The Olden Times

It may be that as I get older, I become nostalgic for what my children call ‘the olden times’ (when I was a twenty something). In that spirit a friend, with much the same age and background came to visit recently, and we spent some time discussing ‘university and the research methods’ of the 1990’s economics field.

At the time, in order to undertake quantitative research project, I had to write a 15 metre long computer program, which like a good dish I would leave overnight whilst the program would (from my local faculty computer) dial into a computer at the London School of Economics, borrow some data and analyse it, returning raw regression results to me the next morning (statistical packages like Stata and EViews would follow later).

If there was a problem with either the data or the program, I had to wait till the next evening to rerun the program. That computers in different countries could talk to each other, was relatively novel. Today, such an operation might take a fraction of the time.

Back then, if one wanted to consult a piece of research, often the fastest way of doing so was through inter library loan – a system where a written request was made by one library to another in a different university, and where a photocopied version of the research paper was sent by post. Little wonder then that when Netscape arrived, people tended to conceive of it as a ‘world library’.

That all this happened in the mid to late 1990’s will date me, and I hope show younger generations that research and discovery existed before social media and were generally more interesting as a result. Travel and communication were different also. I can recall relying on pigeon post to organise nights out or arranging holidays with promises to ‘see you on the Charles Bridge (Prague) at 7pm in three week’s time’.

Before I sound too sentimental or old fashioned, I want to stress two points. The first, which I also underlined last week is that humanity is at a crucial point where it is being challenged by technology – our ability to contemplate is challenged by over-stimulation, and our sociability is challenged by the virtual.

The second point is that what really had me thinking about the ‘olden times’ is the bond market. The mid 1990’s was really the last period of sustained high interest rates (having risen sharply in 1994 the Fed Funds rate stayed above 5% till the recession in 2001).

Further, in finance and economics textbooks of the time, as well as banking valuation models, one was always told to use a reference long bond yield of 3.5%.

In today’s increasingly nervy market climate, where inflation in both Europe and the US is spiking to multi-decade highs, the possibility of a fed funds rate of 1% by next year seems profoundly off-putting. One can only imagine the reaction if we went back to 5%, á la the ‘olden times’.

Without going through the boring exercise of trying to forecast inflation (my view is that service price and wage inflation will stay sticky for the next year, though commodity inflation – oil, semiconductors, lumber etc – is peaking), I want to note that the most interesting element of these multi-decade turning points is the psychological one.

People like me whose view of financial theory and practice was formed in the period up the global financial crisis, have difficulty understanding the co-existence of 7% headline inflation, zero interest rates (and 1.7% long bond yields) and record high stock market valuations. Against the benchmark of decades of financial history, it makes little sense, except that central banks decree that it does.

On the other hand, younger people, who may have come into markets since 2007 will find all of this to be normal – rates will stay low, returns will be high and liquidity can only but be plentiful. This is perhaps where the greatest risk lies in markets, that a significant generation of investors are unused to the kinds of forces that have riled economies in the past (rising inflation and subsequently, interest rates).

The other difficulty, which I find relegated in the broader debate over inflation and supply chains (a good overview from the CFR here) is productivity. Once the economic fog of the coronavirus crisis lifts, governments will have to zero in on productivity as the driver of growth. My stories from the ‘olden times’ are good illustrations as to how far computing power and the data industry have come, and the extent to which they have contributed to large productivity gains.

However, what is remarkable about the past fifteen years is that in certain large economies, Italy, Britain and even the US for instance, productivity has collapsed. It is not clear why this is the case – low investment, inefficient or lopsided digitization or long (and thus inefficient) business cycles are some of the factors I can think of. Neither is it clear to what extent the many new technologies (see last week’s note), and approaches to work (zero-hours, work from home) we are witnessing will boost productivity, or turn out less productive humans.

This will be the biggest economic policy challenge of the next decade.

Have a great week ahead,


Mind Games

In the past year the share price of Apple has outperformed Bitcoin, and Tesla’s share price which has hitherto been umbilically linked to bitcoin, has been far more jumpy (over the last two years it has had 29 one day moves of more than 10% as compared to a mere 17 for bitcoin). 

These insights beg lots of questions, about market functioning, investor appetite and simply, whether bitcoin is now old and dull. There is a debate that instead of being a risky asset across the spectrum of broad asset classes (bonds, equities etc), bitcoin is simply a safe asset within a highly volatile crypto world, though the fact that bitcoin has fallen 15% since I started writing this note nods to the former.

More importantly, it might be that bitcoin is out of fashion and is being replaced in the mindsets of investors by other speedy innovations. Recall the memorable line from a Davos speech by Canadian Premier Justin Trudeau where he said ‘The pace of change has never been this fast, yet it will never be this slow again’.

The spirit of this phrase is caught by the many year ahead forecasts from futurologists, economists and thinkers. Having made my own forecasts before Christmas I have the benefit of sitting back and reading others, one excellent example being Azeem Azar’s weekly ‘Exponential’ email, and a growing number of other notes that try to summarise what is bubbling up.  

What is noticeable is that there is a strong sense of the ‘Roaring 20’s’ in threads of structural trends that analysts see taking place in the aftermath of a pandemic. Chief amongst them is a focus on nuclear power as a substitute to fossil fuels, not to mention the entire greentech complex.

If the forecasts and thought pieces I have mentioned are a good representation of where capital will flow, then a new, exciting infrastructure is being built – in computing, logistics and finance to name a few sectors that happen to be united by data intensity. I might say that having witnessed the bubble, the only value of an asset bubble is that it leaves behind it an important infrastructure (telecoms in this case).

My three key takeaways from parsing many reports, is that whilst on one hand exciting, the central message of the new emerging technologies is that they will lead to a historic and potentially overwhelming challenge to humanity, and in particular to our minds and sociability, with potentially very impactful health related benefits.

Without exaggerating, I feel that 2022 is a threshold year when innovative technologies make our bodies healthier but invade our mental spaces.

To first take a collection of the most popular trends, they cluster around web 3.0, NFT’s, metaverse, social media and crypto currencies. In a brutal way that means that we will all spend more time out of the light, hunched over phones and doubting whether the people and things we have encountered in the metaverse are real at all, and whether it was worth investing USD 10,000 in a metaverse apartment.  

This trend is historic because for the first time, and with only the force of religion (and maybe politics) as a rival, humans will spend time and enjoy experiences in an unreal world, and for some this will come to dominate their existence. Two very obvious side-effects will be sociability and mental health.

In previous bulletins I have remarked that mental health needs to become a core pillar of how health services are reimaged, and it may be that the metaverse is the trigger (ironically it is used to help soldiers overcome post traumatic stress disorder).

Also on the positive side, the enormous advances in medicine and health tech – much of it spurred by the coronavirus crisis, will have a positive effect on humans – pending at least two factors, that the bounty of these advances can be as widely spread as possible, and that the ways in which they are delivered is rethought in the sense that healthcare systems need to change.

One inspiration here, and my second point, is that the rising attention that technologies like blockchain have cast on decentralized autonomous organisations – effectively organisations run by a coded relationships between disparate parties, as opposed to a centralized or even hierarchical bureaucracy (i.e. healthcare systems). While it is a stretch to imagine that today’s healthcare systems and other institutional arrangements can be quickly replaced by decentralized forms, there is much that blockchain can do to cut that bureaucracies (closer relationships between doctors, patients, billing and other parties like pharmacists).

A third related, threshold change in technological influence that is getting a lot of attention and capital, quantum computing (70% of startup level investment in tech hardware goes to quantum computing projects). Governments, notably China and the European Union are also spending heavily on it. In brief quantum computing is revolutionary in that it uses different arrangements of ‘bits’ to produce more powerful processing. Though there are not yet many applications of quantum computing it has the capacity to dramatically change aspects of healthcare, finance and industrial sectors like chemicals.

Having already witnessed historic, positive changes that resulted from the pandemic – the general patience and obeisance of the world’s population, the acceptance of working from home and the power of vaccines, we are now crossing a threshold in terms of how technology will change our bodies, as well as our minds and the ways we relate to the world.

Have a great week ahead,


Death to Democracy?

One of the many books that came through the O’Sullivan chimney this Christmas was Blake and Mortimer’s ‘The Last Swordfish/Le Dernier Espadron’. The Blake and Mortimer comic book series is now under new authorship but started in Belgium (close cousin of Tintin) in the late 1940’s and like the earlier John Buchan books for example, they speak to a caricature view of Britain, its upstanding male role models, along with doses of racism.

Similar to books like Greenmantle or the Three Hostages (Buchan), the Blake and Mortimer ones have a recurring theme of good versus evil, the possibilities of technology, and the contest between the free and tyrannical countries.

Reading ‘Le Dernier Espadron’ my first thought then is that in Britain today many of the leading politicians (Gove, Johnson etc) remain ideologically and sociologically planted in what they deem the socio-political roots of early twentieth century Britain, á la Blake and Mortimer, whilst showing none of the competence, bravery and virtue of those characters (and those of Buchan and similar writers).

This is manifesting itself not only in a crisis of identity and relevance, but also one of democracy. Britain, in its own way, is rightly admired as an exemplar of democracy and strong institutions, though the current government has done much to erode this, such are the temptations of populism.

At a time when we are faced with many great risks – climate change, war in Eastern Europe and the COVID pandemic to name a few, my greatest fear is that the core of the democratic world is ebbing.

Another example from this week’s press (undoubtedly ahead of Jan. 6) is the front cover of the Economist (always a poor predictor) that shows the Republican Party in the USA ‘walking away from democracy’. An even more troubling, recent example is the de facto snuffing out of the free press and opposition in Hong Kong. It has been subsumed by China, with barely more than a squeak of protest from democratic countries.

With the world setting off on a new chapter (post-COVID, multipolar) that is marked by dazzling technologies, financially healthy consumers, we remain in a democratic recession, to use the political scientist Larry Diamond’s term.

This idea is backed up by last year’s EIU Democracy Index which shows democracy in poor health (the Index is at its lowest since 2006, and only 8% of the world’s population live in ‘full democracies’). Similarly, Freedom House shows that last year was the worst year since 2005 (when they began measuring the spread of democracy) for democracy in the sense that the number of countries whose democracy weakened versus those where it improved (-45) is the highest on record.

In both cases, the spread of democracy halted in the aftermath of the global financial crisis and then deteriorated from 2015 onwards. This is a key watershed. Under globalization the idea was that democracy would spread out from the democratic countries to the rest of the world, now, in a multipolar, contested world, democracy is simply one of a number of competing models or sets of values (the diplomatic spat between little Lithuania and China is worth watching here).  

It’s gloomy stuff, though as I have flagged in my last note of 2021, democracy in Europe is in decent shape as we approach elections in Italy and France. One reason for this may be the fact that the party system in countries like France, Germany and Italy is supple – within limits (funding and vote thresholds) new parties can be formed and rise to power whilst old ones are quickly distorted.

In the medium to longer term this produces political vessels that push extreme views to the edges of politics and makes the centre a contested political space. Imagine if the Tory Party had been allowed to split in the 1990’s, Brexit would likely never have happened. The same is true in the US.

I am not quite sure what it will take to break one of the four main Anglo-Phone political parties, though ideological divides within them are the most stretched ever. It may be that an aspiring breakaway leader (Tom Tugendhat in the Tories or Liz Cheney in the Republicans) will need the help of large (social) media organisations and wealthy donors, a compromise that is itself the antithesis of democracy.

I find that struggle between the ‘Bush’ and ‘Trump’ Republicans fascinating, not simply in terms of the spectacle but also the entry of new people to the fray (such as David McCormick of Bridgewater as a potential Republican candidate in the Penn. Senate race).

Against this backdrop, where the consensus view is that the American body politic is busy destroying democracy, it is worth spending time thinking about the non-democratic world, where in notable cases ‘managed democracy’ has been replaced by the idea of mediaval ‘strong man for life’ (Russia, China and Turkey). Turkey, like Lebanon, shows that people’s patience for the erosion of democracy has limits, and at a point, is linked to banking systems (there has been massive deposit flight across Turkish banks).

China is fascinating here. Growth is slowing, Hong Kong is a depressing vision of the ‘China Dream’ and as we move through 2022, the big story may be mounting opposition (within the Communist Party) to the policies of Xi Jingping – if we ever get to hear about it. 

2022 – What’s Next?

For anyone who writes on the state of the world, the approach of Christmas brings with it the near obligation to sketch out the events and happenings of the year ahead. Last year, I took a traditional though cynical approach when I wrote Drinking with Dickens, the aim of which was to imagine what a vision of the year ahead would look like, whilst under the influence of some of Charles Dickens favourite drinks (i.e. ‘Smoking Bishop’). In the end, some of my comments (‘higher inflation’, ‘tension in Asia’ and ‘Boris resigns’) came close to the mark.

The Folly of Forecasting

This year, I have a less weary approach, partly because there are so many new, emerging trends, partly because the world is opening up travel wise and partly because there is so much at stake. The real world remains stranger than fiction, though to join the two I have added some book recommendations.

JK Galbraith wrote that the only role of forecasting is to make astrology look respectable, and to a large extent he was right. Rather than throwing darts at imaginary future events, my sense is that the best way to proceed is to extend trends and where possible, to try to spot turning points.

To recap on the year, the topics that grabbed my attention were China’s difficult relations with the outside world, ‘the democratisation of risk’ (note that the share price of brokerage Robinhood is down over 60%) and the rise of cryptocurrencies, threats to democracy, rare places and materials, emerging economic models, strategic autonomy, the possibility of new world institutions, identity politics and inflation. Most of these trends will likely persist into 2022.

Looking ahead, let me start with financial markets. The dominant theme will be the slow rationing of liquidity by central banks in the context of the normalisation of the business cycle. Regular readers will know that I am not overly impressed with this crop of central bankers and their reading of ‘transitory’ inflation is a policy error which could be compounded into 2022.

To an extent, markets are ahead of this – in the US a large number of high growth stocks have corrected. At the same time of writing over 50% of stocks in the Nasdaq index are 40% lower from their highs for 2021 though the index itself is only 4% off its high. This illustrates that a small number of mega cap stocks like Apple are propping indices up. This has maybe three implications.

The Tech Pendulum

The first is that for portfolio managers the large tech stocks are the swing factor in performance. The second is that at the index level, very high multiples mean that future returns (on the S&P 500 for instance) will be low. Thirdly, in this context asset and wealth managers who hug index benchmarks will likely produce lower returns for investors than potentially, active, small to mid-cap managers.

Two recurring themes in 2021 were the PitchBook Economy or the rise of private capital (e.g. venture) investments. This will continue apace, with Europe leading the momentum. There will be more activity in exclusive ‘co-investment’ networks and in co-branded proprietary investment funds.

At the other end of the financial industry spectrum, my prediction is that the ‘democratization of risk’ as a trend continues but that retail investors will discover new instruments – put options, credit default swaps and will generally be more attuned to credit and fixed income risk.

Across asset classes, for the first time in a decade emerging market assets are classified as ‘value’ plays, while my expectation is that Europe becomes the focus for growth oriented investors. This backdrop will be conditioned by the normalisation of the business cycle, whose trajectory has been muddied by slower growth in China, supply chain complications and the lingering effect of COVID related government fiscal supports.

My reckoning is that only by summer 2022, will we  get a true picture of the world economy and its important drivers such as productivity (recovering in the US, weak in China). The outlier scenario is that from then on, growth begins to slow as the effects of monetary/fiscal/COVID support wear off, and central banks are forced to reappraise tightening policies.

The Red Curtain

This will also give better colour on the process of deglobalization, or better, the replacing of globalization with a multipolar world. As China becomes more insular (see Desmond Shum’s book Red Roulette on disappearing Chinese billionaires) and Europe slightly better organised, this trend will be reinforced. In particular, there is great potential in Europe with three progressive, capable leaders (and governments) in Italy/Germany and France. I don’t expect elections in France (Macron to stay in power in my view) or Italy to change this much.

The other element of the post globalization world that is becoming interesting is that while globalization meant greater connectivity across countries, the rampant digitalization we are witnessing means greater competition and connectivity within industry structures or ‘verticals’. The industry I am most familiar with is financials and here for example, the process of setting up a bank/platform has been quickly commoditised, to the extent that brands, products, and quality of service (areas where in my view many financials are weak) will become more important.

This digitization of industry verticals is in my view one of the key elements of the ‘new’ or ‘what’s next?’ economy. I have already lost the ability to key tabs on all of the new technologies that are coming into view, and when a friend mentioned developments like glass batteries, ammonia based fuels and spacial computing I felt even less informed.


That said, perhaps the most revolutionary aspect of technology is the way it is changing humanity and sociability. There is mounting evidence that for perhaps the first time in millennia, human sociability is changing in that we are increasingly socialising through and with machines. I worry about the broad side-effects of this (mental health, political, population growth and human development), and suspect that the arrival of the MetaVerse  will compound this. In a recent note I flagged the rising number of Japanese virgins as a side-effect of technologically captured societies and in that regard strongly recommend Aifric Campbell’s The Love Makers as a development of the broad theme.

How The World Ends

To delve more specifically into the geopolitics of the post-globalized world, commentary is dominated by prospect of a confrontation between China and the US in the South China Sea, or of a conflict around Ukraine, dominate, though I don’t have much to add here (but for a different take on diplomacy am reading Claude martin’s ‘La diplomatie n’est pas un diner de gala’ and may follow this with Martin Indyck’s book on Kissinger).

If we must play the ‘where is the next war’ game, you should look no further than Nicole Perlroth’s book ‘This is how they tell me the world ends’ which sets out the depth and detail of the international cyber arms race and is truly terrifying. Granted that there have already been multiple cyber wars (Estonia, Israel, Syria and Ukraine for example) I think it is not long before we see a visible demonstration of cyber power by the USA, and in turn that there are loud calls for a rules of the road of cyber war/security.

More conventionally, I feel that the complex, tense relationship between Turkey and Russia bears scrutiny. They face off in about four different theatres, have large, capable conventional armies and in some cases are at the forefront of new weapons development (markedly so in the case of Turkish drones). One has a leader who is too calculating, and the other a leader who does not calculate at all.

I also think that in the near-term Bosnia needs to be kept an eye on, as an example of the toxic politics that Russia encourages, and the risk that a rupturing of that country could have implications that spread all the way back to Switzerland.

One broad trend to watch is that since the COVID crisis started, the emerging world has dropped behind the developed, in terms of growth momentum, scientific advancement, technological prowess and in cases financial stability. The risk is that this creates tension both within emerging countries (watch the current Presidential election in Chile) but more importantly between the emerging and developed world.

Riddle of Genius?

Another contrarian twist on this is that in 2022 it is possible that economic growth momentum will be healthy in the democratic world and weaker in less democratic ones (Turkey and China spring to mind). While that might prompt some recalibration of the argument (for many emerging countries) that economic growth is best fostered through ‘managed democracy’, neither should it lessen the need to curb the behaviour of those who devalue the rule of law (i.e. I won’t be recommending the forthcoming ‘Shakespeare – Riddle of the Genius by B Johnson).

This note was a bit longer than usual – twice as long in fact, which means two things. First it will take time to digest and might be a good excuse for readers to break away from families and friends to ‘do risk assessments’ or ‘important forecasting exercises’ over the Christmas break. Second, it is the last note of the year – thank you for reading patiently during 2021 and I look forward to picking up pen again in 2022 (next is on Jan 2nd), if you have suggestions on how to improve the note and enlarge its distribution I am happy to hear them.

Have a great holiday,


Are Markets Crowding Innovation?

If you want to mix innovation with the evolution of industry structure then go no further than the Museum of Arts and Metiers in Paris, where upon entering you are confronted by Foucault’s Pendulum – the device that was deployed to demonstrate the Earth’s rotation. 

In the part of the museum beyond the Pendulum there is a fascinating collection of old planes and cars from the turn of the 19th century, a time when France alone had over 600 car manufacturers. Even from 1881, France had a primitive electric car. By 1899, in Germany Ferdinand Porsche had built an electric car that could travel at 100km per hour. I think it is a good example to illustrate the point of ‘this time is different’…in the sense that it is not of course. 

The dynamics of competition, the ability of certain companies to marry technological innovation with financial acumen and an appeal to customers, meant that those 600 car manufacturers were whittled down to a handful, the same being true in the UK, US and elsewhere. This was notably also the case in the railroad industry which in 1900 made up close to 40% of the market capitalisation of the UK and US stock markets. 

With this at the back of my mind, the only rationale I can ascribe to the car industry today is that financial markets are betting that Tesla (whose market capitalisation is equal to that of its nine main rivals put together) and Rivian (whose USD 110 bn market cap reflects a total of zero vehicles sold), will be the ‘winners’ of the struggle to dominate the electric car vehicle industry, notwithstanding the fact that other car manufacturers sell an already large range of electric vehicles, and that the likes of Apple and Intel are entering this market.

It may be that investors have an eye on Apple, perhaps the most forceful example of a winner takes all company. It is now worth nearly USD 3 trn and with four other social media related stocks, part of a group of five companies that make up 25% of the market capitalization of the US stock market (the highest concentration since the 1930’s). Without these stocks, the year’s performance of the Nasdaq index would be closer to 7% than 21%.

Apple’s products are rated as the most popular with the US consumer, and will have thus benefitted from the COVID triggered fiscal stimuli across countries, and it has recently announced that like Facebook/Meta, it will be entering the metaverse (with smart glasses and a headset). Yet all is not quite rosy. Details of a mysterious investment deal with China have been disclosed and the company has recently warned suppliers that orders of its iPhone 13 are slowing. One might expect the stock to have weakened on these news items but instead it has rallied by 9%, outperforming broad indices by 6%, which is unusual for such a large stock.

What appears to be driving Apple’s stock, like that of Tesla, is activity in the options market. Over the past two weeks, there have been millions of call option contracts (with short expiries) bought on Apple, and this heavy activity induces buying of the underlying stock by brokers. The oddity is that the options market is supposed to be a derivative of the stock market (though this year volumes in the options market surpassed those in the stock market for the first time), not its master.

That this can happen in the case of a stock like Apple suggests that financialization as a trend is accelerating and is having real world side-effects. Remember that in theory, events and activity in the real world should be reflected in financial market prices, and not so much the other way around.

There are plenty of implications here, notably that fund managers that restrict their analysis to bare fundamentals will not pick out security moves driven by market micro-structure effects and will be prone to underperform.

More importantly there becomes a growing issue of market stability – recall how the mountain of derivatives that was based on the US housing market soon came to engulf that market. It may mean that assets that become heavily financialized, in turn endure periods of what appear to be inexplicable volatility. This has happened in the commodities sector when metals like silver have had ETF’s (exchange traded funds) structured around them.

Overall, it points to a problem of economic veracity – disentangling the elements of true technological innovation from those of financial innovation, and I suspect that once the financial market geniuses disappear, the promise of the electric cars and gadgets of the future will be more pedestrian.

Have a great week ahead,


PS – Next week’s note will be the last of this year, and will in keeping with tradition, feature my attempts to forecast the trends of the next year, as well as a few book recommendations.

The Red Curtain

For personal reasons Ireland is one of my touchstones when trying to understand the ways in which the world is changing, and more generally it is an interesting laboratory to witness the effects of the rise and fall of globalization on a small open economy.

Globalization has markedly changed Ireland such that the Ireland of the 20th century is drifting steadily out of the collective memories of Irish people. In the middle of the 20th century, the country had few active trade and diplomatic links, something that led the writer Seán Ó’Faoláin to remark that ‘Ireland …is behind a Green Curtain that we have been rigging up for the last thirty years – thought proof, world proof, life proof’.

That is a remark on a country that was waiting to be reconnected with the world, but it recently came to mind when thinking of China.

In the last week, under heavy pressure from the Chinese authorities, Didi Chuxing, the ride hailing company announced it would renege its NYSE market listing and instead list in China/Hong Kong. Also, this week the Women’s Tennis Association (WTA) have suspended their tennis tournaments in China in response to the disappearance of the player Peng Shuai.

She had been ‘recalled’ to China having accused accused Zhang Gaoli formerly a high-ranking Chinese Communist party official, of sexual assault, and she is since believed to been held under duress. While the Epstein trial shows that powerful men can behave appallingly wherever they are, the treatment of Peng is sinister, tone deaf to international public opinion and, has been repeated in the cases of other public figures.

As background I have just started reading the fascinating ‘Red Roulette’, Desmond Shum’s account of what happens to wealthy Chinese who rise too high too quickly (to spoil the surprise Shum details the murder, ‘suicides’ and disappearance of numerous Chinese billionaires).

Couple this with China’s antagonizing of nearly all of its neighbours (some of whom also threaten it), other snippets such as a collapse in passport issuance by the Chinese government (notwithstanding COVID), the exigencies of China’s COVID policy and a growing range of moves to establish self-sustainability and in some cases international monopoly in areas like data (LinkedIn has been cut off in China) and rare earths, and the picture grows of a China that is reinforcing its strategic autonomy, but also cutting itself off from the rest of the world and to adopt Ó’Faoláin’s terminology, enveloping itself in a ‘Red Curtain’.

This ‘Red Curtain’ process, if my view is correct, will be gradual but nonetheless meaningful. David Skilling points out that trade ties between the EU and China are still strong, and that American banks are keen to further implicate themselves in the Chinese financial system (Jamie Dimon of JPM is notable here, though less so for his diplomacy). However, Germany’s new government is markedly less China friendly than the Merkel one, and various EU level oversight processes will curb foreign (Chinese) investment into Europe.

In the big picture, the ‘Red Curtain’ is consistent with other countries or leaders (Brexit/Johnson, Trump, Bolsonaro) turning away from internationalism, and confirms the trend towards multipolarity.

China’s size, the late stage of its very long business cycle (with a slowing property market) mean that the prospects of a ‘Red Curtain’ need to be taken seriously.

Diplomatically, it raises the problem that a more closed off China is harder to read from outside, and somewhat harder to deal with (ask Lithuania). Domestically, there is a risk that this more ‘closed’ approach creates a sense of risk aversion across entrepreneurs, a lack of debate about policy issues (especially at a local level) and as a result of this, a policy mistake. One structural policy error might be that productivity slows.  

From an investors point of view what is interesting is that the heavy-handed approach of Chinese regulators and politicians has turned Chinese equities (especially those listed abroad like Alibaba) into ‘value’ investments. In contrast if US companies that export to China (think of Apple and Tesla) were to be cut off by the ‘Red Curtain’, their valuations would crater.  As an aside, I wonder if the ‘Red Curtain’ will split the MetaVerse in the sense that it offers a distinctly different experience to those that use Chinese technology, to those using Western technologies and platforms.

Notably on the other side, more fund managers have mentioned to me that the Chinese government bond market begins to look attractive compared to those in the West. In that context, Chinese assets – having for long being regarded as a structural emerging market growth play – are becoming interesting for value investors.

Ultimately, whether this value is realized depends on one factor – the mind and ambition of Xi Jinping – by installing himself as China’s leader for the foreseeable future, he has tied the fate of his country to the wishes of one man, which history tells us is a risky strategy, especially if it leaves China ‘thought proof, world proof, life proof’.

The PitchBook Economy

The PitchBook Economy

One of the marked trends of the past year has been innovation in financial markets – which with the benefit of experience I can say is usually an entertaining and ultimately dangerous phenomenon. We have seen and explosion of activity in the options market, unconventional financial structures like SPAC’s (Special Purpose Acquisition Companies) become conventional weapons of acquisition and the crypto currency/coin market has blossomed, partly on the back of impressive technology platforms such as FTX.

Two further points are worth noting. One is that as ever, innovation and speculation go hand in hand – a chart of the price of Tesla and the price of bitcoin following the same parabolic upwards path (they only go up) shows how the options market, technological innovation and animal spirits are all umbilically linked. Second, promisingly for the broader economy, waves of innovation often start in the financial markets and spread out towards other sectors.

Much of this financial innovation has been cast as the ‘democratisation of finance’, giving people access to low-cost trading platforms and multiple types of assets (and leverage). When all is said and done it will more likely be remembered as the ‘democratization of risk’ – the distribution of risk from large institutions and hedge funds to retail investors (note that in the last year inflows into US equity funds exceed the total of the previous 19 years).

While much of the financial media fixates of the ‘democratisation of finance’ and the meme stocks that define it, there is another, almost opposite trend taking place at the other end of markets – the deepening of private capital investments.

This is defined by a quest by higher end asset managers, large family offices, well connected financial investors for access to non-quoted (e.g. venture capital, pre IPO stakes) investments in companies that are at the heart of technology driven sectors. To a certain degree, not least in its sociology and anthropology, the contrast between the search for private investments and the hurly burly of retail trading reflects growing social divisions.

It might also be exemplified by differences in the tools of the trade. To a large extent the rise in equity markets over the past twenty years, and all of the wealth that has been created around them, is exemplified by the Bloomberg terminal, which provides data on nearly all quoted markets and thousands of companies. It is hard to get exact figures for the usage of Bloomberg terminals but what I can glean is that it has plateaued at around 330,000 in recent years.

In the private capital world the tools of choice are ‘rolodex’s’ in the modern sense that private capital operators rely largely on trusted networks, and Pitchbook – an information service that provides otherwise hard to get detail on private companies (such as funding rounds, identity of shareholders, financial profiles). The idea it seems, is that Pitchbook saves the effort that would be incurred by junior analysts in venture and corporate finance teams.

The ‘Pitchbook’ economy has sprung from several factors. One is an explosion in entrepreneurship. For instance, George W Bush is reputed to have said ‘the French don’t have a word for entrepreneurship’ but even in France the venture and startup culture is very healthy, fueled by a rising number of business schools, incubator platforms like Station F, supportive state bodies like the BPI and government support (inEurope the value of venture activity is seven times what it was in 2014). The same is true in other European countries and individual American states like Texas.

A second change is the role that technology has played in permitting companies to grow faster (and fail faster too it must be said). I was struck by a line in Azeem Azar’s excellent ‘Exponential Age’ where he remarks that when he started writing the book, TikTok was little used, and when he finished some twenty months later it was the most downloaded app’.

In the Pitchbook economy, capital moves very quickly towards companies that are perceived to be able to win in the sense of establishing a market foothold. Commensurate with this, competition between venture capital firms, banks and new investors (Tiger Global is increasingly spoken of) is heating up. Against this backdrop investors talk of the growing number of unicorns (startups worth a billion dollars) and decacorns (startups worth ten billion dollars of which there are 30 globally – almost the same as the total for the three previous years).

At this relatively early stage in the emergence of what I call the Pitchbook economy the rising private investment sector has several implications. One is a change in the way people work and regard employment. It seems to me that any younger people are willing to try the entrepreneurship/growth company route than be seduced by the security of large corporations. There is now a cachet associated with entrepreneurship, and for the moment a sense that the payoffs can be significant. Labour and pension structures have yet to adjust.

A second is that the digitization and the ‘greening’ of our economy will accelerate – I find it hard not to think of private growth companies in Europe that are not involved to some degree in either trend.

We will also likely see rapid consolidation across sectors. The neobank market in Europe is in my view becoming congested and some operators will simply not make any money (N26 has wisely pulled out of the US market) and in the mobility sector BOLT is now becoming the dominant player.

As a final comment, the one factor that unites the private capital and public markets is financial liquidity. The bloating of stock market valuations is matched by the very demanding valuations of private companies. In that respect, the ‘Pitchbook’ economy will only prove itself once we go through a monetary tightening cycle, and we get a sense of who the survivors are.

Have a great week ahead,


The Interregnum

While the rest of you were struggling under grey skies and rain, I spent the end of last week under the blue skies and fresh Atlantic breeze of Porto, Portugal. Now, before I lose half my audience through jealousy, I can say that I was working at a corporate event on the topic of the uncertain future for globalization.

With supply chains in chaos and the key trade relationship between the US and China still in a delicate state, the future of globalization is something that bears heavily on corporations as they emerge into the post covid recovery.

While many of the people I met felt that the image of a deflated globe (see the logo above, and cover of ‘The Leveling’) was too pessimistic a representation of the state of the world economy, my current roadmap is that we are on a path away from the globalization of the period 1990-2020 (fall of communism to the fall of Hong Kong), and towards a new multi polar form of world order, that has largely yet to be constructed.

To give this phase or path a name, I propose ‘Interregnum’, an English term to denote a pause between periods of government (notably used between the end of the reign of Charles I and the ascension of Charles II to the throne between 1649/60 – highly relevant to the Levellers by the way).   

Today, the Interregnum is the mid stage of a paradigm shift (see Thomas Kuhn’s Structure of Scientific Revolutions) and is characterized by noise, uncertainty, and multiple contests between the ‘old’ and the ‘new’ (finance is a good example with the emergence of ‘DeFi’ or decentralized finance).

In the Interregnum, new leaders have yet to emerge (think of the USA, Russia and China) and the firm ‘rules of the game’ of the new world order have not yet been fixed (there is no binding agreement on the rules of engagement of cyberwarfare for example).

That’s not an optimistic sounding diagnosis, though a realistic one, and one that should also challenge the view that everything is well in our world.

What is also confusing is that in the context of globalization (an intertwined, interconnected and interdependent world where nations are willing to sacrifice some sovereignty for better trade relations), there are several emerging trends that could be taken as representing a return to globalization, but in fact do not do so.

One of these is the upturn in the business cycle, which has had a huge helping hand from government spending and developed world central banks. Indeed, one interesting snippet from the earnings calls of large US banks is that households are cash rich and this should fuel consumer spending into the second half of next year. In contrast, I suspect that China is now close to a recession.

More broadly, my point is that a rise in economic activity is not the same thing as a resumption of globalization. Globalization is a very specific pattern of activity and while many of the drivers of globalization such as the flow of people and ideas are in abeyance, other, distinct patterns are emerging.

In general, globalization and the business cycle (see the NBER page on business cycles) have a very odd relationship. Prior to the beginning of this wave of globalization the world enjoyed a regular rhythm of short business cycles. In contrast, the period of globalization has been marked by the two longest periods of expansion in modern economic history (1991-2001, 2009-2020), punctuated by the bubble and the global financial crisis.

A partial explanation for this is that the positive effects of globalization – China exporting deflation, emerging economies growing up, greater global consumption and the international disintermediation of financial risks have all helped to dampen and sustain business cycle expansion phases.

Another positive trend that bears watching is the acceleration of the digital economy, which from an investment point of view is exciting and disruptive. There is a temptation to say that the advent of the digital economy portends the revival of globalization but my sense is that the effects of digitization will be largely confined to industry verticals and nation states.

Consider the point someone made to me of the hundreds of thousands of Indian ‘tele-doctors’ – they will disrupt the Indian rather than say the UK health system. Consider also the vast amounts of data that will be created by the application of 5G and then 6G to our cars – the use and storage of much of this will be local (at least in Europe) than global.

However, the idea that technology is transforming the nature of economic activity is a very important one, and one that gives clues as to what will replace globalization. For corporations, globalization meant that they could optimize their activities through an interconnected network of activity – a factory in Mexico, fed by research and development in Zurich from a head office in Berlin, inspired by marketing specialists in Barcelona and sold to consumers in North America.

The effective end of cheap labour, the rise of protectionism as a political issue and advances in robotics most likely mean that the trend of ‘going abroad’ is slowing. What is more interesting is what is happening to consumers and workers – to a large extent they are ‘coming home’ – feeling freer that they can, even at the margin, work from the city of their choice and consume more services online (from legal advice to trying on clothes virtually).

I am not sure what the long term effects of this can be but I suspect that in Europe at least people flows will be better distributed around second and third cities (Bordeaux, Porto, Munich, Malmo for example) and that there will be greater attention to local political issues (one sub trend I have picked up on is the growth in applications that seek to make participation in local democracy easier and more innovative – see Polyteia, Citizen Lab, Civocracy and Fluicity for example).

That’s probably a hopeful way to end this chapter of the debate on the future of globalization, or ‘what’s next?’

Have a great week ahead,


Great War to Total War

To the north and east of Paris lie two of the great medieval cities of France, Amiens and Reims, both possessed of spellbinding cathedrals that have played a central role in the history, and especially, the monarchy of France. The cathedral of Reims sticks in my mind because the marathon/semi-marathon of Reims starts directly in front of it and the early morning view through the stained-glass windows is as inspiring as any sporting setting.

The cathedral at Amiens – where the skull of St John the Baptist was reportedly brought – stays with me for a different reason. Amongst its many tombs and graves it has a tablet to the memory of Raymond Asquith whose life story is an impressive, near caricature of the elite of his generation – he was a distinguished scholar (Balliol and All Souls), part of the London intellectual scene and notably the eldest son of prime minister Herbert Asquith.

At the age of 38, Raymond Asquith, father of three children, led a charge at the battle of Flers de Courcelette (September 1916) and was shot in the chest. He reportedly lit a cigarette, so as to distract the attention of his men from his injuries but died later.

At a time when Europe has commemorated Armistice Day, Raymond Asquith’s particular story is a reminder of several factors – the intertwining of French and British history over the past one thousand years, the fact that elites were once very close to wars and their consequences and in the case of the First World War, how the tactics of war proved disastrous.

Today, elites are far away from the ‘front’ in many respects, France and Britain are still locked in a close, troubled relationship, and the tactics of war have changed greatly.

For some, the dreadful end to the first period of globalization (Great War) echoes to the end of the second period of globalization in the sense that geopolitical tension in general and a Great Power rivalry (US-China) looms large in the newsflow. Anyone who has read in detail the build-up of the German and British navies in the early 20th century will worry that America and China are following a similarly dangerous path – China has more ships than America, America has better sailors, generally better equipment though China it seems has more tricks up its sleeve (hyper sonic anti-ship missiles).

What is more interesting and worthwhile (than predicting a naval battle in the South China Sea) is the way in which the idea of war is changing. In previous notes I have referred to the Russian (Gen Gerasimov) doctrine of total war, which is a view of conflict that covers many strategies such as cyber, border testing, propaganda, and covert attacks, for example. This approach is very much in display across Eastern Europe – the encouragement of discord in Bosnia, the hollowing out of Hungarian politics and in particular the harnessing of Belarus as a form of geopolitical attack dog against the EU.

An excellent steer as to the tactics of ‘total war’ is David Kilcullen’s ‘The Dragons and Snakes’ where he examines the new, unconventional forms of conflict pursued by the likes of Russia and China. One striking example Kilcullen describes is Russia’s efforts to drive immigrants and asylum seekers through the border with Norway, the aim being to test Norway’s reaction, its border security and to generally aggravate NATO (by the way, recently, the cables of a Norwegian undersea surveillance system have mysteriously been cut). To a large degree this tactic is being repeated in Belarus. The suspicion that most of the immigrants have been flown into Belarus suggests that sadly for the immigrants, this is a manufactured crisis that targets the EU’s sensitivity to the migrant issue.

The build-up of Russian troops in Belarus and in Ukraine is also threatening, though in my rather amateur view does not portend an outright conflict but rather represents Russia’s aggressive way of delineating the limits of its tolerance for NATO. It is hard to see what gain an outright military conflict might bring for Russia.  If a full conflict in Ukraine is triggered, by instinct is that the USA in particular will surprise to the upside in terms of the vigour of its response.

In the past five years Russia has extended its military footprint around the world – notably in the Middle East and lately through African countries like the Central African Republic where the activities of Russian mercenaries have had ugly consequences. What remains to be seen is whether foreign policy adventures can, in the eyes of the Russian people, substitute for sluggish economic growth and a horribly mismanaged response to COVID.

What is also critical is the response of NATO and the EU. The situation around Belarus is complicated by many factors – consider that Poland recently bought drones from Turkey, though Turkish Airlines has flown some of the migrants to Belarus, and also that Turkey – a NATO member – imports lethal, sophisticated arms from Russia, whilst also facing off against it in multiple theatres. Consider also the position of smaller Baltic states like Lithuania and Estonia who foreign and security policies has been becoming more vocal and sophisticated, and who will expect the full diplomatic support of larger countries like France.

A savvy approach would be to try to reduce migrant flights into Belarus and in my view to double up on sanctions on the Lukashenko regime and to more robustly support Belarus’ pro-democracy movement. The USA will not be displeased either if this spat lead’s Germany and the EU to reconsider their energy ties to Russia. As for Russia itself, this latest move, sadly and unnecessarily in my view, deepens the divide between it and Europe, and is yet another cleavage in an increasingly fractured post-globalization world order.

Have a great week ahead,


Pantomime Monetary Policy

Christmas is approaching and in Britain and Ireland at least, that means that pantomime season is upon us. Pantomime is a form of theatre or musical, usually based around fables and children’s stories and involves a healthy dose of slapstick comedy. A key feature is audience participation, where a protagonist on stage engages in a mock argument with one saying “Oh, yes it is!” and “Oh, no it isn’t.

While I am not, unfortunately, an aficionado of the pantomime, it oddly enough has me thinking about central banking.

More and more, facts, trends and signals pop up that seem to contradict the logic of current monetary policy in the developed world to the effect that many investors and economists are proclaiming ‘oh, yes it is’ with respect to higher inflation, extended asset prices and inappropriate monetary policy, whilst central bankers hold to the ‘oh, no its not’ chorus.

What is new, is that markets are now beginning to chip in.

In recent weeks the yield on short-term debt (i.e. 2 year bond yields) in the key economies of Canada, Australia and Britain have spiked dramatically higher, signalling the view that central banks are entering into new terrain in terms of adjusting to a world of higher, noisy inflation.

That has stopped some central bankers like Christine Lagarde from continuing to harp ‘oh, no it isn’t’ as she did at a press conference last week, though credit risk of some periphery countries (notably Italy) is starting to rise (relative to Germany).

Overall, there is a generalised rise in bond market volatility (especially in instruments that try to price inflation expectations), which other asset classes do not yet seem to have picked up on.

It is also worth making the point that assets that are not in thrall to central banks (EM equities and many commodities) are behaving quite differently to those that are (i.e. Nasdaq). I do think that as the economic cycle becomes ever more noisy, that the idea of ‘pantomime monetary policy’ (PMP), where there is growing discord between central banks and markets, is here to stay.

There are several factors at work – activity levels are very high (the ISM Services index just hit a 25 year high), asset prices (real estate, equities, credit and crypto) are at highs, the end of globalization and scarring of economies and labour markets by the coronavirus are creating a complex set of inflationary pressures, whilst the strain that underinvestment (link to an excellent thread by the CEO of Freeport) and shifts in trade are placing on supply chains is complicating this. Add to this the risk that China could well be in a recession, and the outlook is very muddy.

For the time being, the risk to politics and profits is from higher prices. If I were a pantomime villain, or simply a populist politician, inflation would be my best friend. We wrote about this a few months ago (A Face in the Crowd), warning that rising prices (which contrary to government statements in countries like the UK and US, are not being outstripped by wage growth) will soon become a contentious public issue. The populist panto villain knows that in the short run a government or a central bank can do little about inflation (especially if it is only caused by extraneous issues). As if to illustrate this, last week Andrew Bailey the Governor of the Bank of England declared that he was ‘very sorry’ that the cost of living was rising so quickly, but, against expectations, declined to raise interest rates.

In this context, the panto villain can rabbit on about the ‘price of things’ or ‘the pound/euro in your pocket’ (i.e. the price of milk is up 26% over the last year in the USA) and gain an easy audience.

He or she also knows that a government or central bank that tries to do anything meaningful to bring down prices will be equally unpopular. So, my prediction is that in 2022 political battles and some elections will be swayed by the issue of inflation (something that many have never experienced by the way).

The second implication of PMP, is that without the ‘fairy godmother’ of enlightened fiscal policy, overly generous monetary policy will run wild and produce even greater socio-political imbalances.

The great lesson of the collapse of globalization is that it produces ongoing imbalances (indebtedness, climate damage and financial flows) that need to be energetically buttressed. Most of the highly globalized countries in the world (small, advanced economies) do not by and large have a problem with inequality because they use their tax systems to channel the benefits of globalization. The UK and US did not do so, and that is perhaps why we have had the twin shocks of Brexit and Trump.

Following from this, few governments have sought to channel and capture the effects of excessively easy monetary policy through asset charges or taxes or measures that would redistribute the benefits of higher asset prices (the primary effect of quantitative easing) across societies. As a result, and consistent with the above prediction, housing affordability will become a pan-national, lead political issue.

So, dear audience…

Is inflation back to haunt us? ‘Oh yes it is!’

Will central banks step in, especially to curb asset price inflation? ‘Oh no they won’t!’

Is the world a stable place? ‘Oh no its not!’

Will it all end badly? ‘Oh yes it will!’