The Last Emperor?

Much of last week was spent in Rome, which is overwhelming in its sights, though the highlight for me was the peace of the Appian Way. Rome is also rich in lessons on civilisation, politics and strategy – many of which appear to be lost on leaders today. In that respect it is a good place to consider the rise and fall of nations, a phenomenon that is gathering pace.

More broadly if we consider the biggest, most powerful cities in the history of the world, Rome stands out. Many of these great cities— Babylon, Nimrud (south of Mosul), and Alexandria—were the focal points of great civilizations but, sadly, have been in the news for the wrong reasons. It is surprising how many Chinese cities have been “the biggest” through time, with cities like Nanjing, Xi’an, Hangzhou, and Beijing dominating the period from AD 600 to AD 1800. London briefly took over during the nineteenth century, and the biggest-city baton was then passed to New York.

Overall, if we adjust for world population and perhaps level of development, Rome has a very good chance of being considered the world’s greatest city. At the time of the birth of Christ, Rome had one million inhabitants. Scaling for demographics, Tokyo, to match this, would need to have over seventy million residents today. Rome is also impressive in that it was the world’s dominant city for some five hundred years.

Yet, the empire it spawned (which endured for twice the typical 240 year lifespan of empires historically) is today often used as a template for the potential decline of America (or, together with the example of ancient Greece – the rise of China against the relative decline of America).

This in turn should lead us to think of Edward Gibbon’s The History of the Decline and Fall of the Roman Empire, which is a reference point in economic history in general and in declinism specifically. Gibbon sought to explain why the Roman Empire disintegrated. His thesis is that Rome became complacent, its institutions were weakened, and the leaders in Roman public life lost their sense of civic virtue, or what Niccolo Machiavelli later simply called “virtu”—the good of the republic or common good.

Since Gibbon, other writers have turned declinism into a deep furrow. Germany’s Oswald Spengler controversially wrote The Decline  of the West in 1918, and in recent years in Europe we have had Thilo Sarrazin’s book Deutschland schafft sich ab (Germany gets rid of itself ), followed by books like Eric Zemmour’s Le Suicide Français and Michel Houellebecq’s Soumission, not to mention a raft of similar titles in the US.

Many of these books are impatient, and make the mistake of thinking an ‘empire’ ends with an event whereas in reality it is more of a slow process, the economic signs of which may be a failure to enhance productivity, falling human development and a failure to keep up with new technologies.

Yet, if the history of Rome and Gibbons’ assessment of it in particular are a guide to the runners and riders in today’s multipolar world then what else should we look out for?

To start with I would watch out for a breakdown in ‘fraternity’ or social cohesion as characterised by for example a rise in inequality. In the USA wealth and income inequality are close to the extremes of the 1920’s. The share of income of the top 1 percent is now back to levels not seen since the 1920s. In New York, the ratio of the  income of the top 1 percent to that of the other 99 percent is 45 to 1. A good portion of this gap is driven by high executive pay, which across the range of industries in the United States averages three hundred times the pay of the average worker. It is hard to find such an extreme relationship at any other time in history. In Rome in AD 14, for instance, the income of a Roman senator was one hundred times the average income, and legion commanders received an income of forty-five times the average!

A second is political agitation, which is manifest in many countries. My personal, very amateur view is that political systems that allow themselves to change and evolve, will avoid extreme outcomes. The disappearance of old political parties and the rise of new parties and a new ‘centre’ in France and Germany are examples. In contrast the lack of flexibility of two party systems in the UK and US has produced extreme political outcomes.

Perhaps a more pertinent argument would be to relate ‘strong man’ governments to the Roman system – where the increasing concentration of power around one man (Russia, China) could produce a catastrophic strategic error. In that regard, whilst the declinists focus their attention on the US, it is worth spending more time thinking about China.

The dominant size of Chinese cities from the period 600 to 1600 AD should at least inform those outside China that the China Dream is based on a desire to reclaim its historic role as an economic superpower and, to date its economic decision making has been very good. To that end, China has a new, economic empire. It is yet an unsure geopolitical player with few allies in Asia and the wrong ones (Russia) further afield.

Its most fragile aspect is the concentration of power around Xi Jinping, which will be tested by China’s coronavirus crisis and by the socio-political effects of slowing growth and demographics. He should bear in mind that for all the years the Roman Empire endured, the average ‘term’ of a Roman emperor was only just over five years, seventy percent of them dying of ‘unnatural’ causes.

Have a great week ahead,


The End of Experts?

Henry Parker Willis was an understated, underestimated though very important figure in central banking. An academic and expert in finance, he was a key architect of the Federal Reserve Act in 1913 and the first Secretary of the Federal Reserve Board that became what we now know as the ‘Fed’. He played a role in the monetary structure of other countries, notably advising the Irish government on its post-Independence monetary system. Interestingly, he was the PhD adviser to Charles Kindleberger, known amongst other things for perhaps the best book on financial market bubbles (‘Manias, Panics and Crashes’) and architect of the Marshall Plan.

Willis’ decisive approach in crafting the Federal Reserve Act was to favour the overseeing of monetary policy by experts, rather than more politically oriented actors. He may not have realized it but this legacy is a very important one, increasingly so today.

World affairs is largely divided between experts appointed to judge independently over matters from advances in healthcare, monetary policy and the formulation and prosecution of the law on one hand and elected or politically aligned officials who ‘decide’ on the other. The medical response to COVID, the performance of Europe’s technocrats during Brexit and the alertness of many Western militaries in the context of the invasion of Ukraine are just a few reminders that in a complex world, we need experts.

At the same time, the case for the ‘deciders’ is more mixed, especially with the rise of populism – which by definition pitches experts against political decision makers. What is worrying, especially in the UK is that the ‘deciders’- who typically offset their lack of specialized knowledge with popular legitimacy – are becoming less accountable. There is plenty to write on this, but I will save it for another Sunday.

What worries me are the ‘experts’ and the fact that in many cases they are being left behind by the complexity of our world and are not adjusting their processes to it. Central banking is the prime example.

Notwithstanding the side effects of the invasion of Ukraine, macro assets classes are behaving in an increasingly wild and disorderly manner – take the yen, government bond yields and most commodities as examples. What is grave is that each of these assets impacts livelihoods and businesses in a very real way.

It is now well recognized that the dislocation in markets is caused by the blind, over eager accommodative monetary policy of the COVID period, which itself was conditioned by the over application of QE in the 2010’s. QE became an elixir, suppressing interest rates, boosting markets and wealth.

It also caused inflation, first in asset prices, then commodities and now, aided by supply chain blockages, across the board. In the view of many, and I agree, the Fed and the ECB are chasing a massive policy error, and doing so in an increasingly violent way (threats of 75 bps rate hike at the May Fed meeting).

The risk of policy carnage is high, and the fallout of this could well be severe. In the aftermath, the ‘deciders’ will likely pin all the blame on the ‘experts’ and ask what might be done differently.

I have a few suggestions, starting with diversity. Central banking is not a diverse place, made up mostly of middle-aged males. What is more telling is that all of these males, and the growing number of females that join them, are formed in the same way and look at the world in a similar fashion.

Most of the members of the policy committees of the Fed and ECB have spent their careers in central banking circles, with the odd jaunt in and out of academia. As a result there is little diversity of experience at the top of the main central banks, and central bankers are not well socialized to the implications of their policies on the outside world. Few have ventured forth to declare to the public that whilst inflation across much of Europe is pushing 7%, the ECB’s models say it should be 2%.

In the future, in addition to greater gender diversity, it may well be useful for central banks to appoint decision makers with a greater variety of experience across industry and other related walks of life.

A really important sub-element here is to appoint policy makers with a sense of the consequences of their actions, and an ability to alter their view when it is wrong. Forecasting as they say is hard, especially when it is about the future and to a large extent the role of the central banker is about mapping and creating a vision of the economic future.

Where this vision jars with reality, policy makers should ideally be conditioned to rethink their positions, or be equipped with simple devices like the Bank of England Governor’s ‘letter to the Chancellor’ (the Governor must write an explanatory letter to the Chancellor if inflation deviates from target by over 1%). There is also much that central bankers can learn from dynamic decision making (the Ukrainian military is a good example) and from new ways of organizing expertise (decentralized organisations).

A further innovation, at least for the Fed and ECB is to give local central banks more autonomy over their economies. This will take a degree of experimentation but the idea is that depending on the structure of an individual economy (compare Ireland and Greece or Texas and Kansas), specific macro-prudential policy levers could be developed to cool or speed up local economies in the context of overall monetary policy.

My pessimistic conclusion is that many of these and other suggestions will have to wait until the next recession to get a hearing, when central banks start to prosecute QE4 to undo their most recent mistake.

Have a great week ahead,


From Left/Right to ‘Upstairs/Downstairs’

A couple of weeks ago I mentioned the French adventurer and writer Sylvain Tesson’s book ‘Berezina’ in the context of Ukraine. This week I have recourse to one of his telling quotes that ‘La France est un paradis peuplé de gens qui se croient en enfer’ which, given my perch overlooking the Seine, I fully subscribe to. I often think that if the residents of Bordeaux were transplanted to Birmingham or Seville, they might lament the public goods they had left behind.

The problem is that the residents of Bordeaux and other French cities are attached to their home country and deaf to the argument that the grass is not greener elsewhere. More worrying, well over half of the French electorate has voted for ‘anti-establishment’ candidates in the recent Presidential election, and warnings grow louder that Marine Le Pen might be elected President.

My personal view, based on what I see around me and the sense that while French people express themselves vividly, they are not willing to vandalise their country’s economy and geopolitical standing (unlike Brexit), is that Emanuel Macron will enjoy a second term. Still, it is hard not to feel uneasy about this prediction in a world where logically inconceivable events occur with growing frequency.  

Sitting betwixt France and the outside world, one common misperception I find is the view from outside that France is a chaotic, badly run state. In my view it is the opposite – a complex, centralised, Cartesian machine run by generally competent people. To this end, the person at the very top of this machine must be steeped in its workings, which is why it seems to me very difficult that an ‘outsider’ could become President. For example, the prime minister Jean Castex is not a politician in the traditional sense, but rather a technocrat who knows the machine inside out.

In addition, anyone wanting to undertake a political revolution and take on this machine, can only do so from inside, as Macron has demonstrated.

A side effect of this centralised ‘machine’ is that it produces an elite class, and a broader elite that clusters around Paris. In my experience, France is a more elitist country than say the UK or certainly than the US. Very few foreigners run French companies, and the same is true for  women, and in general for those who have not attended grandes écoles. Unlike say the US or UK, the ‘elite’ labour market is still tilted towards being part of a cabinet.

Now the idea of this impenetrable elite has become part of the political debate. This is reinforced by the fact that with the French state now so large (government spending is 56% of GDP) and debt high, that there is little fiscal space, so much of the political argument pivots to the question of identity.

To this extent, like many other countries, the French political spectrum is shifting from a traditional Left/Right axis to what we might call ‘Upstairs/Downstairs’ where people with different backgrounds and occupations feel that they increasingly have different levels of relevance in society. This configuration is broad but may well make sense to the way a Tunisian software programmer or a Lille based manual worker views French politics.

The important question now is what Emmanuel Macron and the French state will do about this growing divide in the next five years. The likelihood of a disparate, divided parliament and the competing interests of voters on the left and right will make domestic policy very difficult, and Macron might well concentrate his efforts on foreign policy.

The challenge, in my Irish eyes, will be to make French politics more democratic (the EIU rates France as a ‘flawed democracy’ along with the USA for instance) and manifestly more grass roots oriented. Some measures, such as opening up ownership of the press are unlikely to happen, but social media may eventually circumvent this.  

There will likely be a debate on constitutional change after the election, and in terms of France’s political structure it might do several things – hold parliamentary elections before the Presidential one, give much more political and fiscal power to the 13 regions in France, and implement a Citizens Assembly in the sense that Ireland has (i.e. that can help to frame laws and referenda).

In the past, efforts to capture the views of the ‘downstairs’ have been far too haughty and theoretical (I am thinking of Giscard). This is part of the problem – the elite are by design haughty and cultured. A channel needs to be found to give French people a purchase over the politics of their country that translates into clear, practical improvements in their everyday lives. If that doesn’t happen, then an outsider from the ‘downstairs’, with far more talent than Marine Le Pen will step forward and take the Elysée.

Have a great week ahead.


And now, the portfolio crisis

In early September 1939, the financial press (i.e. Economist magazine) wrote of the robustness of financial market indices, notwithstanding the outbreak of war, and the carnage that would come.

Usually, in less dramatic circumstances, markets have a tendency to fall in the buildup to geopolitical conflict, and then rally thereafter. To date, this pattern has held, though like the aftermath of the outbreak of the COVID pandemic, there is a moral dissonance between human suffering and rising equity prices.

Two years ago, the COVID related rally in prices (markets doubled from their COVID lows) the rationale was that aggressive fiscal and monetary policy, in the context of an accelerated digitization of economies, would boost valuations.

Now, the hangover from that stimulus – a multi-decade high spike in inflation is undercutting bond markets, and arguably should also prove more demanding for equities. Whilst new technology driven trends remain in place, the other change in the narrative is that the invasion of Ukraine has signalled the end of globalization.

This view is ‘late’, globalization has been faltering since the mid 2010’s and has been undercut by events like the snuffing out of democracy in Hong Kong and the failure of the large nations of the world to collaborate during the COVID pandemic. Many of the boons of globalization – low inflation, peace and the spread of prosperity – are now being reversed.

In markets, there are several lessons.

The first, with respect to emerging markets in general and Russia in particular is that the idea of resilience or institutional quality is important. Russian assets have long traded at a valuation discount to other emerging markets because investors were distrustful of governance there. In future, I expect that both bond and equity investors across emerging markets will pay greater attention to the role of factors like institutional quality, democracy and the rule of law when making investment decisions with respect to emerging markets.

In other asset classes, the spike in inflation and the corresponding sell-off in ‘safe’ fixed income is producing a portfolio crisis, the amplitude of which has yet to be fully appreciated. For the past twenty or more years (during globalization) the wealth and asset/investment industries have invested trillions of dollars of client money based on corresponding chunks of equities and government bonds (notionally a ‘60/40’ portfolio).

The ‘death of inflation’ in the context of high growth during globalization meant that both asset classes performed, and then the advent of an overly long period of quantitative easing supported both asset classes, such that for the past ten years the average return on equities was close to 11%, well above the average of 5.5% over the last 100 years.

This era of ‘easy’ returns is likely now coming to an end, and with it the credibility of the investment industry. Whilst it is well known that few investment managers can consistently earn above average returns and fewer still take the kinds of risk needed to do so, many rely on them to protect wealth. The sell-off in ‘safe assets’ like government bonds undercuts this and begs a number of questions, notably because the performance of bond and equity prices has become positively correlated. 

First, there will be more downward pressure on fees for investment funds (especially hedge funds, down 7% on average in the first quarter) and likely more consolidation across the sector.

Secondly and more importantly, there will be a debate as to what constitutes a ‘safe asset’ in the context of rising inflation – the issue being that most portfolio frameworks only permit tiny holdings of assets like commodities and inflation protected bonds.

Some investors believe that the answer lies in private assets, but here again there are several issues.     In the developed world and much of Asia, real estate prices are extremely high (relative to income and GDP) and will likely not withstand rising interest rates. In the US, with long-term mortgage rates rising to 5%, housing related stocks (and increasingly banks). My sense is that much of the rest of this year will be dominated by concerns that the housing market has peaked and will ‘roll over’.

Second, and relatedly private capital assets, notably private equity where there is a large amount of leverage deployed, may also struggle in terms of performance. In venture capital, valuations have followed public markets down, and if you believe in technology driven megatrends (in fintech, health tech and supply chain tech), this may well be the most interesting time to build exposure to high growth companies, the snag for many investors is that access to these opportunities is difficult to realize. 

In coming weeks, my sense is that the market narrative will focus mostly on negatives – Europe’s strategic dis-engagement from Russian energy in the context of its brutal war on Ukraine, the risk that high inflation leads to political instability in countries as diverse as Peru and France and the possibility that Asia is entering a recession (lead indicators in South Korea and China are pointing downwards).

While these events are important in terms of determining the direction of travel of the economic cycle, they should not disguise a growing crisis within investment management. Many in the industry speak about the end of globalization but do not map that on to the viability of their businesses, not the products they sell to clients. 


In 2012, the writer and adventurer Sylvain Tesson commemorated the bi-centenary of Napoleon’s retreat from Moscow by driving (in a sidecar with friends and much vodka) westwards from Moscow back towards France, replicating the journey taken by Napoleon’s disintegrating army.

A crucial point in that journey was the Battle of Berezina (Belarus), where the harassing Russian army chased the French towards the ice filled Berezina River. Heroic work from French engineers meant that a good number of Napoleon’s troops successfully crossed the river, only to be faced with cold, starvation, disease and further attack by the Russians.

The calamity of Berezina was a final catastrophe for Napoleon’s Russia campaign, reducing perhaps the greatest army ever assembled from 600,000 to about 110,000 survivors and curbing Napoleon’s ambitions of European dominance. The only comfort for Napoleon was that the Russians had not pressed him harder, fearing that the end of the Emperor would lead to an ‘even more intolerable’ domination by the British.

Reading this account, some might be tempted to say that in the context of the invasion of Ukraine, little has changed in Europe but the fact is that this war is a terrible interruption to multi-decades of peace and successful diplomatic relationship building (think of France and Germany or the Good Friday Agreement). What is also remarkable is the way in which many of Napoleon’s more positive contributions – in education, law, civil service and infrastructure still define how France operates. It is the world’s fourth military power and the sixth largest economy, or fifth, depending on the pound.

In contrast, Putin’s Russia is hollowed out on many of these variables, and regular readers will know that I often lament the way ‘strong man’ countries like Russia and Turkey allow their political economic infrastructures to atrophy to the point of inevitable crisis. The risk for Russia now is a deep economic malaise and capture by Chinese capitalism.

In the shadow of Napoleon, the question that goes begging is beyond this terrible war, what changes will we see to the geopolitical map of Europe. Bearing in mind that this was the invasion few thought would happen, we should answer this question in an imaginative way.

In the near-term elections this weekend in Hungary will attract attention, notably because it looks likely that Viktor Orban will extend his reign. Orban, at one time an advocate of the ‘open society’ has made a dark and mysterious transition during his political life, towards ‘illiberal democracy’ and somehow magnetically drawn towards Russian power and money (the FSB is believed to be well implanted in Budapest).

In many respects what happens next will be a test of the EU rather than Orban. Brexit has opened up the possibility that countries can leave the EU and the new emphasis on ‘European values’ by the EU makes Orban’s Hungary a very difficult member. My sense is that in the aftermath of the invasion of Ukraine there will be more calls to penalize Hungary (for its closeness to Russia) and to find a mechanism to force its full or partial exit from the EU.

Indeed, some of Hungary’s neighbours may also face greater scrutiny – Serbia may find its path to EU membership slows to a halt, and Austria, a seemingly respectable EU member will be pushed to clean up its intelligence services, banking, legal and property markets to rid them of all Russian influence.  

On the more positive side, Poland is now a political force in Europe, and has an opportunity to make peace with the EU following estrangement over ‘European values’. Together with the geopolitical ‘tigers’ in the Baltic states, I expect Poland to try to steer a more hawkish European approach to security in general and Russia in particular. One ally in this regard will be the USA.

At some stage people will begin to question the viability of Russia’s presence in other countries, from the role of Russian mercenaries in African countries (which we discussed in ‘The Man on the Horse’), the many ‘Stans’ notably Kazakhstan, and in Belarus.

I am simply not familiar enough with the situation in Belarus to understand why there has not been an attempt to topple Alexandr Lukashenko (there has been some civil disobedience, sabotage of Russian trains by railway workers and reports of near mutiny in the army). A change of regime in Belarus would be a very speedy way of destabilizing Russia, if someone wants to have a crack at it.

This is one potential catalyst that could accelerate a geopolitical crisis and reacting of the political map of to the east of Europe. I have not even yet mentioned many of the bigger trends – the remaking of energy policy in Europe and a coming revolution in defence and security policy.

In a week where the head of French military intelligence was fired, for making the same mistake as Napoleon’s army in misreading the Russians, the world we are entering into will produce some very sharp and surprising changes in alignment and political identity across Europe and beyond.

Have a great week ahead,