The Staccato Economy

Imagine if some of the key patterns in our lives, the length and nature of the seasons for example, were to change. With mounting climate damage, that may well become the case. In other aspects of human life, such as longevity and the length and form of the working day, long established patterns are already changing – on balance we will live longer active lives, and work continuously, from home.

Another deep-seated change is the business cycle. There are not many people who spend time thinking about the business cycle, given it is a dull corner of economics, but the ebb and flow of the cycle affects us in a fundamental way, through pensions, jobs, investment and wealth.

In recent posts I have mentioned the business cycle a few times, in the sense that the rhythm of the business cycle may soon change, and I want to expand a little on this now.

To put this in context we have, by the benchmark of history, lived through an abnormal period over the past thirty years in that it has been characterised by three of the four longest business cycles in modern history (back to 1870 according to the NBER). Starting in 1990 with the fall of communism and the rise of globalisation, they have stretched for an average of 120 months, twice the long-term average. If we go further back in history, using mostly UK data, business cycles have tended to be even more jumpy.

Indeed, these staccato’d business cycles were driven by factors such as poor harvests (1880), wars (Napoleonic wars) and credit crises (1870’s) – each of which is problematic today. In that context, my hypothesis is that the world economy will rejoin the rhythm of shorter business cycles, for the following reasons.

The first, as regular readers will expect, is that globalization is broken. Many of its component parts such as long-run secular trends in technology, the export of deflation from China and a settled geo-economic climate, to name a few, were drivers of long periods of expansion. Now the boons of globalization – low inflation and rates, geopolitical stability and fluid trade/supply chains – are all being reversed.

A second reason is that the latter part of the period of globalization has produced a series of imbalances. The next ten or so years will be marked by the unwind of these imbalances. Specifically, there are three that I would flag – central bank balance sheets and monetary policy in general, international debt to gdp levels and climate damage. The correction of these imbalances will be one of, if not the defining pre-occupation of policy makers this decade.

Central bank balance sheets are, from next week with the advent of ‘QT’, going to begin a difficult contraction, the result of which will be a sharp negative wealth effect, the return to ‘normal’ of markets in the sense that they provide much better, realistic signals about the state of the world. One side-effect is that credit markets will work better, there may be fewer zombie companies and better allocation of capital, though the likely effect of this on the business cycle will be to have a shortening effect.

In turn, an environment where inflation and interest rates are ‘less low’ debt becomes harder to manage, and in emerging markets there are already mini debt crises brewing. One rather dramatic hypothesis of mine is that in 2024 (the centenary of the 1924 debt crisis) we have a world debt conference that aims to reduce debt levels through a grand programme of restructuring and forgiveness. Such a conference might only be necessitated by a 2008 style crisis – which at the current rate is not beyond policymakers.

That’s a dramatic scenario and a more likely one is that the burden of debt across countries and companies makes a repeat of the long expansion cycles of the recent past a difficult act to follow.

Sticking with debt, a favourite comparison of mine is between the rate at which the climate is warming (percentile ranking of recent world average temperatures) and rising indebtedness. Both are symptoms, not so much of globalisation but rather of unsustainable development – in both cases near existential risks are mounting, and there is a failure of collective action to deal with them. So, just as the world economy recovers from the 2024 debt crisis, it will tip over in the 2028 climate crisis.

Enough doom mongering but I do want to focus on collective action. In the recent past the large developed and emerging economies of the world were synchronised in two ways. First, structurally in that the West provided capital and consumption while the East brought manufacturing. This is now disrupted – in very broad brush terms, the west wants to reshore, while the east is happy to consume the goods it makes, and increasingly to enjoy its own wealth.

Second, policy across the blocs was coordinated, or at least there was a sense of openness and fluidity of policy discussions – the Plaza Accord is an early example, as is the ‘Committee to save the world’ that brough the Asian crisis to a close and then the G20 intervention in 2008 is another. Today, China and the US are barely on speaking terms, and the idea of strategic autonomy means that Europe increasingly needs to look out for itself.

A final complexity for the business cycle is that so many aspects of economics are changing – the nature and structure of work, the troubling trend in low productivity, the economic drawbacks of high wealth inequality and the way in which the notion of strategic autonomy will warp investment trends. This makes for much economic noise, and my sense is that all in it adds up to a world where the business cycle is incessantly disrupted and where businesses and policy makers need to think in terms of four rather than ten year business cycles.

Have a great week ahead,



Simon Kuper has another, good book out, called ‘Chums’ which explains how Oxford, and specifically its debating society the Oxford Union (as well as some related clubs like the Oxford Conservative Association) have created an eco-system that has funneled its members into a near monopoly of political power in the UK, and most dangerously of all has supplied the protagonists of Brexit.

Part of Kuper’s argument is that the Oxford Union – a very good number of whose presidents (e.g .Johnson, Gove, Hague) have gone on to senior political roles – is a kindergarten for Westminster politics.

I picked up a copy of the book on Thursday.

What made this purchase interesting was that I bought the book in Oxford, on my way to speak at the Union, but more about that later.

An interesting and important theme that emerges is the labour market for politicians and the impact of this on decision making. When you see the manner in which the Oxford Union debating chamber resembles the set up at Westminster and indeed the way in which the Union building, like Westminster, offers bars, libraries and meeting rooms that could foster conspiratorial behaviour, it is no surprise that budding politicians are drawn to it as a forming ground, and in turn that the networks made there have such an impact at Westminster.

In other countries, aspiring leaders follow channels also – notably Harvard, Georgetown and Yale Law in the US, and ENA (École Nationale d’Administration) in France. In many other countries – the US, Asia, Greece, Ireland and Spain for instance, families form the training ground for young politicians and seats are often passed through generations (a much less egalitarian approach).

The outsized role that the Union plays in British politics betrays the fact that unlike other important professions such as the military, the Church and medicine there is no training for politicians – at least in the UK. France as mentioned has ENA which turns out well formed technocrats, and in the US the fluidity with which people can pass from professions (law, Wall St, public service, the army) into politics means that elected representatives come to politics with a good degree of experience.

The tendency then is for the stereotyped Oxford educated politician to favour form (wit, speaking ability) over attention to detail, an approach that was evident through and beyond Brexit (though Olly Robbins the UK’s original negotiator was also an Oxford graduate).

One solution then would be a British ENA, and notably in the 1990’s I recall a group of left leaning Oxford academics (Roger Undy the labour economist for example) organizing courses in change management for the members of the future Blair cabinet, and to an extent the Blatvinik School at Oxford does this now.

The idea of a school for politicians, at lease in England, seems fanciful because the ethic of British politics is that policy is best left to civil servants and parliament is for entertainment. The flaw in this argument is that the civil service – from the Treasury to the Foreign Office – has been increasingly run down, denuded and bullied by politicians (Priti Patel and lately Jacob Rees Mogg). This produces a policy, ideas and implementation wasteland.

The majority of university graduates who might have been attracted to the Treasury or Foreign Office see this, and instead opt to work in industry and this, rather than the lying and braying of the current Tory elite, is the real emerging structural flaw in the British system.

Back to the Union. When I was a student at Oxford the Union was not quite my scene, though I remember seeing some memorable speakers there, like Lech Walesa and Imran Khan.

This time, I was surprised at how young the students looked (its really that I am much older), and expect that they are a much more diverse, balanced and sensible group than the Union Committees of the 1980’s, but probably less entertaining at the same time.

I enjoyed my evening at the Union, though disappointingly for someone who cares about the risks of ‘the end of globalisation’, our argument (Colin Yeo, Paul Donovan and myself) that ‘this House would abolish borders’ was rejected by the Union membership.

As a cheeky end to my story of the Union, if you want an alternative, ribald view on what life at an Oxbridge college should be modelled on, then have a look at the tv series based on Tom Sharpe’s excellent ‘Porterhouse Blue’.  

Have a great week ahead,



Last week I did a talk entitled ‘2030’ – a topical title these days given the cloudy outlook and there are already some decent books such as Jim Stavridis’ ‘2034’ that look out that far. Yet, the fallacy of forecasting is to try to imagine discrete events in the future – a better starting point in looking ahead eight years is to go back eight.

If we travel back to 2014, the key events were Russia invading Crimea, Britain’s existential political struggle (Scottish independence), an epidemic (Ebola in Africa), pro-democracy protests in Hong Kong, an economic crisis in Europe, the election of Modi in India and Iranian nuclear talks. Many of these phenomena are still with us (Modi, Iran), others ‘we’ failed to take seriously as portending more serious developments (Russia, Brexit, Epidemic, HK). In particular, the last four have stress tested globalization and found it wanting each time.

If, based on the comparison of 2014 to today, we extrapolate a trend in the behaviour of nations then we might hazard that by 2030 Russia and China will form a lonely anti-Western alliance, Emmanuel Macron will be President of the EU, Hungary will be been forced out of the EU replaced by Scotland, several international conflicts have been caused by food and water shortages, despite massive advances in healthcare technologies.

Alternatively, a contrarian or controversialist view might see Russia applying to join the EU, the UK becoming the Singapore of Europe, Japan quickly building a nuclear weapons program and a metaverse driven mental health epidemic.

That demand for ‘2030’ vision is high, is attributable to the end of globalization and the opening up of uncertainty over issues like geopolitics and more recently monetary policy and financial markets.

As we stressed in last week’s note, I believe we are now into a phase called ‘The Interregnum’, one where the old order is being broken down and slowly new structures will be built up. My endpoint is a multipolar world of large regions who ‘do things’ differently. How well formed this will be by 2030 is hard to tell.

There are a few tectonic shifts that I would like to highlight, the first of which relates to geography.

Going back to Paul Krugman’s early work on geography and trade, the great triumph of globalization is that it undercut geography in the sense that industrial production and even less so trade, were tied to geography. Tom Friedman’s ‘The Earth is Flat’ was a schmaltzy celebration of this.

In the next eight years and beyond, geography will again be undercut by the notion of ‘values’ or ways of doing things. The European Union is driven by a values based approach to its community (much of which is lost on its 500 million citizens), based around social democracy. As an example, Hungary is an EU member but its leadership and electorate increasingly express a very different set of values, which is why I consider it may not be an EU member by 2020. In contrast, the British value system is consistent with that of the EU, which is why Scotland would relatively easily be a member and England can continue to cooperate closely with the EU on international affairs.

A values based approach to politics and diplomacy is quite different to the idea of alliances that have historically bound nations because values are deeply rooted in the culture of regions and the behaviour of their citizens. In that respect however, Europe is the least interesting of the regions.

In the USA, whether people realize it or not, there is a grand contest ongoing over values, the latest battle ground of which is Roe v. Wade, and across Asia countries like the Philippines and Thailand on one side and Japan and Taiwan will interrogate their value systems relative to the role of China in Asia, the stresses on both autocratic and democratic models of governance and socio-economic topics like immigration.

One of the most pertinent indicators of ‘value’ based approaches is the treatment of women and the LGBT communities. There is a very strong correlation between these factors and other important markers such as the quality of democracy, innovation, quality of life and human development variables. Small advanced economies are a great example.

In economics, I have already speculated that the very long business cycles of the past thirty years will likely be replaced by shorter boom-bust cycles, not least because there will be less synchronicity between the large economic regions.

Another major, likely change with 2030 in view will be the transition of corporate business models from the ‘globalised’ one (where different functions could be dispersed around the world) to one where there is more of a focus on the vertical industry chain – a process that is dominated by two factors, a community of users or clients (think of fintech or health tech) and a skeleton of very efficient technology that links them with services.

I want to finish this week’s note by returning to 2014, and offer a final thought to scare you on a Sunday morning. Many of the crises of our day were prefigured in 2014. The one recurring danger that is manifest across the world is climate damage – parts of east Africa have not seen rain in two years, India is experiencing brutal heat. In this respect I think the extent of climate damage and the policy reaction to it will be the swing factor that determines what 2030 looks like. 

Have a great week ahead,


Victory Day?

One of the curious accoutrements of the Kremlin are the very large benches that sit just outside it, almost too big for comfort such that the first time I passed them I imagined giant Cossacks resting themselves as they visited the capital. What those giant Cossacks might make of today’s Russian army would be interesting to know, especially with Monday’s ‘Victory Day’ military display in and around the Kremlin.

It is expected that the Russian President will use the occasion to formally declare war on Ukraine and call up a full mobilisation of troops (especially conscripts). Such a move will deepen the conflict around the invasion of Ukraine, may result in the use of heavier and more deadly armaments and further entangle Ukraine in a proxy war.

Of course, another avenue open to Vladimir Putin may be to use Victory Day to engage in some much needed risk management, and to declare a ‘mission accomplished’ in the context of a much degraded Russian army. If he did so, it would be in keeping with the current macro climate where in the context of the unravelling of monetary policy and the business cycle, ‘strategy’ has given way to risk control.

While Vladimir Putin and the Nasdaq don’t ordinarily have much in common, this week’s pronounced volatility in the financial markets (an assortment of some of the biggest daily moves in over 50 years), and Mr Putin’s behaviour, together signal that we are at the end of an era – that was marked in particular by peace and by the benevolence of central banks.

In many ways as we leave globalization behind, we are unwinding its many positives, and those who puzzle the fact that there are so many ‘events’ should step back and consider the very big picture which is that economic, geopolitical and financial cycles have left the ‘globalization phase’ and entered what I have called ‘the Interregnum’.

The Interregnum is not a well defined phase, but rather involves the breaking down of established things (from political parties in France, to the WTO, and more recently apparently  Roe/Wade to give a few examples) whilst more optimistically building up ‘new things’ (the digital economy, better healthcare, a more robust EU).

My suspicion is that from an economics point of view, one of the key factors that will define the ‘Interregnum’ with respect to ‘globalization’ is that we will have much shorter business cycles, certainly compared to the two very long ones that characterised globalization (i.e. ‘92-‘01, ’11-’20) as the effects of QE, indebtedness, questionable productivity rates and digitisation all unfold. This will necessarily make financial markets more interesting.

If this is the case it will make life more difficult for companies at large, for real estate in particular and at a guess may mean that more capital flows to companies operating in areas defined by new technologies and innovations (healthcare in particular) and that are part of secular trends (the ‘building up’ part of the Interregnum). Here it is important to state that companies that rely on leverage and that masquerade as innovators, will find life difficult.

Another emerging challenge, if we are to enter a period of shorter business cycles, is how to organise institutions, companies and the process of innovation. Digitization and the growth of the venture capital industry means that new enterprises can start and grow very quickly (TikTok is the example many think of). Adaptability will be another criteria and here there is a growing focus on how the Ukrainian army has organised itself in a much more flexible way compared to the Russian one, and how this particular case study reinforces the idea of decentralised, dynamic organisational models.

This neatly brings me back to Mr Putin, and makes the point that in the 21st century institutional quality, freedom of thinking and human development will continue to be important determinants of country success. He has neglected all three.

As such, I would like Mr Putin to act as the risk manager rather than grand strategist or evil dictator on Monday, but I worry that the risk of a tail military event (isolated strike into Poland or against a Scandinavian/Baltic state) is still too high.

Have a great week ahead


The Last Emperor?

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

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

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

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

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

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

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

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

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

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

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

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

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

Have a great week ahead,


The End of Experts?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Have a great week ahead,


From Left/Right to ‘Upstairs/Downstairs’

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

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

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

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

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

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

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

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

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

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

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

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

Have a great week ahead.


And now, the portfolio crisis

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

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

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

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

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

In markets, there are several lessons.

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

Have a great week ahead,


Pinning Blame

Vladimir Putin once observed that one could gauge the mood of American diplomacy by looking at the kind of brooch worn by the late Secretary of State Madeleine Albright. For instance, to parse her elegant book ‘My Pins’, she first wore a ‘serpent’ brooch as a message to Saddam Hussein after an Iraqi government newspaper referred to her as an ‘unparalleled serpent’.

When meeting Putin, Albright varied the message from her pins – ‘hear no evil see no evil’ monkeys to warn Putin over human rights abuses in Chechnya and then a spaceship brooch to mark the collaboration between the US and Russia in space. Interestingly, in the book (p. 110) she notes that Putin ‘was capable…but his instincts were more autocratic than democratic ..and single minded in his pursuit of power’.

Albright was Secretary of State at a time (1997-2001) when American power and by association, globalization, were very much in the ascendancy and Putin was the new kid on the diplomatic block. Before becoming Secretary of State, she was US Ambassador to the UN at a time when the UN had power. It was also a time when Alan Greenspan’s Fed was easily the predominant central bank (the Bundesbank was not far behind), and generally well respected or even feared by investors.

Greenspan’s utterances, usually mystic in comparison to the typically forthright statements of Albright, were carefully followed and scrutinized by investors. He cultivated ambiguity (‘if I have made myself too clear, you have clearly misunderstood me’).

Today, the Fed remains predominant, but in a somewhat different way – in terms of its size and market influence (the role its balance sheet plays in financial markets) it is overbearing, but in terms of the credibility of its leadership team it is increasingly impaired. A share trading scandal, and the appalling policy miss on inflation have degraded its reputation.

Today’s Fed Chair, Jerome Powell, has little suasion over markets (he has the worst track record in terms of equity market reaction to his press conferences). That is a pity, at least for the US, because today in the context of the invasion of Ukraine, central banking now is a critical part of the geopolitical landscape.

At a time when many people (notably this week Larry Fink and Howard Marks) are waking up to the ‘end of globalization’, central banks are raising interest rates and curbing quantitative easing, something they arguably should have done last year, but that now amplify geopolitical risks.

In this way, the end of globalization, the rise of geopolitical risk and the end of QE are all linked.

Quantitative easing tranquilized the (market) effects of many of the world’s troubles and arguably insulated decision makers from the long-run political effects of Donald Trump’s trade war on China for example.  QE helped to disguise the signs that globalization was stuttering from the mid 2010’s onwards.

It has also helped to skew moral and logical views of the world – the stock market doubled in value in the aftermath of the COVID pandemic which has resulted in over six million deaths.

Perhaps the greatest danger has been the dulling of the minds of central bankers, and to a certain degree the politicization of their work (in Europe, the US and Japan). Central banking is a notoriously closed environment where groupthink can dominate – this is reinforced through the job market for young economists, the pressures of markets and the institutional rigidities of many of the central banks.

Here the ‘sin’ of the central bankers has been to deploy an emergency policy tool on a permanent basis. QE1 gave way to successive QE programs and the highly supportive monetary policy enacted during the coronavirus period has been kept in place for too long.

The result of this is blisteringly high levels of inflation, made worse by the economic side-effects of the invasion of Ukraine (wars are typically inflationary). In particular, bond market volatility in the US and Europe is nearing historically very high levels, from which it usually spreads by contagion to other markets (equity volatility is comparably very low).

The geopolitical effect of this is to make Western economies more vulnerable at a time when they need to be robust. It is also to sow seeds of doubt in the predominance of the dollar (which I would nonetheless discount) and in general make markets more sensitive to geopolitical risk.

The overall effect is to create the disruptive financial conditions (higher trend rate of volatility, higher trend interest rates and potentially higher inflation for the near term) to accompany a disrupted geopolitical world. As we have noted in recent missives, these can feed off each other – negative wealth effects, high food prices and the trapping of new home buyers at high valuations are just some of the issues to contend with.

Central banks have badly misjudged the economy and mis-calibrated their policies, and the world is a more unstable place as a result.

Have a great week ahead