GoldenEye

I may well lose half of my readers with the next sentence but, whilst many of you were struggling in sub-zero temperatures I spent much of last week in the Caribbean. As the plane passed south over azure sea and white beaches I thought to myself that we were not far from Goldeneye, the Jamaican residence of ‘James Bond’ author Ian Fleming. Indeed, the character of James Bond has some local Caribbean flavour, Fleming was a keen ornithologist and named his main character after an expert ornithologist and author of ‘Birds of the West Indies’ called James Bond, who subsequently visited Fleming at Goldeneye in 1964 (Goldeneye was the name of a 1941 intelligence operation in Spain that Fleming as involved in).

Early in his career, Fleming struggled to match his more illustrious father and brother (the excellent ‘Geographies, Genders and Geopolitics of James Bond’ by Lisa Funnell and Klaus Dodd underlines how Fleming’s conception of Bond was influenced by both his brother and father), and his military career really only took off when he took up a role in Intelligence (he worked at Room 37 at the Admiralty).

He was given charge of a small but telling operation whose aim was to conceive high impact missions that had little chance of success, but that would confuse the enemy. His playbook of operations was called the Trout Memo – after the fly-fishing technique designed to entrap trout.The conception of these high risk missions formed the basis for the James Bond novels, which from 1953 onwards were very popular, and by 1965 the series had reached thirteen books.

In 1965 the writer Kingsley Amis, well known as a serious critic, poet and author, published the book ‘The James Bond Dossier’, an analysis of Ian Fleming’s Bond novels. The book which contains studied lists of Bond’s victims, lovers (at my count Bond prefers English, American, French and then Swedish ‘friends’) and adversaries (few governments, mostly individuals and warped older male sociopaths at that), helped Amis enter the world of popular culture – he clearly had a sense of the allure and longevity of the Bond brand.

Some of the films based on Fleming’s work have been spot on in identifying threats and trends. On the whole and perhaps reflecting Fleming’s own operations, many of them involve the disruption of supply chains and the resulting profiteering – for instance Goldeneye was based on the deployment of an electromagnetic device to rob the Bank of England (don’t forget that Goldfinger plotted to use a dirty bomb to steal gold from Fort Knox), Tomorrow Never Dies Involved the manipulation of the media, in Die Another Day a satellite is used to manipulate the weather over North Korea and so on.

While the Bond film franchise is struggling to settle on a new actor to take over from Daniel Craig, my sense is that we live in a world that is increasingly Bond like in its geopolitics. Whilst the period of globalizations was relatively calm, we are now in the midst of a number of trends that are Bondesque – a Cold War between the US and China, a grey war between Russia and Europe, NATO re-armament (which featured in Thunderball), the rise of oligarchy and the advent of space as a competitive domain, to mention a few.

Every time I leave Europe, the intensity of the US-China struggle for supremacy strikes me, though I feel that most Europeans are not alive to this. Neither are they alive to the shadow war that Russia (with help from China) is prosecuting on Europe. The Polish government (holder of the EU rotating presidency) unveiled a sabotage campaign by Russia to target freight aircraft across Europe. This comes after a series of assassinations, sabotage attacks and hacking campaigns that Russia has prosecuted in Europe.

Back in the Caribbean, a striking event last week was the disintegration of Elon Musk’s Starship, which reminds us of the sharp rise of oligarchs as political operators (as highlighted by president Biden), and of how space is opening up as a new, competitive domain (Bond film Moonraker gave us a taste of this).

In particular the entry of Musk into the operation of military innovation and procurement is a sign of a wave of aerospace and defence innovation, that is being pioneered by firms like Shield AI, Helsing AI and Anduril. As a sample of the thinking behind this innovations, one idea that was put to me recently is to replace fighter jets with hypersonic rockets that carry and deploy drones to the battlefield. Of course the trouble with most of these technologies is that they are unmanned, leaving little room for Bond like characters to distinguish themselves.

A final element worth mentioning is geopolitical power. Britain is a much less consequential player geopolitically than it was in the 1950’s, but it still retains a seat on the UN Security Council for instance. The trouble is that many of the institutional reference points of the Fleming era are losing their lustre, and risk being replaced by an entirely new set of institutions, and we could speculate that in the future we will see the development of a World Cyber Police, an AI led World AI Safety Institute and an authority to police genetic editing and DNA hacking, all of which might feature in future Bond plots.

James Bond may be on hold as a cinematic experience, but I wonder if the next Bond movie should be called ‘No Time for Tariffs’.

Have a great week ahead,

Mike

Contrarians and Controversialists

We spent a memorable New Year’s Eve on Dursey Island, one of the more remote parts of Europe, whose only point of access to the Irish mainland is by ‘Ireland’s only cable car’, where the principal safety device is a bottle of holy water. In 1602 Dursey was the scene of the massacre of some of the O’Sullivan clan. Some six hundred years before that, it was a staging post for the Vikings.

I am tempted to think that had the Vikings stayed the O’Sullivans could have escaped the slaughter of the Siege of Dunboy, but then again, always optimistic, I contend myself that Dursey – unlike the other Viking island (Greenland) will not attract the attention of the US Navy.

My intention this year is to be as least distracted as possible by the geopolitical strategizing of President Trump, but in the context of a far more ideological cabinet, his thoughts have consequences – not least for how they will encourage the enemies of America and the ‘west’ to behave.

For investors, political and geopolitical risks will likely play a much greater role in developed market asset returns than in any time over the past forty years, and the market reaction to Donald Trump’s victory offers them a wonderful opportunity to take a contrarian view and ‘spend American exceptionalism’.

To explain what I mean by that, our starting point in 2025 is that an array of US assets trade at very high levels. Indeed, to recap a phrase I used in December markets are starting 2025 from the ‘wrong place’ in the sense that an enormous amount of capital is tied up in assets (the top ‘7’ technology firms, the dollar, corporate bonds) that trade at all time lofty valuations.

For instance, Bank of America estimates that the dollar is the most expensive that it has been since the early nineties, and valuations for US stocks are close to the highest levels they have reached since the late 1990’s. The top fifteen companies in the US are now worth the same as Chinese and European equity markets together.

Added to that, quite a few assets have exploded in value because of their proximity to Donald Trump – notably the crypto eco-system and Tesla (which has added USD 850bn in market value around the time of the election, an amount equal to the value of its ten nearest competitors).

There is not yet a bubble in the broad US market – many segments such as value stocks (high dividend companies) and small companies have not performed, but there is sufficient capital held in very expensive dollar denominated assets that it demands the attention and action of investors.

Market analysts do not appear worried – in the time-honoured fashion the major investment houses have released their year ahead forecasts, which suspiciously all cluster around the 10% market, and equally suspiciously no investment house is forecasting a negative year for US stocks. This collective conclusion must have required great analytical power because an independent re-running of these same models points to flat or negative returns.

To that end, investors should take advantage of expensive dollar assets and diversify abroad.

They may be convinced to do so by two developments. The first is the collapse in long term US bonds since the Federal Reserve launched into a series of rate cuts from September onwards. In effect the bond market is signaling that it sees a resurgence of inflation ahead, and it is also likely flagging that the credit worthiness of the US may be deteriorating (in the sense that there is little prospect of the budget deficit and government debt being pared back).

Related to this, the second Trump administration begins in a much worse fiscal place as the first Trump government did in 2016. In the period 1960 to 2016 (with the exception of the Vietnam War) the US budget deficit has always followed the tempo of the business cycle (as proxied by unemployment).

That is to say that the budget deficit shrunk when the economy was strong (low unemployment) and it grew when the government spent more to cushion the effects of recession (high unemployment).

Today, we have the opposite – unemployment is low and the budget deficit is very high. This implies three risks – that too much spending in a ‘hot’ economy creates inflation, that there won’t be any money left to ‘rescue’ an eventual recession, and that the rising deficit implies rising debt, which bond markets don’t like.

None of these risks, and rising bond yields, appear to worry the US equity and corporate bond market, but they should. A contrarian view might look to sell expensive dollar denominated assets and allocate overseas.

So my message to start the year is – don’t invade Denmark, buy its equity market.

Have a great week ahead, Mike

2025 – The Hangover

I’ve decided to send my Sunday note early for two reasons. Tomorrow morning we head to Cork for holidays and I attach a link with a short list of suggested Christmas reading, and wanted you to have a chance to get to the bookshop (always a more rewarding experience than buying online).

Granted that it is year end, I am often caught up in the swirl of ‘2025’ prognostications on the economy and politics, and while not a great fan of short-term forecasting I thought I would lay out a few themes that will condition markets and economies into 2025.

I wouldn’t start from here.

Financial markets – which are dominated by US equities (over 65% of world market cap), are starting 2025 from a vertiginous place.

Retail investor surveys have never been so optimistic, stock market concentration is at levels last seen in 1929 (the top ten stocks account for 40% of the market) and valuations are stratospheric (a simple measure, the price to earnings ratio, has only been higher in 2020 and 2001). In that respect, many investors might pose the question ‘when is the crash?’. My sense is that absent a damaging trade and supply chain war between the US and China in Q1, we will likely see a very meaningful rotation from US equities to cheaper markets in parts of Asia, but more so Europe (the election of Friedrich Merz as German Chancellor in late February might be the catalyst for this).

The Plaza Problem

A further reason for this is the strength of the dollar, which makes foreign assets cheaper for US investors. Following the election of Donald Trump, a range of key currencies have weakened noticeably – the yen, Brazil’s real, the Indian rupee, renminbi and the euro. Whilst the new Treasury Secretary Scott Bessent will see the benefits of a strong dollar, the weakness of ‘foreign’ currencies is anathema to the worldview of Donal Trump, who dreams of another Plaza Accord (a ‘Mar-a-Lago Accord’) that might reset the competitiveness of the dollar.

The problem with this view, as we head into 2025, is that the weakness of Asian currencies and the euro, relative to the dollar, is driven largely by diverging economic performance. In that context, a Trump administration that runs the economy ‘hot’ risks postponing a grand currency accord. It also risks a resurgence in inflation (and bond yields), which I suspect will be a story for next summer.

China – Japan or Greece?

The one factor that could temper inflation is China, a very large political economy that we know increasingly less about. My bet is that commentators will spend much of 2025 debating whether China is ‘Japan’ or ‘Greece’, in the sense of how the deleveraging of its economy materialises. China will become the risk factor for 2025 – economically, geopolitically and commercially in the way it will respond to the onset of tariffs from Washington.

Despite a recent, aggressive financial stimulus, the Chinese economy is gripped by deflation – in house prices, activity and a fall in entrepreneurial activity. Underlying this is a generalized demand problem.

This year’s plenum on economic policy has not done much to repair the structural creaking of the economy and the worry is that internal ‘reform’ (i.e. a political crackdown) further saps the willingness of entrepreneurs to invest, and equally that Xi is shaping China in the form of a more closed state, that curbs the will of those inside, adopts a singularly selfish approach to those outside, and relies on several great strides in technological industrialisation for the prolongation of the ‘China Dream’.

The contradiction here, and specifically between the three strands to emerge from the plenum, is that in its policy making and economy China needs innovation but is creating a socio-political system that smothers it.

In this respect, the third plenum and the recent liquidity boost missed a trick in not outlining a Keynesian style stimulus for the economy (or even longer-run structural one). The property market is slowing, entrepreneurs are very cautious and the risks associated with local government debt are rising. While China has so far managed to duck a major recession, the government may have become too complacent about the deleveraging process, and the possibility that this accelerates downwards, dramatically so as was the case for Greece, or tortuously as was the case for Japan.

Bond markets – suffering the hangover from elections

As China slows, the key variable to watch is the Chinese long bond yield, which has been compressing lower in recent months as investors take a dim view of the economy. Elsewhere, there should be plenty of action across bond markets, driven by the fiscal aftershock of elections across the world.

We still have a general election in Japan and the prospect of an election in Germany next February (23rd). In the cases of the US, UK and France, elections have seen bond yields rise in the context of near record indebtedness and very large deficits.

In that respect, the fiscal hangover begins. Governments across regions will find themselves reined in by bond markets and under pressure to curb spending and in some cases to raise taxes. This pressure alone may eventually tilt economic policy more towards supply side changes, and also change the kinds of issues that politicians focus on such as immigration and identity politics.

Fiscal rectitude may only come to reign after a few bond market tantrums. There are two countries in particular worth watching – France and the US. First, the French budget process has been very drawn out, and with France having to cut its deficit in half over the next three years, it is unlikely that France’s political class, not to mention its public, are ready for deeper austerity. In that way, higher French bond yields will be a fixture in markets and might periodically push much higher.

The other market to watch is the US bond market, which in 2025 may become the limiting factor for equity and other riskier assets. Since the Fed cut interest rates by 50 basis points in September, bond yields have risen and remain stubbornly high. With growth in the US economy strong, and other economies steadying, the risk factor is that inflation rises (though lower oil prices and deflation from China can offset this), driving bond yields higher, or that the desire of the Trump administration to run the economy ‘hot’ provokes a rise in yields. In this sense, the bond market may become Trump’s nemesis. The market reaction to this week’s Fed meeting is a sign of things to come.

This post is a little longer than normal and am now going to ‘down pens’ till you hear from me again on January 12^th, when I will focus on some of the risks and potential surprises for 2025.

Have a lovely Christmas and a very prosperous new year,

Mike

W.E.N.A

A few weeks ago, it would have been inconceivable to most foreign policy experts that Israeli aircraft could bomb Syria at will with their tanks apparently in shooting distance of Damascus, all the while a new Islamist regime installed itself there. This latest turn in the topsy turvy geopolitical world gives a glimpse of some of the regime shifts to come and the fragility of erstwhile brutal, long-lasting dictatorships.

I absorbed the implications of the event in Abu Dhabi, which in terms of its success and trajectory, underlines the view of some that there are ‘two middle easts’. At the same time, Abu Dhabi has risen to a point of influence that it will be the lodestar in building the economic structure of the region once a viable peace plan for Israel/Palestine has been found.

The surprise departure of Bashir al-Assad will likely accelerate the reordering of the region and give food for thought to other ‘strongmen’. It may eventually be that a gang of them ends up living out of the Ritz Carlton in Moscow.

Indeed, a couple of academics have tracked the flight of deposed dictators and state that ‘we find that dictators are more likely to go into exile in states that are close neighbors, have hosted other dictators in the past, are militarily powerful, and possess colonial links, formal alliances, and economic ties. By contrast, fleeing dictators tend to avoid democratic states and countries experiencing civil conflict’. More specifically, in Europe the top three destinations for dictators are Russia, the UK and France!

Despite Assad’s fall, Syria itself is not out of the woods – Hayat Tahrir al-Sham may be media sensitive, but they are also deadly, conservative Islamists. They have manifestly been given a firm helping hand by Turkey, which is re-establishing itself as a regional power.

Turkish foreign policy is an enigma, wrapped in a mystery. In the past I have written how, in the aftermath of the Arab Spring, many countries in north Africa wanted to follow the ‘Turkish model’ of development. Since then, Recep Erdogan has enfeebled the country’s institutions and its economic backbone and has turned a foreign policy that used to be based on ‘no trouble with neigbours’ to one of ‘trouble with neighbours’.

However, Erodgan is a key player now – especially in terms of how he negotiates Russia’s military withdrawal. There remain many open questions, notably how the fall of Syria further weakens Iran and what implications this has for Iraq. Larger regional countries like Egypt and Saudi Arabia will welcome the toppling of Assad and the further undermining of Iran, but now have to face up to the prospect of a regional peace deal where the strength of their support for Palestine will be tested.

If in 2025 a peace deal is struck that keeps in place the two-state formula, then the prospect of a regional economic recovery, led by the UAE (or Abu Dubai as some call it), may not be far off.

Visits to ministries, financial institutions (including Abu Dhabi Finance Week) and infrastructure players, with Prof. Afshin Molavi and several other economists and writers, gave a sense of the ambition of the region. In particular compared to previous visits to the region, two things stood out as ‘new developments’.

The first is a growing sense of independence on the part of the UAE to go its own way in terms of how it makes policy (as opposed to being a policy taker from the US and the EU). This is evident in finance, infrastructure, labour markets and trade. On trade specifically, the UAE has to be geopolitically ambidextrous in how it builds relationships with the US and China, though when it comes to technology, the sense is that it is very much plugged into America.

The second element worth commenting on is the idea of ‘The Fourth Pole’. I have written on this in the last year, and the idea is that in a multipolar world made up of three ‘poles’ (US, EU and China) there is room for a fourth pole made up of India, the Gulf States and other players across the ‘region’ (which we could define as those countries a five hours flight away from the UAE, which includes some 2.4 billion people across Asia, Africa, Southeast Europe and the Eastern Mediterranean).

The notion of the ‘Fourth Pole’ is gathering pace around the very close relationship between the UAE and India (the very popular Hindu Temple in Abu Dhabi is just one sign), and the web of trade, finance and infrastructure deals they are engaging in across the region. This relationship may not ultimately become as deep as that of the EU countries, but it is beginning to look like a modern version of the ‘Coal and Steel’ community. The risk however, is that they overbuild capacity in the face of a forthcoming economic shock or recession.

As a final word, the best indication that I had that the UAE is feeling both confident and more independent is that some well-connected government advisors have come up with an acronym for the west – W.E.N.A (Western Europe and North America)!

Have a great week ahead,

Mike

Moriarty

Monday morning started with an early sprint from Baker St to Marylebone train station in London, passing close to 221b Baker St, the fabled home of Sherlock Holmes. However, Holmes was not on my mind, but rather his nemesis, Professor James Moriarty. I was on my way to a seminar on the future of crime (especially as it concerned robots and social robots) organized by the excellent team at UCL’s Dawes Centre for Future Crime.

The rumour is that Conan Doyle based the character of Moriarty on George Boole, Professor of Maths at University College Cork from 1849 until 1864 (disappointingly his former home on Grenville Place is in a state of dereliction). Boole, one of the great mathematicians, created Boolean algebra which laid the foundations for computer language and is this the structure around which scientists use machines to mimic and ‘improve’ on human behaviour. To that end, Moriarty and the idea of the ‘future of crime’ should be of all the more interest to us in an AI driven world.

Whilst many serious crimes are in abeyance – murder rates in small open democracies (Switzerland, the Czech Republic and Ireland for instance) are very low, and those in the large EU economies – France, Germany, the UK and Italy trend below 1 per 100,000 (the USA is seven times higher), new forms of crime are on the rise, many of them driven by technology.

Mobile phones and social media have become an entirely new vector for crime in terms of the theft of passwords, online bank details, identity theft and the harassment and abuse of people online. Similarly, crypto currencies are the conduit for much criminal activity, and it is believed that confiscations have made the FBI the biggest holder of bitcoin. In addition, the metaverse has opened up an entirely new legal space, where injuries and attacks carried out in an apparently unreal world can have consequences in the real world.

In this context, the issue at stake at the Dawe’s Centre seminar was whether socially intelligent robots can create new forms of crime, that are not yet covered by legal frameworks and for which countermeasures have not been conceived.

It is a terrifying prospect – robots could not only be primed to deliver drugs or explosives but imagine the consequences of robot bodyguards and guard-dogs who take it upon themselves to attack specific targets. In many cases, the prosecution of an assault by a robot would likely follow the logic of charging the owner of a dog (Britain’s Princess Anne was famously prosecuted when her pitbull ‘Dotty’, bit two children). On a more mundane basis, robots increasingly interact with vulnerable humans – the lonely, the elderly and for instance autistic children, and while these interactions are very helpful, they also open up scope for abuse. In time the growing prevalence of sex robots will cause all sorts of controversies.

However, in cases where the robot acts intelligently and autonomously, the law is not clear and frameworks on AI offer only meagre guidance. Robert Harris’ book ‘The Fear Index’ is a good illustration of what might occur when an intelligence ‘bot’ takes over a critical infrastructure, and the use of AI on the battlefield is chilling in its ruthlessness.

Heavy duty robots also permit the exploration, surveillance and protection of faraway places (the deep sea, space and remote parts of the earth) though at the same time they permit mischief by various actors such as attacks on critical marine infrastructure.

It may well be that, as in the case of driverless cars, socially intelligent robots are less dangerous than humans, though the notion itself of criminal robots is cause for concern. For the time being, many of the impetuses to the ‘future of crime’ are human factors. Some of them relate to changes in wealth – such as the rise of powerful oligarchs, and a rich ultra-high net worth class of people who on one hand are targets for crime and on the other hand have the means to dominate others and push their own visions of what society should look like. We may see more of this type of behaviour in coming years.

Then, we really get into ‘Moriarty’ territory when states begin to collaborate with individuals and gangs, as is the case with Russia for instance. States have access to intelligent and often lethal robots and can enable organized criminals to use them – it is not impossible that gangs might start to use drones in contract killings. The other, related area that is increasingly relevant here is corporate intelligence and security (Lewis Sage-Passant’s book on this topic is very good) where many corporate security teams have to combat hacking and other attacks by robots, from criminal gangs, and as was sadly demonstrated in New York last week, assassins.

If Moriarty existed today, and perhaps he does, corporates as well as governments might be his preferred targets, and he would very likely equip himself with robotic henchmen (and women) who could subvert the human world.

The question is, what would Sherlock do?

Have a great week ahead,

Mike

The Diplomacy Crash

US stock market valuations have only been as high as in 2001 and 2020, market concentration is more extreme than in the late 1920’s (the top ten companies now make up 38% of the market capitalization of the S&P 500 index), and money manager surveys show US households to be the most bullish on future returns from equities since the survey began in the early 1980’s.

So, given this precarious euphoria, when is the crash?

My response is that crashes come in unexpected places and times and one idea that has not had much coverage but that might become current is the idea of a ‘diplomatic crash’. By this I mean that a host of countries have invested diplomatically, or in terms of soft power, in institutions, partnerships and causes. The acceleration of a multipolar world by the second Trump presidency will crash the value of many of these diplomatic investments.

An example might be the ‘special relationship’ between the UK and the US, the seeds of which were sown by Roosevelt and Churchill during the second world war (Churchill coined the term in 1946), and later cultivated by Thatcher/Reagan and then the Bushes and Clintons with both John Major and Tony Blair. Today, it is very hard to see any personal chemistry, or philosophical common ground between Donald Trump and Sir Keir Starmer. If the ‘special relationship’ were a stock or even a crypto coin, its value would be at a historic low.

In more detail, the idea of the ‘diplomacy crash’ came to me the night before I voted in Ireland’s general election. Ireland is a very quirky, even eccentric country from a geopolitical view in that unlike many other European countries there is close to no debate in Irish politics on defence and security, and its defence capability is miniscule compared to benchmark countries like Norway and Sweden.

In that context Ireland, like many other mid-ranking developed countries, is about to suffer a diplomatic crash. It has, correctly, invested heavily in the UN and the rules-based order. Some of the pillars of this order, like the World Trade Organisation – effectively built by an Irishman (Peter Sutherland) – are in a state of dereliction. It may well be the case that the UN ceases to be effective in dispute resolution between states, world health policy and great power coordination.

In addition, together with Spain and Norway, Ireland has spent significant geopolitical capital supporting Palestine (all three countries recently recognized Palestine as a state). Here, it cannot be ruled out that a grand peace deal is made in the Middle East, between Israel, Egypt, the UAE and Saudi Arabia, whose goal is to create greater investment and commercial flows between these countries and strategically disable Iran, but whose outcome is to render the ‘two-state’ solution unachievable. This new, harsh reality would leave the humanitarian led foreign policies of many European countries well ‘off-side’, compared to the stance of the Trump administration.

Ireland is just an example here, and there are plenty of other crashes in diplomatic capital – Germany’s trade policy with China, and potentially Japan’s relationship with the USA, France’s relationship with Africa and in general the cultivation of the rules-based order by democracies.

In finance, when a market crash occurs, investors become structurally risk averse, run for safe assets and generally retract positions. This might be the same in diplomacy. The risk then is a more unsure, less engaged diplomatic world, and worryingly one where the international rule of law is ignored.

In Europe, reflecting the lessons of the euro-zone financial crisis, this may imply that EU foreign policy becomes more consistent across countries (though perhaps not yet unified) and more focused (Katja Kallas is perhaps the most forceful foreign policy chief that the EU has had). In addition, new policy coalitions and leadership groups will form, notably so in the case of the Nordic and Baltic states on defence and immigration.

The EU also needs to stop geopolitical hedging by its members. Hungary under Viktor Orban has become notoriously close to Russia, and whilst Serbia had tried to play both sides it seems more comfortable as a bona fide EU nation (it is an accession state).

Once Ireland’s election result is clear, the first task for its leaders may be to choose sides – solidarity with Europe and active participation in the EU defence effort, or a singular, eccentric relationship with the Trump administration.

Have a great week ahead,

Mike

Profiles in Courage

John F Kennedy, who died this week 61 years ago, is famous for many things, but a lesser known accomplishment is that he won a Pulitzer Prize for a bestselling book entitled ‘Profiles in Courage’, that told the stories of eight American political figures (mostly senators if I recall) who took morally courageous stands on issues that went against the views of their parties and popular opinion. An example was John Quincy Adams’ decision to break from the Federalist Party (over foreign policy).

Like all things Kennedy, the book was a dazzling success, but also had a few magical ingredients. It is generally accepted that Ted Sorensen, adviser and speechwriter to Kennedy, contributed much of the book, or in his own terms, he wrote ‘many of the words that made up the sentences’. Equally, the book did not make it through the formal entry process for the Pulitzer, but was nudged into the competition by Joe Kennedy, the president’s father.

As an aside, in the context of the recent presidential election, it could well be argued that Joe Kennedy was a Trumpian figure…or that Trump is simply following the ‘Patriarch’s; example (David Nasaw’s book of this title is very good). Joe Kennedy accomplished more as a businessman than Trump, but fell short in his political career. Instead, he groomed Joe junior(killed in the second world war), then John, Bobby and Ted.

One of Joe senior’s achievements was his appointment as American ambassador to the UK, but his term was cut short because of his perceived stance on appeasement. With some irony, Joe senior had encouraged the publication of his son’s Harvard thesis as a book.

‘Why England Slept’ queried the ‘soft’ stance of the British government towards Germany in the lead-up to the war and argued that if Britain had re-armed earlier and taken a more robust stance with Germany, the second world war may not have happened, or at least might have taken a different path (the book was a great success and the British royalties were given to the city of Plymouth which had been badly bombed by the Luftwaffe).

Though Robert Kennedy junior may now take the ‘Kennedy’ limelight, the message of JFK’s books echoes in today’s world. In a couple of years’ time, someone might write ‘Why Europe Slept?’ in the sense that Europe has let its guard slip on security and not built defence infrastructure to keep up with the threat of Russia.

In a week where a Chinese vessel is suspected of cutting a telecoms cable between Germany and Finland, when the first EU defence and space commissioner has been confirmed (Andrius Kubilius’ first task is to compile an inventory of Europe’s defence supply chains) and where an intercontinental ballistic missile has apparently been used on Ukraine, there is a sense that Europe is still not ready for the worst.

The idea of ‘profiles in courage’ is even more pertinent. In a multipolar world, where countries and companies have to ‘take sides’, where America will arguably become more transactional and less relationship driven in its foreign policy and, where democracy is being eroded from within and afar, moral courage will be at a premium.

One unfortunate example here is Olaf Scholz’ moral capitulation in calling Russia’s president last week, ostensibly to lay the groundwork for a peace deal. Scholz likely had the upcoming German elections in mind, but his call was rewarded with an intense bombardment of Kiev.

This has left Scholz even more discredited. Up until this week there was now a growing debate around his future as SPD leader and the prospect that he could be replaced by Boris Pistorius, the popular defence minister. Pistorius has declared that he does not want the leadership tole.

This is a pity for Germany, because having Pistorius in place as Social Democrat leader by the time of the election might boost the party and would also make a coalition with the CDU easier to form and more ideologically consistent. As it stands, the polls show the CDU/CSU with some 32% of the vote, the SPD on 16%, AfD at 19% and Sara Wagenknecht’s party at 7%. At that rate the CDU-SPD coalition might need to take on a smaller partner, but in effect Merz would be the dominant partner.

A Merz lead coalition could be a real change for Germany, could reignite its economy and remake its energy policy, and may turn it into a more robust geopolitical player vis a vis Russia.

My advice is that Merz, and his compatriots at the head of the SPD both read the works of John Kennedy.

Have a great week ahead,

Mike

Distance

If any readers travel to Singapore, I can recommend they visit the Botanic Gardens to sense the dawn break. A badly adjusted body clock brought on by jet lag meant that I found myself jogging around the Gardens at 5.30am on Monday and Tuesday mornings – uplifted by the sounds, smells and sights of this mini paradise.

My few days in Singapore, principally to speak at the Founders Forum gathering, allowed me to gauge the Asian reaction to the prospect of a second, more menacing Trump term in office.

I did so armed with the memory of a May 2016 visit to Singapore where I had asked a gathering of some 300 people to compile a word cloud (using their mobiles) of thoughts and emotions they associated with Donald Trump. The result was harsh, and very few of the participants that day thought Trump would be elected as president in 2016, and just as few thought that Brexit would happen.

To my mind the event was emblematic of the certainty of the era of globalization, and the ways in which this was smashed by events like the first Trump presidency, Brexit and the smothering of Hong Kong’s open society.

Singapore is one of the most important places to observe these changes from – it is highly globalized (the DHL Connectedness Report highlights it as the most globalized country in the world), delicately balanced between the Chinese commercial and American worlds, and institutionally one of the strongest countries (though it is one tenth the size of County Cork, it has an active army nearly ten times the size of that of Ireland). As a leading ‘micro-power’ it has an even greater stock of soft power.

As such Singapore will acutely feel the rising tensions between China and America especially in terms of the technologies it uses, investment flows and diplomacy. For context, the soon to be secretary of state Marco Rubio has laid out the faultlines in the relationship between China and America in an interesting document entitled ‘The World China Made’.

Indeed, several prominent politicians in Singapore such as prime minister Laurence Wong have declared the end of the ‘golden era of globalization’. My guess is that in the Trump era, Wong and colleagues will have to tread incredibly carefully diplomatically. Economically, it is clear that Singapore’s role as the wealth hub of Asia, or its ‘Geneva’ is gathering pace, and also obvious that its economy is benefitting from the growing prosperity in countries like Indonesia.

There are two other aspects of my visit that are worth stressing, less for what they say about Singapore but more for what they tell us how the ‘West’ is perceived.

First, with regard to Europe, in two separate meetings I was asked if I thought the euro would survive. This greatly surprised me as not only do I think the euro is a solid, though not yet perfectly formed currency, I have not been asked that question in Europe in nearly ten years. It suggests that Europe still has a reputational problem, or that at very least its ‘message’ is not reaching Asia. Conversely, it seems that there are too few Asian voices in the European media – connecting us to what is happening in cities like Singapore and Hong Kong.

The second reflection, which also resonates across Europe, is that for the first time in at least a century, an American presidency is being launched that has a manifestly threatening and aggressive stance towards the rest of the world.

America has historically been the builder of relationships, alliances and institutions (Pax Americana) and its (soft) power has been built on this. The tenor of the Trump cabinet is increasingly clear, and many of the appointees appear to have been selected on the basis that they did bad things in the past, or that they are prepared to do bad things to others in the future.

This is the great unknown for the USA, that its new posture towards the rest of the world causes it to lose influence and friends.

Have a great week ahead

Mike

Empire

Donald Trump will be president of the United States for a second time, defying those who thought his first term was an anomaly and who considered that the American people still care about the rule of law. He will preside over the 250^th anniversary of US independence, the next Olympics and World Cup.

This is an election result of such great consequence that it will decide whether America’s hegemony is renewed, or that its empire fades like so many others have done through the ages. Fittingly, I woke up to the news of Trump’s victory in Vienna, a city that knows a thing or two about empires. In that context, an interesting and possibly underread book is ‘The Hapsburg Way – 7 rules for turbulent times’ by Eduard Habsburg, known formally as the Archduke of Austria and now a career diplomat for Hungary.

Of Habsburg’s seven rules, the most important are ‘Believe in the empire, and your subsidiarity’ and ‘Respect law and justice’. Trump will likely not do well on these counts, nor does he score on ‘Be Catholic’ though the Catholic church has chased his coat-tails through the electoral campaign. He does better on ‘Get married and have many children’ and ‘Be brave in battle’.

The book is full of interesting snippets, such as that the first governor of Texas (in 1691) was installed by the (Spanish) Habsburgs. In that respect the only blemish in the book is the foreword, written by Habsburg’s boss Viktor Orban, who this week held court over his European counterparts in Budapest, in the wake of the Trump victory.

While I think that Trump will be much more disruptive for Asia and Europe, and that his presidency will see an unprecedented re-shaping of the Middle East, a great deal of media attention is devoted to his impact on Europe and NATO. Overall, the reaction is far too alarmist and the vision of world leaders cowering before Trump gives little acknowledgement of his and America’s vulnerabilities.

Despite this, with near comic timing, only hours after Trump’s victory was confirmed, the squabbling German government fell apart, a development that has been simmering for some time.

Germany will likely have an election next March, and this is good news. Scholz’ ineffective and indecisive government will be thrown out (Scholz may also be replaced by Boris Pistorius at the head of his party), and Germans will vote in a centre-right government, if polls are to be believed. There is very strong appetite on the part of German businesses to restart the economy, unblock planning laws and rethink energy policy. This much was very clear to me when speaking with investors and businesspeople in Hamburg (after Vienna).

If a new centre-right government transpires in Germany, this should re-engage the political engine at the heart of Europe between France and Germany. But there is a small chance that Emmanuel Macron will not be president of France in a year’s time. Macron, who this week compared Europe’s fate to ‘herbivore in a climate of carnivores’, is fantastically unpopular in France and it cannot be discounted that the Rassemblement will try to bring him down in 2025. Similarly, there is a risk that far-right parties in Europe are emboldened by the Trump victory.

Apart from the travails of the German and French leaders, there is a shift of power going on across Europe – in favour of Poland and Italy, and towards the Baltics/Nordics. The sense is that a Trump led US will bring about the end to the Pax Americana, which may initially leave Europe more vulnerable diplomatically, though ultimately it will become more independent (to America’s disadvantage). Arguably the loser here is the UK, stranded offside the EU, and at odds with Trump and his vice-president.

A Trumpian America, if true to the caricature, will leave Europe as the last bastion of democracy and independent institutions. This is a great challenge and one that most people are not ready for. In events I speak at, a trick question I pitch to the audience is to ask how many of them (usually accomplished, educated people) would enter politics – in most cases there are few volunteers. If European democracies are to be renewed, politics must re-civilise itself and to quote Eduard Habsburg, politics also needs more brave people.

Another area to watch is institutions. Donald Trump already politicized the Supreme Court and might well do the same with the Federal Reserve. On Thursday the Fed, oddly in my view, cut rates, but the press conference after the meeting was dominated by Chair Powell denying that he would resign if Trump requested, he do so. As America’s institutions may become more politicised, and world institutions like the UN and WTO become less relevant in a Trumpian world, Europe needs to ensure that the independence and competence of its institutions is pristine.

Returning to the topic of defense, perhaps the most interesting confirmation hearing (by the EU Parliament) of EU commissioners designate was that of Andrius Kubilius, the Lithuanian, first defense commissioner. His first task will be to deliver a paper (in 100 days from now) on the state of defense procurement, the integration of defense supply chains and the opportunities for a more intensive commitment to space technology. In his commentary, he revealed that a pan-European missile defense shield could cost up to Eur 500bn. So, we should brace ourselves for the issue of EU war bonds to pay for this.

To end this note with a very big picture view, in the context of the theme of the ‘Levelling’, Trump’s first victory was a wrecking ball to globalization. This second one shatters it completely and will try to remake America and the world order with a narrative and vision (‘tariffs’, ‘deportation’, ‘loyalty tests’) that will deglobalize. Politically, Trump has sold Americans a political vision based on the Leviathan (the people surrender their liberty to a singular leader in return for protection). Europe is still a ‘Leveller’ type system (bottom up democracies). Of the two approaches, I am with the Levellers.

Have a great week ahead,

Mike

No-one will save you

A headline in last week’s Guardian caught my eye. It read ‘No-one will save you’ and detailed the bubbling awakening of a volcano near Grindavik in the south of Iceland. Granted that we were in the area, we drove down to have a look. My family didn’t share my ‘lava-lust’ and luckily for them the police were still in place and roads to the volcano were closed.

However, the ‘no one will save you theme’ is also relevant to Iceland in the financial sense, in the way it represents a rare example of a small, powerless country that resolved its banking and debt crisis by itself, in a very painful but ultimately productive way.

Some readers may recall that in the mid 2000’s Icelandic entrepreneurs were making headlines with bids for leading British retailers like Hamleys and Karen Millen. That a small, fish led economy of some 350,000 people could produce such brash, adventurous capitalists has less to do with Iceland’s Viking and Celtic heritage than the over supply of cheap money from its banks.

At the time, Iceland vied with Ireland for the title of ‘biggest banking sector’ (relative to GDP). According to a presentation deck from Mar Gudmundsson, the Norwegian who took over as head of Iceland’s central bank post the crisis, the Icelandic banking sector grew by a factor of three times between 2004 and 2008. Specifically, Iceland’s banks, the likes of Glitnir, Landsbanki and Kaupthing (all AAA rated of course) were growing their balance sheets at a rapid rate (to a near record 10 times Iceland’s GDP) and bankers travelled from London to sell them new, genius investment ideas.

Like Ireland, Iceland became admired for its ‘model’ economy, and took advantage of the fawning of other Nordic countries and bodies like the OECD to sell more ‘Glacier bonds’.

There are plenty of colourful stories about the exploits of Icelandic bankers at that time, but to cut a long story short, when the global financial crisis struck in October 2008, the Icelandic banking system quickly collapsed.

As a small, open economy with meagre financial resources, the fallout was dramatic and painful. In the aftermath of the crisis, the Reykjavik stock market fell by 90%, the corporate bond market cratered and the currency (Icelandic krona, ISK) by 50%. Many households had borrowed in foreign currencies and as a result saw the burden (in ISK) of their mortgages soar. On paper, Iceland’s debt to GDP hit 700%.

A classic banking bubble was soon followed by a deep, textbook ‘bust’ (one economist Hermann Schwartz summed it up as ‘Iceland came late to the global party, drank too quickly, and hit the floor rather harder than larger economies’)

What is most interesting about Iceland is the way it resolved its crisis, largely by itself and through the will of the people. This might sound obvious or even trite, but when I compare it to the fallout from Ireland’s economic blow-up whose causes were very similar to Iceland’s banking crisis, Iceland has demonstrated a far greater degree of reform and accountability in its public life. In a world of heavily indebted nations the example of Iceland is one to bear in mind.

Like other European countries at the epicentre of the financial crisis Iceland was gripped by protests. Reform came quickly. The long-serving prime minister, Geir Haarde lost his job (his last speech to the nation ended with the words ‘God save Iceland’), and the governor of the central bank was forced out of his role.

The new government, and to a large extent the Icelandic people are considered to have largely taken ownership of the resolution of the crisis (think of the public opposition to pension reform in France as a counter example). Some thirty-six bankers were tried, sent to jail and fined, a development that is in stark contrast to other crisis hit countries.

Iceland suffered a brutal financial shock, and a deep hit to the real economy (output dropped 15% in two years), though this was ultimately less severe than the damage done to the Greek and Spanish economies, one reason for this being the manner in which the drop in the ISK made Iceland attractive as an exporter and tourist destination (the curiosity of tourists was also piqued by the explosion of the Eyjafjallajökull volcano and the use of Iceland as a location for Game of Thrones). .

A number of financial reforms also helped, the financial regulator was given extra powers, notably to protect deposit holders and new, domestic economy focused banks were created. The government refused to assume responsibility for debt owed to foreign nations and investors (many of whom were in the UK which placed Iceland on a terror watch list). Fiscal austerity was imposed, under the watch of the IMF, but this was less onerous in its conditionality than that imposed on Ireland, Greece and Spain.

The result of this reform and readjustment process was that the Icelandic economy began to recover some three years after the crisis started, and according to Iceland’s central bank GDP growth had caught up with the recovery of the US economy by 2018, surpassing that of the euro-zone.

Whilst it is a small, idiosyncratic economy, there are some clear lessons from Iceland in terms of how an open economy might deal with a multi-faceted banking, debt and currency crisis.

Very broadly, the key elements involve prioritizing the domestic economy, domestic banking deposits and the free functioning of the financial system, the sense of justice and accountability that comes from ‘regime’ change and the arraignment of guilty bankers, the absence of overly punitive austerity, and the presence of a stabilizing mechanism (in this case the currency).

As I write, Iceland’s economy seems to be thriving, with a new focus on biotech, geothermal power and climate-tech.

France, Germany and the UK should pay attention.

Have a great week ahead

Mike