One of the more surprising things someone said to me in recent years was that ‘Ireland has a decent space industry’. The fact that the comment came from the head of the space agency of a large European country, and we were sitting together in a bus in the Middle East adds some lustre to the observation.

There is a budding space industry in Ireland, to match its large aircraft sector and this had me wondering whether someday Ireland will send a man or woman to Mars!

The images that NASA’s Perseverance probe have sent back to earth reinforce the sense of wonder created by previous probes (about ten craft or probes have landed on Mars) and remind us of both the power of technology and the possibilities that space opens up.    

While the Perseverance ‘trip’ cost close to a total of USD 3bn and the journey lasted about seven months, a human voyage to Mars is estimated to cost closer to USD 500bn and depending on the corresponding orbits of the earth and Mars, between seven to nine months.

It was thought that the mental toll of spending seven months cramped in a space craft would be too much for even well trained astronauts, but following the COVID-19 confinement, you might say we are all astronauts now! Until someone is courageous enough to make the journey, we will see more and more robots visit Mars, and more interesting experiments such as attempts to grow plants on Mars and to develop oxygen machines fit for use on Mars.  

With NASA very much to the forefront in landing rovers on Mars, a number of countries are also in the process of executing or planning missions to Mars – Japan, India, the EU are chief amongst them. Russia first drew up plans to send humans to Mars in the 1960’s, and China is expected to land a probe on Mars in May whilst the UAE is a new player with its Amal probe. A number of private companies – SpaceX being prominent – are also getting in on the space exploration (and commerce) game.

The race for space is potentially part of a bigger trend which I will call the ‘scramble for rare places’. This is taking various forms – a race for safe parts of the planet such as the notional billionaire’s New Zealand mountain lair (please do watch the film ‘Goodbye to 2020’…and New Zealand also has a space industry), a race for space and the scientific and mineral gains this may produce, a race for the deep oceans and relatedly a race for the Arctic.

In particular the Arctic is interesting – it is overseen by the Arctic Council (Canada, Finland, Iceland, Sweden, Norway, Russia, the United States and Denmark) for its strategic location, its role as a gauge of climate damage and relatedly the opening up of shipping routes by melting ice.

Geopolitically it is a vital place – a Russian submarine planted a Russian flag under the Arctic in 2007 (interestingly Russia’s leading Arctic scientist has been charged with spying for China), and Denmark has recently acted to beef up its military presence in the Faroe Islands and Greenland.

Reflecting Thomas Pakenham’s book ‘The Scramble for Africa’ (which is happening again by the way) the scramble for rare places has a strong strategic impetus, has dubious ecological side-effects and may ultimately have serious negative side-effects (again, an understatement in the case of Africa).

This ‘scramble’ reflects a world where cooperation between nations is becoming increasingly strained, where large chunks of economic activity are dependent on select natural resources (rare earths) and where, in some parts, rules of the game (space and the Arctic) are not open to interpretation.

To draw in the thread of last week’s note, it also reflects great power ‘Great Games’ on steroids. In the Great Game of the 19^th century British and Russian spies crossed paths in Isfahan and Bukhara, now they will orbit each other around Mars, glide past each other in sub-Arctic mini submarines, or meet on exclusive ranches on the Argentine plains.

Like the Great Game, it’s all potentially fascinating but likely costly too.

Have a great week ahead,

Mike

The upturn in the world economy and the assured arrival in power of the Biden administration will have many commentators pondering as to whether globalization is back, after a violent interregnum during the Trump years.

As regular readers know, I believe globalization is finished. To take trade as an example, if trade bounces back it will have changed in two important ways, both of which make the world less interdependent.

First, trade and state led investment will be driven by the notion of ‘strategic autonomy’ – that they should be structured so as to reinforce a country’s geopolitical power as well as its prosperity. Second, advances in technology and the corporate strategy lessons from the coronavirus crisis mean that business models can be more technology driven, more decentralized and arguably less labour intensive, something that may impact many south Asian countries.

Another important element is that the one aspect of globalization that many ignore is political.  Globalization happened because of a shift in political models – communism fell, and thereafter the ‘American’ model traversed the world (again especially Asia), the number of democracies rose, and human development improved manifestly across the world.

Yet, this sense of ‘one system’ is now at an end – the global financial crisis and the Trump Presidency have sapped its credibility. Moreover, globalization has not transformed the world politically in the image of the American model. Indeed, there is plenty of evidence to suggest that the flourish in ‘democracies’ has halted and is reversing. Take for example the the Economist Intelligence Unit’s Democracy Index which in 2020 fell to its lowest level since 2006, and with 70% of countries covered showing a deterioration in the quality of their democracy.

In this respect there are two vital cognitive errors that ‘Western’ commentators make. The first is to assume that all countries prioritise their economy over geopolitics and social needs – Russia shows that this is not the case. The second is to believe that economic progress will naturally beget a desire for democracy. China, and the relative success of its Communist Party show that this is not the case.

What is now important and noticeable is that more and more events are occurring that push back and check the liberal democratic model. The most prominent of these is the quenching of Hong Kong’s ‘two systems’, and event that bookends the fall of communism.  The failure of liberal democracies to support the pro-democracy movement in Belarus is another and is the dereliction of many world institutions such as the WHO (World Health Organisation).  

The abject failure of Josep Borrell’s diplomatic mission to Moscow and a surge in military posturing in and around the South China Sea (for example ‘scrambles’ of Japanese fighter jets are at a record, averaging three per day) also point to a hardening of political arteries.  

Against this backdrop, a new model is emerging to challenge that of liberal democracies and for the first time since Ronald Reagan bemoaned the ‘evil empire’, we have two competing ‘ways of government’. I call them the Levelling and Leviathan models, drawn from the mid 17^th which was formative period for the emergence of the nation-state, elaboration of democracy and thinking on how government should work.  

The Levelling model (from the 17^th century English movement who crafted the ‘Agreement of the People) is based on the popular rediscovery of liberal democracy in the light of all of the challenges our world throws at it – indebtedness, climate damage and the penetration of social media into mindsets. Most of Europe, including the UK and the Democratic Party in the USA and naturally the Biden administration are in this camp. Indeed, on Friday President Biden staked a claim to revitalise liberal democracy when he stated he would ‘make a strong and competent case that democracy is the model that can best meet the challenges of our time’.

On the other side, are the Leviathans – who following the sense of Thomas Hobbes’ 1651 book ‘Leviathan’ see the need for a ‘supreme’ actor to control a country’s fortunes and where its citizens enter into a bargain with that leader. China today is a ‘Leviathan’ – its citizens exchange liberty for prosperity and national prestige, and there are growing signs that its President covets a long, unchallenged (ask Jack Ma) period in power. Its not clear to me that Russia for instance is a ‘Leviathan’ country, given the lack of a cohesive national project and the lack of a real developmental contract between Vladimir Putin and his people.

A world defined by ‘recuperating liberal democracy’ and ‘tough managed democracy’ will have many implications. Rhetorically it will make the role of the likes of Joe Biden easier if he can frame world affairs along these lines. It may also force the debate on European values – eastern European states may be forced to give up the illusion that they can pick and choose the variety of democracy they adhere to.

Finally, the battle of the competing attractions of the ‘Leveller’ versus ‘Leviathan’ model will be played out across many emerging nations. Ethiopia is one such example, where an open economy and the beginnings of a stable polity were beginning to take hold but that has recently lurched towards a more controlling, and brutal style of government. Think also of Nigeria – where inequality is growing and where unrest could become a serious socio-political issue. Nigerians may soon ask themselves if they want to replicate China’s success or whether Britain is a model for them.

Have a great week ahead,

Mike

One of my favourite descriptions of globalization comes from JM Keynes, who at the end of  the first wave of globalisation wrote (in Economic Consequences…)

‘The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, in such quantity as he might see fit, and reasonably expect their early delivery upon his doorstep; he could at the same moment and by the same means adventure his wealth in the natural resources and the new enterprises of any quarter of the world’

A modern day version might see Keynes driving a Tesla, speculating on Robinhood and paying for a new house with bitcoin, all whilst respecting confinement rules, obviously. It may not be as effortless as that, the Tesla might catch fire, the Robinhood account may crash or face a margin call and bitcoin may prove too volatile to do anything with.

The confluence of these finance centric eco-systems has led many people to hold that we are in an age of the democratization of finance – where platforms, tools and products are springing up that give the common man and woman access to the financial opportunities hitherto enjoyed by billionaire hedge fund managers.

This is not the case. Instead of the democratisation of finance, we are in an age of the democratisation of risk – where a range of risks, mostly arcane financial market ones, are increasingly distributed across retail investors. The issue is that the man or woman in the street, is unprepared for these risks. The other, finer point is that when many people across a population find they have the ‘same’ risk, and all react against it at the same time, dislocation occurs.

The news that Amsterdam has overtaken London as a financial trading hub reminds me that it in the 17^th century it was a centre of financial innovation (William Goetzman’s book ‘Origins of Value’) and that innovations in finance follow a pattern where early investors and pioneers (especially those who own the infrastructure) do very well, asset prices rise in a parabolic way and this attracts the greater investing public (the democratisation phase), a crash or scandal ensues and regulators arrive late to the scene of the accident.

The derivatisation of the US housing market in the early 2000’s is a good example. Cheap financing meant people could afford more, and bigger houses, until the entire market collapsed.

The study of risk is now a large field. Bodies like the OECD produce a risk scorecard that countries can use in risk assessment, while a good number of institutional and hedge fund investors have become very good at risk management. The coronavirus crisis offers a particular lesson in risk assessment, crisis management and in risk absorption (through fiscal stimulus, the organisation of public services like healthcare and the provision of vaccines, not to mention human adaptability.

The tragic and dramatic experience the world has endured with the coronarvirus may – following on a chaotic Trump Presidency, Brexit and other catastrophes – convince many that the level of risk in the world has risen. I would say that it has not – though two risks loom very large – climate damage and indebtedness – and the factor that makes them distinct is that they are ‘democratisied’ or that they affect increasingly large numbers of people.

If there is a lesson here for politicians and policymakers it is not to permit the democratisation of the twin risks of indebtedness and climate damage (if you graph world average temperature relative to its long term average with world indebtedness relative to its average, the two lines fit nicely over each other).

The telling example was the response of euro-zone countries – notably Spain and Ireland – to their respective financial crises in 2011. In both cases bond market investors, and the eurozone itself, could have borne the risks associated with mounting indebtedness but, ultimately those risks were borne by government balance sheets, and by extension households.

Concretely, what I have in mind is perhaps two principles. That policy makers think not only in terms of the probability of specific risk event outcomes (i.e. from floods to wars) and their potential riskiness, but how those risk outcomes are distributed. Markets work like this – risks never go away, they are simply being continually redistributed across different investors and time frames.

The second element is that policy focuses more on realigning the risk of an event (e.g. polluters) with the fortunes of those who ‘produce’ that risk. In China, the former chairman of Huarong Asset Management was recently sentenced to death for gargantuan levels of corruption. This is accountability taken to extreme levels, but for the Biden administration and many governments in Europe, who foreswear a belief in ‘resets’, ‘stakeholder capitalism’ and ‘ESG’, the democratisation of risk is something they need to fight against.

Have a great week ahead

Mike

‘The euro is like a bumblebee. This is a mystery of nature because it shouldn’t fly but instead it does…after the financial crisis…the bumblebee would have to graduate to a real bee’ Mario Draghi, London 26/7/2012.

Mario Draghi’s ‘bumblebee thesis’ of the euro never got the attention it deserved, largely because a few minutes later in his speech he mouthed the words that he was ‘ready to do whatever it takes’, adding ‘believe me, it will be enough’.

That Draghi went from David Attenborough to Dirty Harry in a few minutes arguably saved the euro and transformed the ECB into a giant monetary battleship whose financial vortex swallowed all credit risk across the euro-zone.

Like Ben Bernanke in the USA, Draghi’s launching of an emergency policy also launched a mindset. In the USA Janet Yellen, and then Christine Lagarde in Frankfurt carried on down the road of intervention. As a result, Greece and Portugal no longer (for the moment) have to worry about paying interest on new government debt issues, whilst France has investors queuing up to pay it for the pleasure of partaking of its vast debt mountain (10 year yield of minus 0.25%).

Draghi’s ‘do whatever it takes’ became the glue that held the euro-zone together – to the extent that the coronavirus crisis failed to create another existential crisis of the euro. However, another side-effect of the ECB’s bond buying program is that it took the pressure off governments to enact the economic reforms that are much talked about in Brussels. Partly because of this eurozone capital markets reform has stalled, its banking sector is relatively weak (as evidenced in valuations) and most troubling of all, the trend growth rate of the euro-zone is too low for comfort.

Italy is a case in point. It is often excoriated by critics in London, Brussels or Berlin for its lack of reforms – the same critics often ignore the suppleness of the Italian political system, the relative steadiness of its fiscal situation and the strength and dynamism of the northern Italian economy. Having said that Italy is not regarded as a model to follow.

What is astonishing then, is the willingness of Mr Draghi to dive into the marmite of Italian politics, and in a way take on the consequences of his own monetary actions in accepting the mandate to become Italian Prime Minster (Yellen has done the same in the US). Though, at the time of writing he has not yet found the support to form a government, his move is a brave one.

It is also a great opportunity for Italy, and Europe. Mr Draghi is very capable (holding a PhD from MIT where former PM Conte had ‘refined his education’ near but not at New York University).

Draghi is also a leader, having manifestly convinced close colleagues, European leaders and many others to share his monetary odyssey. In a previous note I wondered if he might return to Italy to manage AS Roma or become President. The role of Prime Minister seems beneath him and it should be said, risky.

Italy has a history of having many prime ministers (now 30 in the last 73 years, and 37 from 1861 to 1921), with some of them like Mario Monti taking the role as a non-political technocrat. Part of me thinks that politics is no place for gentle technocrats, not perhaps for successful businesspeople (Silvio Berlusconi of course is the exception here).

In that way, Draghi will have to cultivate a style that sees him rise above the rise of everyday politics, not to mention the many populists amongst them, and try to connect with everyday Italians. I am no expert on Italian life but like many countries edging towards the end of the tragic COVID crisis, its people are in need of leadership and, an economic recovery. Again, my naïve, non-Italian perspective is that they can not do better than Draghi.

If Draghi had a policy wish list it might go as follows – boost the trend level of economic growth across Italy, upgrade its education system from schools to universities and transform Italy’s foreign policy stance to one that is less Russia friendly, more involved with Mediterranean neighbours like Greece.

His appointment may also help to mend Italy’s relationship with Brussels, by ensuring that it is represented by one of the most credible European politicians. Moreover, as the post Merkel era approaches, Draghi can become the dominant leader on the European political scene – he took over the Italian Treasury when Emmanuel Macron was a 14 year old school boy.

So, the surprise of 2021 could be Draghi (again) and a renaissance for Italy? I wish him the best of luck.

Have a great week ahead,

Mike