of other markers such as the quality and provision of education and healthcare, and metrics like life expectancy there is a significant difference between the core and periphery (there can be a difference in life expectancy of up to seven years between ‘mid’ and ‘southern’ states like Mississippi and wealthier coastal ones like California and New York). More generally, overall life expectancy is plummeting in the US, at a rate only seen in Russia around the fall of communism. 

In that respect, deposit flight may reflect the innate fears Americans have about their country, and this is a warning sign for a much deeper malaise.

Have a great week ahead,


We are the people, who are you?

Hidden away in Jan Werner Mueller’s book on populism is a gem of a quote from Recep Erdogan ‘We are the people, who are you?’ It is a powerful, defiant statement from a politician who has become the embodiment of Turkey – first by seducing its people with progress, growth and national achievement, and more recently by capturing the state – breaking and denuding its institutions, and as a result of his actions and values, annihilating its economy (inflation has pushed close to 100%).

Erdogan will become a central figure in the news in coming weeks. While there are no major elections in G7 countries this year, the Turkish presidential election (first round is on the 14th May) is important internationally for a range of reasons.

It is a decisive pivot point for Turkey, which is clinging to democracy and to the notion of a stable economic structure. A victory for Erdogan will quench that democracy and arguably cause those who still have hope for its economy to throw in the towel. It might dim forever the example of Kemal Ataturk that Turkey should strive to be secular, democratic and lean Westwards.

More broadly, Erdogan is a test case in the ‘autocratic-recession’ thesis – populists like Bolsonaro, Boris and Donald Trump have been derailed, and a change of guard in Turkey would mean that one of the longest standing populists has been rejected, and that Turkey’s democracy might again breathe.

Geopolitically the election is highly significant. There was a time when Turkey was admired as a role model and force for stability in the middle east (notably so in the aftermath of the Arab Spring) and its foreign policy maxim was ‘no trouble with neighbours’. As we have noted in this previous missive, Turkey is enmeshed in conflict at every point of the compass – stuck in the Azerbaijan-Armenia conflict, active in Libya and Syria, at odds with Israel, the most obstreperous member of the NATO alliance and a ‘frenemy of Russia. Simply put there is a lot at stake.

Standing against Erdogan is the veteran politician Kemal Kilicdaroglu – who has been leader of the Republican People’s Party since 2010. He is an economist and civil servant by background and generally regarded as mild-mannered though in recent weeks he has led demonstrations outside the offices of ministers. This is partly because the ante has been upped by the political consequences of the earthquakes which led to 50,000 deaths.

Not unlike the fatal derailing of a train in north-eastern Greece, the human toll in the Turkish earthquake is recognized to stem from the consequences of corruption – either through shoddy engineering or in the failure of Turkey’s institutions to provide help to the stricken.

Erdogan – despite being a career politician is widely thought to be a billionaire, and he as members of his family are derided as ‘Mr 10%’ is some quarters (the original Mr 10% was – allegedly – Benazir Bhutto’s husband who it was said took a fee of ‘10%’ of every major contract in Pakistan).

I have heard people that the same holds in Turkey. Whether this is true or not Turkey is the example I always use to illustrate the negative effects on bond and currency markets of the weakening of institutions (Erdogan’s family and close allies have for example controlled the treasury and central bank).

In this regard, Turkey is a salient tale in the rise and fall of nations. Since the early 2000’s when Kemal Dervis had righted the banking system and the prospect of membership of the EU was dangled in front of it, Turkey made great progress. Lately this has come to a halt as policy making, the quality of institutions and the rule of law have been degraded.

Ironically, the authority on the importance of institutional quality and the need for a sense of civic ethic is Daron Acemoglu (the author with Simon Robinson’s of ‘Why Nation’s Fail?, and they have a new book called power and progress out soon).

Acemoglu, like Dani Rodrik, is one of the leading economists in the world, and Turkish. Both of them I am sure, lament the direction that their country has taken, and both would have clear policy answers to set it back on course.

To return to the election, Erdogan’s latest rick is to ‘pull a sickie’ and cancel campaign events in a move that some insiders say is an attempt at a sympathy vote. My sense is that should the first round of the election be close then Erdogan will go into full populist mode and enact the Trump play card – claiming a conspiracy by the army, outside forces and potentially, a rigged vote. The fate of the mayor of Istanbul, in jailed for speaking out against the Erdogan government, is a sign of how far Erdogan is prepared to go to safeguard his position. A good deal also depends on the cohesiveness of the opposition parties in the face of an onslaught from Erdogan.

Defeat for him would ripple across emerging markets, Ukraine and the middle east.


Chris Mullin was regarded as one of the most likeable MP’s in Westminster, serving well before it became poisoned and banalised by the Brexit bullies. He had many talents – a human rights campaigner and notable author. His book ‘A Very British Coup’ is very good and was turned into an excellent tv series. His political diaries are amongst the best of the genre.

Early last week, a particular phrase in those diaries came to mind. In 1997, when Tony Blair had come to power, Mullin wrote ‘To my surprise I notice that Blair is given to mild name-dropping. This week he mentioned that in Holland yesterday he had called on the Queen. The other day, he quoted something Hillary Clinton had said to him. On another occasion, he quoted the president of Brazil, on another that he was off to see the Queen.’

My memory of this diary entry was twigged on Monday night in Belfast at the dinner to celebrate the 25th anniversary of the Good Friday Agreement[1], by the sight before me of Blair, obscuring my view of Bill and Hilary Clinton.

‘Get out of my way man!’ I shouted, as I made my way to see Bill (I did not of course say this, but I did manage to snatch a minute of Bill’s time). 

Now that I have gotten my own name-drop out of the way, the real reason I bring up the topic of Bill Clinton is that the economic circumstances of the early part of his presidency give a steer as to what may come next this year.

In particular, with inflation ebbing from high levels fears of a recession are mounting, and institutions like the IMF and the Federal Reserve are warning of this. Macro-wise, lead economic indicators (NY Fed recession indicator, Philly Fed, Conference Board lead indicator) and bank lending data point to a contraction in growth.

While this is now one of the most widely expected recessions (given the debate amongst economists), we should be ready for that debate to amplify with commentators speculating on whether we have a ‘U’, ‘V’ or ‘W’ shaped recession.

In this context, there has not been a traditional business cycle contraction/recession in a very long time – the COVID recession was a ‘shock’ event, the global financial crisis was a calamitous financial system event, and the 2001 dot.com recession was – apart from the technology and banking worlds – not much of a recession. Then 1997/98 was again a mixture of a bubble and financial market crisis. This leaves the recession of the early 1990’s and its aftermath as one of the few recent examples of an ‘ordinary’ recession.

Of course, the oddity with this litany of financial crises is that central bankers (and their economic models) still think in terms of notional business cycles.

So, back to the Clinton years. Perhaps three things stand out. 

High inflation, a war, an oil price shock and rising interest rates all caused the recession of the early 1990’s, and helped deepen the Savings and Loan crisis (a crisis of incompetence and skulduggery). We have just about had all those already. Notably the beginning of the recession ended the political career of George H Bush, who went from having record approval ratings in the aftermath of the Iraq War to a stumble over ‘no more taxes’.

Financially, the aftermath of the recession was very complicated – the ERM crisis led to the ejection of the pound from the currency board, and in 1994 persistent inflation led to a huge unwind in bond prices in the context of ongoing tightening by the Fed. That the Japanese bond market was a significant factor here is worth considering today, given that higher Japanese yields could be the next ‘shoe to drop’.

To gather these strands together, the world is vastly more complicated today than it was in the 1990’s, and the set of risk factors is broader. Of interest also is that the US is not the dominant economy at a time when coordination between the large regions is difficult to achieve.

My expectation is that we are entering into a classic business cycle (U -shaped if you must) that will be greatly complicated by strains across the debt markets. The stark difference between one and three month interest rates in the US is a sign of things to come, and specifically of a messy debt ceiling debate in the USA. If interest rates remain at high levels in 2024, and if they rise further in countries like Japan and the UK, then we might even have a debt crisis.

On that cheery note, have a great week ahead.


[1] Thank you Garret

Fractured World, Part Deux

I had wanted to write on the nature of the coming recession, but something more important came up, and even though it concerns Emmanuel Macron whom we wrote about two weeks ago, it is central to the thesis of The Levelling that the world will be cleaved into three ‘poles’ each driven by different value sets and increasingly distinct ways of doing things.

One of the rules of political leadership is that when in trouble domestically, a leader should go abroad, or start a war. Emmanuel Macron effectively did both last week, when in the vapours of his visit to Beijing, he carelessly distanced the EU from the US, the international fight for democracy and the cause of Taiwan (Macron spoke as five dozen Chinese jets harassed Taiwan, and China war-gamed missile attacks on the Taiwanese mainland).

Macron’s comments on the geopolitical outlook have caused quite the stir and it is worth dwelling on them and on how others perceive and react to them, not least because they give important indications of how the world order is evolving and where points of sensitivity are. 

First, some context, from Paris. Most French people find Macron’s personal manner hard to take because either he reminds them of their boss or like the clever student, he gives lengthy, erudite replies to questions. That his personal style is beginning to grate was in some part behind the motivation behind the recent protests against pension reform.

Second, language and style are important. In French (see the Les Echoes interview) Macron’s comments are not quite as bad as English language headlines suggest. Many of those in apparent shock at Macron may not speak French nor will they appreciate that he speaks in long paragraphs rather than soundbites ready for media consumption. Having said that, Macron might want to speak less.

There were many things Macron should not have elaborated on – the dollar, his view of Taiwan and China’s belligerence towards it. In some respects his views on Taiwan begin to resemble the views of isolationist (mostly far right) American politicians on Ukraine. In many respects, this is a diplomatic victory for China and a defeat for the notion that there is a coherent view across the West on the sanctity of democracy.

There are important elements in Macron’s frame of mind for American diplomats to consider – the side-effects of AUKUS, the risks of another Trump like government in the US and the impact of the IRA Act on European leaders. Worryingly, Saudi Arabia has also taken a step away from its close relationship with the US. 

Further, Macron’s stated desire for Europe not to be a vassal of the US was very badly expressed.

I spent much of last week in Dublin and will be in Belfast next week – and while the visit of Joe Biden to Ireland highlights the extremely close cultural ties between the US and Ireland, the Good Friday Agreement (now 25 years old), the Dayton Accord and possibly German unification, could not have happened without the US. Most Nordic and Baltic states, together with Poland would rather have the US as a close ally, and that likely riles Macron.

However, the Biden visit to Ireland also demonstrated that Europe is changing – Ireland today bears little resemblance to the image of Ireland Biden grew up with, and the America of the Kennedy’s, Reagan and Clinton (all good Irishmen) is a distant memory when we think of the challenges Biden has to contend with.

European governments will not be happy with the expansive nature of Macron’s comments on the role of Europe in the world and on how strategic autonomy is defined, and most of them will feel that President von der Leyen is the correct person to pronounce on these issues. She is often the victim of casual sexism in that the men in the room downplay her views and role.  

However, part of Macron’s comments on strategic autonomy may have been deliberately disruptive. To date, few other leaders apart from Macron have tried to publicly elaborate on strategic autonomy. The time is come for others to step forward – possibly the Dutch prime minister or the Estonian prime minister and even the German foreign minister (also in China last week and who laid out a much firmer line).

Geopolitically, the friction caused by Macron’s remarks is part of noisy evolution of the multipolar world, where the three main regions – the US, China and the EU will fill out their geopolitical identities and frame relationships with each other. Europe in particular has more work to do in defining strategic autonomy in a practical way.

Economically, there are two very important points to make. First, in his weekly note David Skilling draws on recent data and research from the IMF to show that geo-politics is driving the foreign direct investment flows, with flows into strategic sectors and semiconductors now avoiding China.

As David puts it, the implication is that increased geopolitical tensions are likely to lead to FDI being increasingly concentrated within geopolitical blocs.  There are various geopolitical scenarios, but a ‘hard fragmentation’ into closed, competing geopolitical blocs will have a strongly negative economic impact as FDI flows are distorted – the IMF assesses ~2% of global GDP – as countries lose the economic benefits that come from FDI

This shows that the battles of words and ideas over Taiwan has real implications, and in time many corporates will themselves have to start taking sides, and in many cases, pronouncing a view on Taiwan.

My final point this week concerns the coming global recession. Having spent months denying there could be a recession the likes of the Federal Reserve and the IMF are now actively flagging this as a risk, not least as bank lending plummets. Amongst other things, the nature of the next recession will have geopolitical consequences – whichever region manages to come out of recession first, will have the edge in the ‘war by other means’.

Have a great week ahead,


Edmond Dantes?

n France, the latest production of the ‘Three Musketeers’ is hitting cinemas and it is feted for being the most expensive French film ever made. My attention however is focused on another of Alexandre Dumas’ works, ‘The Count of Monte Cristo’, where the main character Edmond Dantes, deviously wronged as a young man, eventually escapes prison on Château d’If, builds a fortune and then exacts revenge on his rivals.
The book was set around the time of Napoleon’s escape from Elba, but this time I associate it with another well known political figure, Donald Trump. If he reads books, Trump might fancy himself as a modern-day Edmond Dantes – he will prove his tormentors wrong when his case for campaign fraud is held at the end of this year, and then march back into power. Yet, I think that ‘The Donald’ is unlikely to enjoy the same triumph as ‘The Count’ but the great risk for America is that the court case turns out to be a damp squib and he manages to turn this to his advantage in the 2024 presidential race.
I hope that this does not turn out to be the case, and the media, social media and most of the Republican party bear responsibility for giving Trump the political oxygen he craves, and not the shame and censure that someone who has debased American institutions deserves.
The prospect of a second Trump presidency and the fragility of American public life is a key reason why European governments now worry publicly about the US as a political partner. More seriously, it has caused some countries – Saudi Arabia as we noted last week – to start to bet against American decline. American declinism is a growing cottage industry, matched by the ‘Europe will fall apart’ brigade, and led by the ‘end of the dollar’ crowd.
This group was out in force last week, forecasting the end of the dominance of the dollar. I think this is unlikely. China – allegedly the coming financial empire – makes up barely 3% of world fx reserves. It has yet to be tested by a full recession and it continues to make the wrong sort of geopolitical friends (fragile states like Russia and Iran). Chinese monetary policy is still opaque, and surprise currency devaluations are a live risk. Further, few Westerners or professionals from countries like Indonesia, Bangladesh and India want to live there and the barriers to doing so are high.
If developed world currencies are likely to lose their place in the world trading system it is likely to be smaller ones like the pound and the Swiss franc. Brexit is making the pound less relevant in a number of ways, and the Credit Suisse debacle will sow fears regarding trust in Swiss laws and the durability of its banks. Traditionally, one reason that the Swiss franc remained strong was that capital flowed into the country and did not flow out. At the margins, this may change – possibly to the benefit of larger American banks.
So, if the dollar is safe for now, there are still two issues to worry about. The first is that whilst it is financially the most dominant nation, America’s diplomatic power is much reduced. One illustration is to think of how it was the central, organising force behind most of the financial and economic rescues of the past fifty years – from the Brady bond solution to Latin America’s crisis to Alan Greenspan’s ‘Committee to save the World’ after the Asian crisis. When the next crisis comes, America will be the most significant player but not the dominant one and the risk for the US, is that the solution to that crisis may tilt financial power away from it.  
The second more profound worry is that at the heart of American society there is a disturbing set of socio-economic trends. America today is debatably the most unequal (in terms of wealth) society ever (I have even compared it to the Roman empire)
Gravely, life expectancy and adult health have dropped sharply – a highly unusual development in a rich country, and one more associated with some kind of emerging market socio-economic shock (Russian life expectancy dropped by nearly five years from 1990 to 2005 for example)
An important paper by Anne Case and Angus Deaton (2015 Nobel winner), “Rising Morbidity and Mortality in Midlife Among White Non-Hispanic Americans in the 21st Century,” highlighted the deterioration in health conditions, especially those relating to mental health, for middle-aged white men and women in the United States.
The mortality rate for this cohort has increased sharply owing to drug and alcohol poisoning, suicides (the United States is seeing a sharp rise in suicides, according to the Centers for Disease Control and Prevention) and related diseases such as cirrhosis of the liver. Groups with lower levels of education saw a sharper rise in mortality. Gun violence is of course another problem (witness the debate in Tennessee).
The worsening of inequality, social and health conditions in the US is a sign that politicians should pay much greater attention to health in public policy. If a serious politician is looking for a mantra and a program to run in 2024 he/she should try ‘Make Americans Healthy Again’.  
Have a great weekend,

War and Peace

I have flown over Mecca a few times on the way to Jeddah and in particular, flights during the Hajj are memorable. Usually, the pilot played prayers on the intercom as the plane approached the holy site, and most of the passengers were taken up with prayer – in a way that perhaps only an Irish Catholic could appreciate. More impressively, sights of the enormous infrastructure that spans Jeddah airport to Mecca gives a sense of the hundreds of thousands of pilgrims that visit Mecca every year from across the Muslim world.

Notably, in a few months Iran’s Shia Muslims may be made welcome to Mecca following the agreement between Iran and Saudi Arabia to reestablish diplomatic relations, under the diplomatic stewardship of China. I am not sure that this event immediately heralds a geopolitical revolution in the Middle East but it is significant in many ways, and will at the margins reduce tension between the countries of the region (‘no problems with neighbours’), though may also provoke stress between the regions beyond the Middle East.

For Iran the deal brings several positives – even more trade with China, the mantle of a ‘responsible’ regional actor, the chance to consolidate its overwhelming influence over Iraq and Syria, a lesser commitment of resources to Yemen and less intense pressure on domestic Iranian politics from Saudi related media outlets (notably those in London). Also, the prospect of a visit by President Raisi to Saudi Arabia will add legitimacy to the Iranian government at a time when protests there have been widespread.

For Saudi Arabia there are also multiple benefits. Notably, a calming if not an end to the war in Yemen and by association, attacks into Saudi Arabia itself. Its oil infrastructure and access to drinkable water will be more secure now. Closer commercial ties with China will be welcomed at a point where the Kingdom’s currency has weakened and when inflation is high, and a corollary of this will be pressure on the US to ‘charm’ Riyadh.

Diplomatically, Saudi Arabia now has a dangerous hedge- it plans to join the SCO (Shanghai Cooperation Organization – about which we have written much in ‘The Levelling’) as a ‘observer’ member, which we might think of the SCO as a China led anti-NATO gang. The motivating force behind this deal is Saudi Arabia’s Crown Prince Mohammed Bin Salman (MBS). He is hugely ambitious for his country, and while young people in Saudi Arabia enjoy far, far less freedom than those in Iran, the relative change in their lives and expectations in recent years has been very significant.

Broadly for the region, the reestablishment of diplomatic ties should see a shift in emphasis from local geopolitical tension to economic growth. For China, it is a major win, notably in terms of trade – it accesses oil from both Iran and Saudi Arabia, will promote the use of its currency in the region (similarly a recent trade deal with Brazil will boost use of the yuan) and will invariably sell more Chinese goods into the region, not to mention access its real estate markets.

China will also host an Arab-Iran summit in Beijing later this year, a move that underlines the view EU President Ursula von den Leyen expressed last week in a keynote speech that ‘China’s clear goal is a systemic change of the international order with China at its centre’.

If China is a winner, then in this increasingly bifurcated world, the US must be the loser.

The announcement of the deal came at a time when Western banks were collapsing, and strikes and riots disrupting European capitals, so to an extent it has passed under the radar. It confirms my view of rapidly changing geopolitical tectonic plates, and China’s aim to realign the world along autocratic/East v democratic/West lines. The Chinese may well feel that twenty years on from the invasion of Iraq, the West’s grip on the Middle East has decisively loosened. They should also be careful not to think that meddling in the Middle East is a prerogative of great power status.

There are maybe three tests of this new alignment. One is very simply the extent to which the reopening of diplomatic ties produces any real ‘warmth’ between Iran and Saudi Arabia. The second is whether the coming global recession further weakens local currencies and specifically will lower the price of oil, and thus local economies.

The third test may come from Israel and focus on Iran’s quick march towards acquiring a near functioning nuclear weapons program. The war in Ukraine has seen Iran emerge as a sophisticated producer of military technology and granted that it is now producing a very high grade level (84%) of enriched uranium, Iran could be considered to be in the antechamber of nuclear powerdom. This may prove a threshold too far for Israel and many armchair wing commanders

In this respect, the protests that have dramatically gripped Israel in recent months in the light of the Netanyahu government’s attack on Israel’s institutions have thrown the country into disarray at a critical moment. This is nearly entirely Bibi’s doing, and it may just become his greatest mistake.

Have a great week ahead,