UnGraceful World

There is a cottage industry of people looking for signs that the Russian army is going to spring across its borders and attack Ukraine – evidence that the ground under foot is less muddy, groups of medics armed with blood supplies making their way to field hospitals on the border and the traipsing of Russian boats through the Black Sea. The latest warnings from Washington underline these developments.

The real signal however, was that a few days ago Vladimir Putin’s superyacht ‘The Graceful’ left the Blohm & Voss shipyard in Hamburg, which in its early days saw the construction of the battleship Bismark. That the ‘Graceful’ set sail for home suggests that the Russian President does not want one of his toys to fall under the scope of sanctions.

Last week, the image of the French and Russian presidents at opposite ends of a long, white table dominated the front pages. Putin has a habit of managing the ergonomics and choreography of meetings, usually arriving very late.

In 2014 Merkel had to wait 4 hours to see him, in 2012 Viktor Yankovich also waited for 4 hours, Shinzo Abe waited 3 hours in 2016 – interestingly, and this might tell us about Putin’s psyche – the two visitors who have only suffered a very short wait were royals, King Juan Carlos of Spain (20 minutes in 2006) and Queen Elizabeth II (14 mins in 2003). In addition, Putin likes to make his guests uncomfortable, for example bringing a dog to a meeting with Angel Merkel, who has a fear of dogs.

The reams of commentary on the meeting focused both on Putin’s psychology and on the role of Macron.

On Putin, the quip from the French statesman Aristide Briand that ‘people think too historically. They are always living half in a cemetery’ is worth considering in that Putin seems to think and act in the ‘blood and iron’ mindset of the late 19th century, an approach that today is brutish and dangerous (fittingly Bismark noted that ‘not through speeches and majority decisions will the great questions of the day be decided…but by iron and blood)

Macron is potentially more difficult to fathom than Putin. Despite the widespread belief that he is being played by the Russian president, the aspect that people underestimate most in him is that he is a risk taker. Moreover, he is singularly the only European leader with strong and coherent ideas, and political energy, on the future of Europe. What has however troubled some other European politicians (especially the Baltic and Eastern European ones) is that Macron deigns to speak for them.

In this respect, Macron is taking advantage of the poor design of European foreign policy – it has been expressly set up so that it does not have one single voice, or as Henry Kissinger put it – ‘who do I call if I want to speak to Europe?. In effect, Macron is solving Kissinger’s dilemma in that he is setting himself up as the go to person for the likes of Anthony Blinken, but he is not regarded by Europeans as the ‘voice of Europe’.

In that respect, the role of the EU’s foreign policy commissioner is one that is designed not to pronounce a singular voice. He or she (rarely a top flight, independently minded politician) is kept at a safe distance from power, usually imprisoned in an airplane (for instance in 2011, Javier Solana, the EU foreign policy chief flew over 430,000 miles, over three times that of his American counterpart Colin Powell). That is not to say that EU foreign policy is itself neutered, it’s just very complex, and designed to be at the mercy of large countries with a taste for foreign policy, like France. It is also game theoretically difficult to agree on a common foreign policy stance across twenty seven countries, at speed.

Yet, in policy areas where there is a very specific competence or topic – trade and Brexit are two good examples – the EU can be focused, competent and show solidarity across member states.

The question from here is whether stress tests such as the tension around Ukraine force a structural change in EU foreign policy, in just the same way that the euro-zone financial crisis catalysed a much better organized approach to EU economic and financial policy. Here, there are some tests ahead.

First there is an emerging pragmatism, especially around security operations where (the evacuation of Kabul was an example) missions are undertaken by ‘coalitions of the willing’ instead of having to cobble together a common stance across 27 countries. For military operations this approach is quicker, and enables cooperation with the likes of the UK, Denmark and Norway.

Second, assuming that there is no ‘hot’ conflict in Ukraine, there is a need for deep dialogue between the Baltic/Eastern European states on one hand, and France and Germany on the other. This dialogue may also become mixed up in the bigger debate around European values.

The Ukraine crisis is also a ‘discovery’ moment for Germany and its new chancellor in terms of his shameful ambivalence.

Thirdly, in areas where foreign policy becomes mixed with ‘megatrends’ like climate security, cybersecurity and data protection, the EU will have the time to take a more considered and deliberate approach.

As I send this note it is not clear what could transpire next week – I will grant that the US and UK are in control of the international PR battle, but the troubling private feedback from Macron’s visit to Moscow is that he found the Russian president more pre-occupied with history and more belligerent than ever before.

Ne vous mêlez pas du pain, II

I will not forget the moment I realized that the COVID epidemic was upon us, as it spread from China, then through Italy and the rest of Europe, and the lockdown came upon us. At the time I thought the lockdown might take two weeks, but in effect it has lasted two years (so much for my forecasting ability). That period has done so much to alter societies, economies and our outlook on the world. To a large extent, it has also scrubbed away some of the trends and memories of the immediate pre-COVID period.

Looking through my notes this was a period of very unusual strength in markets and economies – the stock market kept pushing new highs on near record low volatility, whilst the global economy was coming to the end of the longest expansion in modern economic history. There were, however, signs of distress under the bonnet.

In mid to late November 2019, I wrote two notes entitled ‘Ne vous melez pas du pain’ and ‘Demonstration Contagion’. In one, I flagged the sound advice that Robert Turgot, the 18th century French economic thinker and administrator gave to Louis XVI regarding food prices and unrest. It was good advice, which the King did not heed.

In the other, I highlighted ‘a remarkable outbreak of protests across a range of countries – from riots in Honduras, to ongoing tension in Hong Kong to climate related demonstrations in India’. At the time, the number of Google searches on the world ‘protest’ was at a five year high.

Granted the ‘hiatus’ of the coronavirus the question that I want to pose is whether, with inflation barreling forward at multi decade highs, unrest and discontent return (recall that some weeks ago we wrote that high inflation is a gift to populists) to break the general obeyance of the coronavirus period, and what kind of policy response this begets.

As context, for example, in the UK post tax incomes have dropped by 2%, the biggest fall since 1990. Housing affordability in the US is at extremes, and in parts of Europe inflation is out of control. So, in general we may be confronted with a world that, for some time, executes policy for political reasons, very much against the strictures of the textbooks.

Here are some thoughts on the likely fallout.

First, I can see a situation where central bankers face derision (or even more derision as some cynics might have it). As we noted last week, Jerome Powell’s Fed has got the inflation call badly wrong, and individual governors have demeaned the institution through their personal trading.

In Europe, the ECB deserves especial attention. Their record on inflation and rate forecasting is so appalling it is dangerous, driven perhaps by the fact that very few of the ECB governing council members have any experience of industry, finance or investing – occupations that might otherwise condition people to change their minds when proven wrong. If you take a peak at the photos of the ECB governors it a strikingly homogenous group, though even less diverse in the way they think and act.

The tardiness of central bankers in combatting inflation means that for the next year, households will face rising rates, high prices and a negative wealth effect. This cocktail should be enough to turn public attention towards the Fed and the ECB tower in Frankfurt. In Europe an added element of complexity is the divergence of growth and inflation across euro-zone countries, and the unwillingness of euro-zone central banks to use macro-prudential policies to rein in inflation. In time we will also see central bankers dragged before senate/parliamentary committees to explain why they have allowed the inflation genie to escape.

As central bankers grow increasingly uncomfortable under the glare of public opprobrium, politicians may decide to ride heroically to the rescue of households. For instance, in the past few day’s governments in Ireland, the UK and France have issued compensation payments to help people pay energy bills. One estimate I have seen suggests that with this ‘cushion’ the effective rise in electricity prices for French households is only 4% compared to an underlying 45%. When we recall the Gilets Jaunes (a movement triggered by higher fuel prices) and the coming presidential election in France, the logic for such a move is clear.

The risk is that these measures simply sustain inflation and create a greater dependency on governments.

Another, more inventive avenue may be a re-appraisal of fiscal policy broadly in the sense that it can be used is break down bottlenecks in supply chains and in ownership structures. Here one important outcome from the ‘inflation crisis’ may be a greater policy focus on breaking down monopolies in industry and consumer goods, concentrations of ownership in property markets and an increased investment in critical industries like semiconductors.

In the meantime, markets are shifting to the next phase of the ‘inflation’ trade. With equities having had a very sharp initial sell-off, the worry now is that credit risk begins to rise – this is dangerous because it translates directly in the real economy and will continue to undermine other asset classes. Inflation may fall as this occurs, though for some time people will continue to pay ‘high prices’. When growth and wealth fall, there may be ever more discontent, and we might be back to 2019.

Have a great week ahead,


Stress Tested

This January has been the worst start of the year ever for the stock market, and specifically the market reaction to Fed Chair Jerome Powell’s Wednesday press conference is the worst in modern time with markets reversing to the tune of 3.5% (generally Powell’s press conferences get the worst market reaction… Ben Bernanke’s were the best). At the same time, the biggest invasion force mustered on the outer edges of Europe since the second world war stands ready for the battle cry.

If you are reading this on a Sunday morning, as prescribed, I’ll understand if you go back to bed and hide, it’s a depressing state of the world.

In this respect my intention is not to forecast where the stock market is going to go, nor on what day Russian troops will pour over the Ukrainian border (amongst other considerations it would apparently be considered bad form to eclipse the Winter Games in China, which takes us to late February – keep it close, but the 22nd is the day!), but to rather make the point that these two not unrelated events are stress tests, that reveal much about the world that is evolving before us.

Indeed, there are some common patterns. The first is policy mistakes.

The recent conversion of the Federal Reserve to a tightening stance comes after a decade of easy money that has conditioned investors and households that ample liquidity will continue unabated. Its no surprise then that asset prices and increasingly, consumer prices are extremely elevated. The Fed has many warnings that inflation was rising, and as recently as November officials were describing high inflation prints as ‘transitory’ (the latest inflation deflator released Friday, is at the highest since 1983). The Fed is now chasing its own mistake.

In prior years when the Fed had credibility (and its most senior officials were not dealing in the markets they oversee) a very hawkish tone by the Fed could be construed as the use of words to curb market exuberance rather than rate increases outright (more economically damaging). It is unlikely the case this time.

In and around the Ukraine, much is made of the tactical genius of Vladimir Putin. Without any special insight into how he operates (books like ‘Putin’s People’ and the ‘The Dragons and the Snakes’ help) the intention of his constant needling of the borders of Europe (from the border with Norway to angry Irish fisherman) is to gauge the reaction and readiness of NATO/European countries.

In this instance, even if we do not have a war, his actions are producing some interesting side effects – the readiness of Sweden and Finland to join NATO, the activism of small Baltic states, the dominance of American diplomatic power across Europe and the improving credibility of Tony Blinken, and the turning of even the most mild-mannering German politicians.

In that context, a full war on Ukraine might backfire badly on Putin, wealthy Russians and its economy.  

The second, related element is the way in which the two events – the prospect of higher interest rates in the US and the threat of war in the Ukraine are exposing system vulnerabilities. Here are a few – energy distribution networks, Ireland’s lack of military hardware, the gearing built up in financial markets in the drive to ‘democratise investing’, groupthink in monetary policy, and German foreign policy, to name a few.

In finance, two vulnerabilities that may come into sight later this year are rising credit spreads and weaker housing markets. The euro-zone crisis and the policy reaction to COVID tell us that system vulnerabilities get stress tested until people adapt.

Thirdly, the geopolitical and market stress tests tell us much about the new world order that is forming ahead of us.

To start with geopolitics, in his annual and very long news address in mid-December, Vladimir Putin declared the certain end of a unipolar world, and the advent of a multipolar one. He will no doubt be delighted to learn that this letter agrees with these broad strokes but dismayed that we think Russia is too weak economically, financially, politically and in terms of its soft power, to carve out a Russian zone in this multipolar world.

A defining element of this multipolar world is the greying of the demarcation between soft and hard power and more pointedly, the idea of total war (attributed to a Russian general). This has been on full display in recent weeks, notably the use of press, PR and propaganda by Britain and the US, the prospect of financial and economic sanctions, the threat of massive cyber attacks and the use of energy supply chains as a pressure hold. In the future, places that are on the faultlines of the multipolar world (i.e. Taiwan, Hong Kong, increasingly Africa) will be subject to ‘total war’ style tactics.

An additional point, which always struck me hard whenever I visited Moscow or St Petersberg, is that at the friction points of the tectonic plates of this multipolar world, different countries have very different perspectives on the same situation – markedly so in the way Russia views the situation in Ukraine and beyond, and the way say that British military leaders do.

Finally, to markets, which also have Russia in mind (look at the gap between the Russian stock market and the oil price for instance). At the start of the year we wrote that liquidity would be the dominant factor in markets, and the tightening in financial conditions betrays this with US markets behaving in a way that we have only seen in severe economic crises (2001, 2009 and 2020). This is a concern because it signals underlying risks and threats ahead, and the possibility of further policy mistakes.

For my part, I do not think that the Fed will raise rates as much as the Fed itself and many investment banks think (4-5 times this year according to some forecasts). The key issue is what level prices need to fall to such that markets become less vulnerable to tighter liquidity, and in that context we might see a second dip before the end of March. At very least, the first week of February may be less stressful than January, for markets and geopolitics.  

Have a great week ahead,


Fooled, Again

Fooled Again

In July 2018 Boris Johnson resigned as British foreign secretary, declaring that Theresa May’s Brexit plan (which he later more or less adopted) would only permit Britain the status of a ‘colony’.

The day after Johnson resigned as foreign secretary the death of Lord Carrington (at the age of ninety-nine) was announced. Carrington had been British foreign secretary from 1979 to 1982. He was generally recognized as an exemplar of integrity in public life, and without repeating myself, I had previously written (in the Levelling) a comparison of Johnson and Carrington, the point being to underline the shallowness and mendacity of Johnson.

At the time (2018) I wrote that ‘Johnson was seen as a natural leader of the Tory Party, but the way he has conducted himself since then has led many party colleagues to the view that, even by the standards of politicians, he is too self-serving, and he has lost support within his party.

That sentence could be used today. Johnson’s consistent traits have been to betray those around him and demonstrate unsuitability for office.  Moralizing aside, and while I was right about his character, the joke was on me (and many others).  

Since 2018, Johnson became prime minister, somehow executed Brexit and set about destroying all the things that are most admired in and outside Britain (the BBC, NHS, the rule of law, sovereignty of Parliament and democracy itself). Politics as a spectacle trumps politics as a serious pursuit.

I and many others (I count the unfortunate and very bitter Dominic Cummings here) were fooled into thinking that (poor) form could not triumph over substance for so long. It did, and we should ask why?

The lesson is not to high handedly denounce politicians of weak character, but to wonder what causes people to look beyond these characteristics and support leaders like Johnson. In his case the answers are on one hand easy – his charisma, ability to glad handle people past the truth and to rile his enemies, all of which proved useful during the Brexit process.  

When a crisis arrived that demanded sincerity, patience and attention to detail – he has been found wanting, and it beggars belief to think how he might behave in war (not least given the proximity of his party to Russian finance). Ironically, opprobrium towards Johnson has been triggered not by the enfeebling of the UK economy, or the human misery and death toll brought on by the coronavirus, but by a drinks party(ies). The FT have called it ‘government by stag do’.  

As I write, those who previously held positions as Johnson’s most fervent supporters are denouncing him, consistent with the ‘blood sport’ that is Brexit driven British politics. He is now spoken of as one of the worst prime ministers. Interestingly there is a range of rankings of modern prime ministers (by academic institutions (i.e. Leeds), the public (i.e. BBC/Newsnight), academics as well as newspapers/journalists).

In general, Lloyd George, Atlee, Thatcher, and Churchill, followed by Baldwin and Asquith do well, while the underperformers are led by Anthony Eden, followed by the likes of Balfour, Douglas-Home and Cameron. The role of prime minister has an allure and drama that has been captured in many works of literature from Anthony Trollope’s ‘The Prime Minister’ to more contemporary versions like Chris Mullin’s ‘A Very British Coup’ and of course Michael Dobb’s ‘House of Cards’.

In Johnson’s case, the risk of a coup is not yet high – senior colleagues are standing off in the hope that the Grey report delivers a killer blow, some backbenchers fear that a new prime minister might take the Tories back towards the centre and a hardy few still believe in Boris’ ability to avoid sanction.

My judgement is that Johnson may struggle on till the spring, but his credibility is now so badly damaged, and his enemies emboldened that he would find it difficult to implement meaningful policy initiatives. His behaviour so far in his career suggests that he is not a ‘resigner’ like Carrington but will need to be removed in a heave.   

Whoever becomes prime minister will have two principal challenges – repairing the economy, not just in terms of its cyclical health but structurally in terms of productivity and investment. The second challenge is reaffirming the rule of law and reversing policies that undercut Britain’s democracy.

A third challenge, and only for a very brave prime minister is how to sway the Tories away from their Brexiteer, right wing faction. Rishi Sunak, should he become prime minister may find that this cabal has little love for him, and might be the first Tory prime minister in decades to confront the faction that has done so much damage to Britain. In a recent note I wondered if it would be healthier for British politics if the Tory party would split, with the centre ridding itself of the right. It sounds obvious but in reality, will prove very difficult to execute but until it does happen, the Tories will prefer to be led by clowns.

Have a great week ahead,


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 dot.com 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 dot.com 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’.