Building Sovereign Debt Funds

One of the attractions of elections is that they throw up new ideas and policy proposals – and it is not unkind to say that one increasingly gets the impression of politicians throwing suggestions at the ‘policy wall’ to see what sticks. Aggressive tariffs on China and taxes on unrealised capital gains are two examples from the US.  

One idea that Democrats and Republicans share is the proposed establishment of a sovereign wealth fund in the US. In the case of Donald Trump, his aim is to fund it with tariff revenues, whilst the Democrats conceive a sovereign wealth fund that might take stakes in firms in strategic industries, which is a very French idea (recalling the ‘strategic yogurt policy’ of 2005). The flaw in this particular idea, is that there is in fact no money to capitalise such a fund.

In stark contrast, I recall the last time Washington pondered a sovereign wealth fund was at the end of the Clinton presidency, when Treasury Secretary Bob Rubin had in a financial ‘end of history’ moment engineered a fiscal surplus (government earning more than it is spending). At the time, the sense was that surpluses would feed a ‘social security’ sovereign wealth fund, which would allow Americans to enjoy a prosperous retirement.

What is striking is that if you look at the history of America’s financial health, the Rubin/Clinton surplus is an anomalous blip. Since then, the US has registered nearly a quarter of a century of deficits, which irregardless of the level of growth of the economy, seem to get bigger (relative to the economy) every year. These burgeoning deficits are starting to take their toll on the US (and I should mention that many other large developed economies – Britain and France prominently so), as its debt level rises beyond 100% to GDP (expected to hit 122% in 2035). It is a very odd situation. In textbook economics, large deficits tend to exist in times of war, recession or crisis. As such, if any of these occurs, there will be scant room for governments to help the economy (and rescue plans may become a trial of strength of central banks).

That’s not all. Readers will sense that I am writing more and more about indebtedness, and it is indeed becoming a preoccupation of mine. The idea of the ‘Age of Debt’ is that debt is becoming pervasive, and as a factor will weigh on geopolitics, the tenor of political debates and the shaping of the financial markets of the future.

In that context, once we get beyond the rise of election campaigns and into 2025, governments will have to jettison dreams of sovereign wealth funds and instead subject themselves to debt sustainability analysis. It is akin to a household giving up a dream of buying a second home as their bank manager demands that the mortgage and credit card balance are paid off first.

Debt sustainability analysis is one of those arcane activities in economics, and I can count at least three friends who can run their own debt sustainability models, which is not something I should readily admit. The essence of debt sustainability analysis is that the future debt load (and its precariousness) of a country are driven by a set of factors – the rate at which a government spends, the inflation adjusted interest rate it pays, growth and demographics. These factors are inter-related – borrowing that is deployed to productive investment can produce growth and thus reduce the risks associated with debt for instance. Today, the rapid acceleration in the indebtedness of many countries, low growth and ebbing demographics are some of the factors that make debt increasingly unsustainable.

If that was a reasonably technical explanation, the best parallel I can think of to communicate debt sustainability is climate sustainability – or at least both sets of analysis point to a world that is heating up, and where there is relatively little reaction to this. Debt and climate sustainability analyses are long-term processes, and my sense is that governments gladly ignore them, until they become immediately problematic.

That is beginning to happen. France’s bond spread (over Germany) is elevated, and British bond yields are close to 4%. Neither country can afford to increase debt levels. The same is true for Canada. In the US, next February will see the installation of the new Treasury Secretary, and he or she will have the difficult task of telling the next President that there is no money in the kitty.

As such, the establishment of sovereign wealth funds is a distant, fluffy dream for most governments. A violent lesson here is that Ireland had a sovereign wealth fund in the early 2000’s, but it was swallowed up in the consequences of the euro-zone financial crisis, and is only now being re-established.

For those sovereign wealth funds that exist – in Norway or Saudi Arabia – the next trade may not be to buy quoted equities and private equity, but to either buy the discounted debt of developed countries when they have their sustainability crisis, or to engage in private lending to them. When that happens, a new shift in geoeconomic power will be under way.  

Have a great week ahead,

Mike

Samuelson vs. Sahm

Next week the Federal Reserve will very likely cut interest rates, for the first time since the COVID related rate cutting cycle. Recall of course that at the end of this speedy sets of cuts, most of the leading central banks had declared inflation to be ‘transitory’. The Fed cut will come on the back of a series of rate cuts from ‘elder’ central banks – the Bank of England, Riksbank and the Swiss National Bank, as well as the European Central Bank from whom we had another rate cut last week.

The anticipated move by the Federal Reserve is instructive in several respects. Market based interest rates are lower than Fed rates and many investors expect (or rather crave) the Fed to make a 50 basis point cut, as opposed to a ‘standard’ one of 25 basis points. At the weekend, the lead headline in the Financial Times read ‘Investors raise bets on bumper half-point Fed rate cut’.

This is yet another sign of monetary addiction – the result of the conditioning of investors to financial liquidity. In mid-August, following a dip in the stock market, I wrote that the idea of the ‘Fed put’ – the notion that the Fed would react to a fall in asset prices by cutting rates – is very much alive in markets.

The market dip led several seasoned and apparently credible investors to call for an emergency cut in rates. However, the Fed has only ever taken such dramatic action in the thick of deep crises (LTCM/Russian economic collapse, the dot.com collapse, 9/11, the global financial crisis and the COVID crisis). Similarly, it has not begun a rate cutting cycle with a 50 basis point cut, outside of financial crises. There is no financial crisis today (though plenty of mounting financial risks such as very high debt levels), but a crisis of expectations.

That crisis of expectations is at play as investors position for the Fed meeting next week. In my experience, the Fed is, in normal economic conditions, a cautious and slow-moving beast, and it would be untypical for them to begin a rate cutting phase with an outsized rate cut. To do so would suggest that they are in a hurry to correct a mistake of their own making.

To the extent that  investor behaviour demands a 50-basis point cut, this recalls the quip from Paul Samuelson, the first winner of the Nobel Prize in Economics, that the market has predicted nine out of the last five recessions.

Set against this apparent concern by investors (do they fear a recession or desire lower rates?) is a debate around a relatively new economic rule of thumb called the Sahm Rule, named after research by economist Claudia Sahm at the Federal Reserve. Her rule states that when the medium-term unemployment rate rises an impending recession is signalled (the three month average of unemployment needs to rise by 50 basis points). It is a surprisingly simple rule that appears to have prefigured eleven US downturns going back to 1953. Sahm’s aim in establishing a reliable rule was that stimulus checks can be sent out at the outset of recessions (as opposed to waiting for GDP data to indicate a recession).

I am tempted to trump the Sahm Rule with two observations.

The first is Goodhart’s Law, named after Bank of England and LSE economist Charles Goodhart which states that ‘when a measure becomes a target, it ceases to be a good measure’, or more colloquially that fame kills a good model.

More seriously, most of the last ten business cycles were conventional ones, whereas this business cycle bears the scars of reversing demographics, the lingering effects of COVID fiscal policy and labour market distortions (work from home) not to mention the contortions of strategic industrial policy (i.e. the CHIP’s Act, Inflation Reduction Act) and the political ramifications of high inflation and immigration. It is anything but a typical business cycle, and very hard to read.

Somewhat unusually at this stage in the cycle government finances are weak (from France to the US) whilst the large corporates of the Western world are in a generally healthy financial state. Of the major economies, China poses the greatest risk to the downside in the near-term.

With different components of the US economy moving in different directions, my expectation is for a slowdown than a deeper recession (this may eventually come at the end of 2025 if inflation rises again). Equally, I expect the Fed to make a series of rate cuts rather than deep cutting cycle. If that view is correct, the interest rates market will be very volatile, as investors periodically over react to data points and price in ‘booms’ and busts’.

Expect a market tantrum next week with investors complaining that the Fed is behind the curve. Samuelson would tell us that the curve has got it wrong.

Have a great week ahead,

Mike

The Tech Coup

In 2018, Pavel Durov the founder of messaging app Telegram, dined with Emmanuel Macron, and for his troubles was later awarded a French passport. Durov should have known that as a French citizen, the state will get you at some stage in your life, and so last week he was arrested in France. Durov’s story is layered with intrigue, and it is not immediately obvious what strategy is being played out here.

At the same time, it is one of a growing number of tales that illustrate what will be one of the great trends of the 21st century, the tension between the power generated by technology and its effect on democracy. Other examples are the disputes between Elon Musk and diverse governments (the UK and Brazil), the difficult passage of the Californian AI Bill, and the apparent Department of Justice antitrust probe into Nvidia.

Equally, technology weighs on many public policy debates now – such as the access to mobile phones in schools, the demands that data centres place on electricity grids and the TikTok-ification of politics.

Technology is a source of wealth, economic growth and power. The historic outperformance of large US technology firms on the stock market is a manifestation of the first effect, while the ways in which governments in what could politely be termed less than democratic governments crave the means by which they can use technology (notably social media) to marshall their citizens is worrying. The countries of the MENA region post the Arab Spring are an example, and of course China is the benchmark here. Democracies at least, have better instincts, and most of them are trying to curb the negative side-effects of the power of technology firms and entrepreneurs.

However, many of them find the burden of oversight frustrating.

One of the striking debates I participated in over the summer was the Rencontres Economiques, where across a range of European policy makers there was great frustration at the dictum ‘America innovates, China replicates and Europe regulates’. In particular, there is frustration in Europe at the relatively shallow pools of capital available to scale up technology firms, but it must be said few politicians are willing to do much to help.

Europeans are vexed with the view that their competence is in regulation, rather than innovation, but I am beginning to wonder if Europe has in fact gotten out in front, notably so with its EU AI Act.

The EU AI Act is only just coming into operation, and it has its flaws, but its strength is that it is based on a broad, clear framework. In contrast, what is starting to become clear in the US is that in the absence of legislation (Senator Chuck Schumer’s AI regulatory initiative is seen as a ‘roadmap’) the effort to curb the power of large social media and AI firms on society will be piece-meal, and as a result much less efficient and more costly (since news of the anti-trust probe into Nvidia it has lost close to USD 700bn in value).

I suspect for instance there will be a lot more civil and corporate legal cases to establish the ownership of data-sets and the access to them by AI engines, as is the case between the New York Times and OpenAI.

At the same time, the lack of a regulatory framework to steer the development of AI and social media risks tension between different arms of the state. In the US the Department of Justice is taking aim at a range of social media sites that are suspected of coming under Russian influence, and the antitrust investigation into Nvidia risks cutting across the Biden administration’s security driven economic policy.

Many of these contradictions and challenges are laid out in an excellent, new book entitled ‘The Tech Coup’ by Marietje Schaake that, whilst written in the US, has a decidedly European tone (the author was an MEP). She argues for a more precautionary approach to the mass roll out of new technologies, with specific limits on technologies like spyware, facial recognition systems and crypto-currencies, and much greater transparency on the uses and finance of AI. These are sensible proposals, but likely the very opposite of what Donald Trump might instigate as a set of policies.

Thus, the tension between democracy and the power of technology will intensify – driven by at least two factors. The first is the geostrategic importance of technology – in particular data consuming and content producing technologies (which explains why the US has been so keen to limit the power of China’s TikTok).

The second, which many legal frameworks have great difficulty in encompassing, is the arrival of the ‘tech bro’, wealthy individuals, who consider themselves above the law, and in some cases, beyond common decency. While some politicians seem dazzled by these ‘bros’.

Democratic states should not bend to their wills and as a rule, democratic states tend to outlast tycoons.

Have a great week ahead, Mike

Wrong Turns

An early morning run through Berlin last week (down Unter den Linden and through the Tiergarten) underlined to me its role as one of the few cities to have been at the centre of several, major shifts in political power – from the dominance of Bismark and the Prussian Empire, to Berlin’s role as a scientific and intellectual hub at the start of the 20th century, the two world wars, effective Russian occupation, and then the path from unification to its role as Europe’s economic powerhouse.

That the consensus view of Germany today is of ‘the sick man of Europe’ is also emblematic of a regime shift in globalization – Germany has neither the leadership, diplomacy, economic policy nor energy policy to succeed in a multipolar world. It is also an interesting vantage point to consider how some of the tectonic geopolitical shifts will evolve through the rest of 2024. Here are a few that preoccupy me.

We have written a number of times in recent years on the way in which the breakdown of the unipolar globalized world order is forcing countries and companies to ‘take sides’. Wars in Ukraine and the Middle East have made this trend more acute, as have growing supply chain centric protectionism. The messy evolution of the world order around three economic poles and value systems (China, EU, USA) adds complexity. Two recent events illustrate how different actors are becoming embroiled with each other.

First, Elon Musk’s interview with Donald Trump, combined with his castigation of Keir Starmer polarise the international consequences of the US presidential election. For instance, the EU Commissioner with responsibility for the Digital Services Act (Thierry Breton) hastily took sides and leapt to caution Musk. If Trump wins, there is a convincing argument that ‘global oligarchy’ will align with him, to the great inconvenience of Europe.

Second, the deepening of China’s support for both Russia (Chinese troops have recently been on exercise in Belarus) and Iran is puzzling and may increasingly put Xi Jinping at odds with colleagues. While this collaboration (of which North Korea is an important component part) is turning the SCO (Shanghai Cooperation Organisation) into a coherent strategic grouping, it is taking China down a narrow path diplomatically, and one that will sap its credibility on the international stage.

The admirers of Xi may argue that China is creating not just a new world order, but a new model of government (autocratic state development). But, from a Western point of view, and I hope a neutral stance, China has fallen in with a ‘bad crowd’ whose foreign policy modus operandi seems to be to ‘make things worse’ (especially for democracies). In that regard, Xi may come under greater pressure from within his party – some of whom think he has taken a ‘wrong turn’, and many of whom are concerned with the performance of the economy.

If China is in danger of taking the ‘wrong side’, Germany is at risk because it is not taking sides.

Returning to Berlin and looking ahead to September, Olaf Scholz may also come under great pressure from colleagues. The ‘back to school’ season brings state elections in Saxony, Thuringia and Brandenberg. In these ‘eastern’ states, the ruling coalition has feeble support (mid-teens for the three coalition parties together), the conservative CDU does much better (close to 30%) with the now notorious AfD enjoying close to 30% in the three above states.

Whilst these are regional elections, the prospect of a strong showing for the AfD (granted the highly controversial nature of its ‘eastern’ leaders) will embarrass Scholz. It might also further undermine the government’s energy policy (voters in these regions want the return of Russian gas and coal). It also brings into question the need for the government to spend more on structural social infrastructure.

Scholz coined the term ‘Zeitenwende’ (or turning point) to coin Germany’s strategic dilemma, but he has done little to steer it towards a better path. The consternation in Berlin over Ukraine’s use of German armour in Russia and the stasis in the government on producing a budget in the context of fiscal constraints suggest policy paralysis.

The new development for the second half of 2024 through 2025 may well be that both Germany and China, two of the important engines of the world economy, become embroiled in economic and political crises of their own making.

On that upbeat note, I am going on holiday for a couple of weeks, and will resume ‘The Levelling on Sunday’ on the 8th September.

Mike

Let the Games begin

On Saturday morning I got up early to run the first and last parts of the Olympic marathon course, a few hours before the actual race. The course joins the most memorable parts of Paris with Versailles and is consistent with the spirit of the two-week Games in showing the accessibility of the city and its magnificence.

I have spent much of the past two weeks at the Games, mostly at the rowing, athletics and other endurance events like triathlon and bike (my favourite performances were Cork’s Paul O’Donovan and Fintan McCarthy –in the men’s lightweight sculls, Cassandre Beaugrand in the women’s triathlon, and the USA’s Grant Fisher in the 10,000m).

Once the security-driven tension of the opening passed, Paris relaxed and blossomed, and I think it is fair to say that the Games have been a huge success for Paris, France and the morale of the French people (their morale always needs boosting, their self-regard not so).

The success of the Games is a sharp contrast to the mood one month ago, when the country was confronted with the possibility that Jordan Bardella might be prime minister during the Games. Yet, Bardella has now effectively disappeared from public view. The question now is whether the success of the Games will colour the process of the formation of a new government?

My hunch is that it makes a government led by either the far left and far right less likely, and points to a preference for a centrist government – which I think is predicated on a split in the NFP left coalition (coming once they all return from holidays). I do not think that Emmanuel Macron’s reputation will be vastly enhanced by the Games, but they could be decisive in the race for mayor of Paris (Anne Hildago might opt to stand again, against the likes of Rachida Dati and Clement Beaune).

One reason that the atmosphere in Paris seemed so relaxed is that most of the Parisians left the city.

In my experience one motivation for this is that, unlike say England, there is no ‘sports culture’ in France (at least in the realms of the upper and middle classes). Achievement in sports is something for people in the regions, or the suburbs. Despite that, France does remarkably well in many sports like rugby, which is in effect played in a few regional centres (and professionally in Paris).

In this respect, the strong performance of France in the Games, allied to the even more impressive medal haul of Australia and combined with the lacklustre showing of larger countries like India, Brazil and South Africa (who have a combined four gold medals compared the six won by tiny New Zealand) begs the question as to what makes a successful Olympic nation, and whether these characteristics are correlated to economic achievement or even innovation.

Here, there are maybe three different models.

The first, which encompasses the English speaking nations (GB -5th place in the medals table, USA – currently 1st, Australia – 3rd, Canada – 11th, New Zealand – 12th and  Ireland – 16th) and some of the Nordics is based on what I call the ‘schools’ model, where sport is taught and practised competitively in the school system, and where this is valued culturally. In many cases, successful school athletes (especially so in Olympic sports) can continue sports at a very high level at university or clubs. Here the US university system stands out for the support it gives to athletes (from many countries, note that France’s hero Leon Marchand is a student at Arizona State University) and the vast resources that individual universities possess.

What is interesting from the point of view of the Olympics is that the national sports of the English-speaking countries – American football and baseball, hurling and Gaelic football, cricket, Australian rules – are not Olympic sports, and if anything draw talented athletes away from Games sports (and the Nordics have winter sports). It is still however an argument that a ‘sporting culture’ pays off.

The second approach is what I call ‘institutional excellence’, as exemplified by France (and it must also be said Australia with its world leading Institute for Sport), where promising athletes are funnelled through high level performance institutes and top flight clubs, and given support in terms of conditioning, psychology and diet. In the case of France, other institutions like the army also play a supporting role (19 of 52 French medal winners are soldiers). Japan and South Korea might also fall into this category, though it is worth noting the role that Japanese corporates play in supporting sports like running.

The third model is the ‘communist’ one which whilst communism has gone out of fashion, the communist system’s approach to manufacturing athletes has not, and is manifest in China, Romania and of course Russia. In these countries, within certain sports (rowing is one), promising physiological ‘specimens’ are channelled into specific sports and driven to compete. Whilst athletes from many countries have engaged in drug-fuelled enhancement, the ‘communist’ model countries have recently been the greatest offenders (Russia’s efforts here has been described as ‘state-sponsored and systematic’).

These are very broad sketches and will miss many elements such as the quality of individual coaching. One element they have in common is ‘age’ in the sense that most of the successful Olympic countries have been competing for a long time (the 1924 medal table was dominated by the USA, France, Finland, GB and Sweden) and I suspect that institutionalised expertise in many sports as well as a sense of ‘how to win’.

While my fellow Parisian Simon Kuper of the FT writes that there is a correlation between the level of economic development and Olympic achievement, I think it is more complicated. There does seem to be a correlation between sporting success and country pedigree (system longevity) and gender equality, and there does not appear to be a relationship between rate of development and Olympic achievement (China is the exception).

What is more interesting is the notion that the three above ‘Olympic’ models are related to different approaches to innovation. As we noted in last week’s brief, China has a state driven, ‘all-costs’, competitive approach to innovation, Europe’s is also state driven and resource-short, while the resource rich US university model (I would include Imperial and Oxbridge in the UK here too) tallies well with the centres of innovative excellence in the US.

If there is a lesson to countries like India, who perhaps want to be more successful (India sent a large business/socialite/media delegation to the Games) it is to focus on schools and colleges, develop a competitive sports program within its huge army, and copy Australia’s Institute for Sport.

Let’s see who does well in LA. 

Have a great week ahead,

Mike

The Plenum Pauses

If I uttered the word plenum, you might think I was a surgeon or arcane barrister, and not a casual observer of Chinese politics. The ‘Plenum’ is held seven times during the five yearly policy making cycle that aims to set the long-term direction of the development of China by the Communist Party.

Amidst the generalised chaos of Western politics in recent weeks, China held its most recent plenum (July 15-19), and this was the third plenum of this policy cycle, which typically focuses on economic policy. Though the outcome appeared to have been something of a damp squib, it is worth reflecting on .

To many international observers (note that China is becoming much less transparent in its policy process and in the availability of detailed macro data), there are three recurring threads.

The first is to ‘make China more like Denmark’(my words not the CCP’s), in other words to deepen its social welfare net and to limit inequalities. This has long been a goal of the CCP. In 2018, in the last chapter of the Levelling we wrote that ‘Another approach is to develop social infrastructure that encompasses many of the elements of intangible infrastructure, such as health-care spending, education, pension plans, and broader financial services. ……Motivation for building social infrastructure in China may come from stress points uncovered during China’s next recession. As such, it would be a logical chapter in China’s path to development, and not at all unlike Franklin D. Roosevelt’s New Deal. The New Deal was a watershed in the United States in many respects, one of which was that it marked the full evolution of the United States from an emerging to a developed nation.

The building out of a social infrastructure in China remains a significant project, as does the flattening out of Chinese society. Granted that I wrote the above paragraph in 2017/18, it is striking that a number of basic reforms are still missing – there is very little reform of the hukou system (household registration system that allows internal migrants to work in cities) and children of migrant workers to cities do not receive the same social benefits and education as children of city parents do. In addition, little accommodation has been made for the fact that the ageing of the population will strain the social safety network. In that regard China looks a little like France!

So, like the US under Roosevelt, the creation of a formal ‘new deal’ type social infrastructure, if it happens, could be a (positive) turning point for China.

The second challenge is to make China more like Silicon Valley. The plenum underlined the importance of maintaining a laser-like focus on ‘high quality development’, which translates as the need to make China the leader in new, strategic technologies. In this respect it is conceptually like the EU’s idea of strategic autonomy, but far far more serious in implementation.

In addition, the wording of the plenum drafts references ‘fierce international competition’, which ultimately points to intense competition with European car manufacturers, and in the telecoms and AI sectors. In recent years the number of directives from the CCP on topics that fall under the ‘Strategic Innovation’ umbrella, has multiplied and state aid for sectors like AI and semiconductors is now burgeoning into the trillions of dollars.

The third element that bears flagging is the ongoing focus on ‘reform’, and to my limited experience there is a ‘lost in translation’ element where quite harsh Chinese policies end up being translated as positive, innocuous Western ones. As an example, I recall in the 2010’s a very senior Chinese trade diplomat explaining that ‘rule of law’ did not equate to a Western sense of adherence to established laws, but rather the imposition of the rule of the CCP on business, politics and society. In that context, the idea of ‘reform’ means the fitting of Chinese society to the will of CCP, and specifically Xi Jinping ‘thought’.  

My interpretation of all of this is that Xi is shaping China in the form of a more closed state (which again to the tone of my recent note on globalization, makes for a less open world), 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 (social infrastructure) and economy (high quality development) China needs innovation but is creating a socio-political system that smothers it. This is the fallacy of authoritarian systems.

In this respect, the third plenum 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. 

I am beginning to wonder if, in the carefully choreography world of Chinese policy making, they need to plan for an ‘emergency plenum’.

Make Books Great Again

In a topsy-turvy world marked by high drama political events such as the recent French election, the turmoil in American politics and the promise of the new government in the UK, not to mention the spectacle of the Olympics, only one event really matters – the onset of the holiday season.

My next-door neighbour, as she packed her bags, asked for a few book recommendations, which I had started to provide by text, but as that got overly lengthy, have written them down here instead (with apologies for the focus on finance and economics).

Regular readers will know that in last week’s note I tackled American politics, and specifically JD Vance, and would recommend his book ‘Hillbily Elegy’ as a text that will help us better help us understand him, and America.

As mentioned, if I were to recommend two books to him – as he ambitiously thinks of the vice presidency, I would highlight Chris Whipple’s ‘The GateKeepers‘ which explains how seventeen chiefs of staff to American presidents have marshalled their leaders, as well as Robert Reich’s ‘Locked in the Cabinet’ which is a wonderful, humorous study of how power really works in Washington. Two other books on American politics have been recommended to me, and as I trust the judgment of the friends who have highlighted them I want to pass on ‘When the Clock Broke’ by John Ganz, and ‘An American Dreamer’ by David Finkel.

Sticking with politics, there are a few ‘tomes’ worth noting for the really serious aficionados’ Robert Caro’s books on Lyndon Johnson could take a long time to read, and Ron Chernow’s ‘Hamilton’, which I would class as a must-read. Crossing the Atlantic, in a more gossipy sense, I often recommend Chip Channon’s ‘Diaries’, and Alan Clark’s ‘Diaries’ is a more tawdry follow up. In a more modern setting, Rory Stewart’s ‘Politics on the Edge’ is decent.

In my experience, the world of finance has been badly neglected by writers – fiction and non-fiction, and it might be that very few people with a literary bent are tempted by finance, and of course, fewer bankers can write well. There are a few exceptions – William Cohan (I enjoyed his book on Lazard, ‘The Last Tycoons’)), Michael Lewis (e.g. Liar’s Poker), Amor Towles – who spent most of his career in investment management but emerged sane enough to produce the exquisite ‘Gentleman in Moscow’, ‘Rules of Civility’ and his latest book, ‘Table for Two’; which I have bought and squirrelled away for later in August.

Another writer in this rarefied group is Irish writer Aifric Campbell, who worked in a very senior role in the City, and has produced a number of books – of which ‘The Lovemakers’ is a must read for anyone with an interest in understanding how AI driven robots will interact with humans.

Some of the more interesting books on finance relate to deal making in corporate finance and private equity – ‘Barbarians at the Gate’ was perhaps the first blockbuster here, and my private equity friends have also flagged ‘King of Capital’ (David Carey and John Morris) which sketches the rise of Blackstone and the private equity industry.

Another asset class that is captivating is art, and here Don Thompson’s – The $12 Million Stuffed Shark – The Curious Economics of Contemporary Art’ is fun.  

There is a useful set of books that link the economy to changes in society, and vice versa and notable recent books here are ‘Finance and the Good Society’ by Robert Shiller, and ‘Ultra-Processed People’ by Chris van Tulleken. In this field, James Scott, a highly accomplished social scientist, died last week and of the books of his I have read ‘Seeing Like a State’ is a very good illustration of the collision of state institutions with social complexity. A not unrelated and more entertaining take on this is William Newman’s ‘Things are so bad they can’t get worse’, the story of the institutional collapse of Venezuela.

Finally, I am stashing a few books away for the holidays, Yoko Tawada’s ‘Memoirs of a Polar Bear’, ‘Le Barman du Ritz’ by Philippe Colin, I have pre-ordered Marietje Schaake’s ‘The Tech Coup’ and for old times sake a few Agatha Christie novels. In addition, my wife tells me that Francois Mauriac recommends the biography of Leon Trotsky, which the Marxist society has helpfully put online here.

Have a great week ahead,

Mike 

JD Goes to Washington

I have twice shared a stage with J.D. Vance, which at the time of writing puts me one ahead of Donald Trump. On both occasions, Vance’s book ‘Hillbilly Elegy’(I managed to get a signed copy, for my mother-in-law) was seen as offering people a glimpse as to why working class America was switching their traditional allegiance from the Democrats, towards what they perceived to be ‘system-smashing’ politicians like Donald Trump. Indeed, to my own reading, a large section of Irish-America has recently made this political journey.

I thoroughly enjoyed Vance’s book, had widely recommended it, and would continue to do so. He has had a fascinating life, which I am sure will get ever more interesting. Somewhat ironically given the Trump political program, Vance’s success in life is testament to the role of institutions (US Marines and education (not unlike Barack Obama)) and in my view is an argument for greater government spending on education and more open access to elite education in the US.

When I spoke (at two separate conferences) with him, my unkind thought was that he expressed himself better – more thoughtfully – in writing than in the spoken word. That seems to be changing, and Vance has clearly crafted an ability to provoke. Much has been made of his intellectual journey to the extreme right of American politics, something that has become the norm as the Republican party has become shattered by Trump (a contemporary of mine – an elite soldier and former governor – has also veered off to the extreme right). As a result, the press is full of speculation on Vance’s views on the dollar and Ukraine.

Vance is in many respects the opposite of Trump in terms of his life story – he started poor, became a soldier, ‘pulled himself up’ through education and has now converted to Catholicism (thanks in part to the Dominicans). Trump had a privileged upbringing, disdains learning and the military (‘losers’), and could not possibly be more irreligious.

Curiously, the Catholic Church in America, which is much more conservative than that outside the US, appears to be attaching itself to the coattails of the Trump movement, a tactic that helps to explain why it is the largest, oldest institution the world has known.

Vance may now reflect on the role of vice-president, and what this will mean for him. In general, it is a political graveyard, populated by token political players. That Kamala Harris has not carved out a serious role in American public life is testament to this. There are, however, two examples of very effective vice presidents – George W Bush, who was more like a prime minister to Ronald Reagan, and Joe Biden, whose experience and vast range of political relationships meant that Barack Obama was tethered to the political establishment.

In this context, Vance, the critic of elites, is at an interesting point.  Since ‘Hillbilly’ was released, he has been mixing more with the American elite, in the technology, policy and venture capital worlds. If he enters the White House with Trump, he will come up against the full complexity of the American power machine.

Here I recommend Robert Reich’s excellent book ‘Locked in the Cabinet’. Reich, a professor of labour economics, was appointed Labor Secretary by Bill Clinton, and the book recounts how his optimism and idealism left him outmanoeuvred by those who ‘really ran the world’ (Robert Rubin).

Another book that I know Vance has, is Chris Wipple’s ‘The GateKeepers’ which is. fascinating study of seventeen chiefs of staff to American presidents. Trump notoriously went through several chiefs of staff, but in many cases the chief of staff can be the most important player in an administration (Jimmy Baker is the most often cited example).

So, for all the clamour around Vance, he might well – like Robert Reich – find himself sidelined by the team around Trump. With the European press over-obsessing about Vance, this is where the real risk lies. The first Trump presidency was chaotic. The second will come armed with a mission to transform America, potentially along the lines of the Heritage Foundation’s Project 2025’. I will devote more time to this, but in short it is an aggressive plan to re-make American government (politicised), society and the foreign policy. As a recent article in Foreign Affairs put it, this will be an ‘Imperial Presidency’, shorn of the constraints that have shaped American public life for the past two hundred years.

To Europe, the US under Trump will look more like China – driven by a single, imperial leader, obsessed with the viability of domestic industry, slow to help allies and much more transactional in foreign policy, and will use financial policy in a more selfish way. Consistent with the end of globalization, there will no longer be an effort to transmit American values, a la George W Bush and Bill Clinton.

In short, it will be an America that few of us will recognise.

Have a great week ahead,

Mike

The End of Globalization

In last week’s note(s) I focused a lot on France, to the exclusion of mentioning other debates that are live around the world. One that preoccupies me is that of globalization – which for most readers will seem so esoteric and distant, that they may rightly care little about it. It is in my view worth stopping to think about the direction of globalization – given the way it has shaped the past thirty years. I sense that as globalization crumbles, we are already starting to miss its notable characteristics – peace, low inflation and international prosperity.

Three things happened last week that have globalization, or its demise, back on my mind.

First at the Rencontres Economiques, I had a row with a former German economic minister who claimed that a new wave of globalization was about to start. This claim seemed fanciful, not least that the German economy is cleaven between a reliance on China, a need to be better aligned with the US, a disastrous energy policy and a fascination with Russia that has still not been broken by the war in Ukraine.

Granted that globalization refers to a world that is interdependent and interconnected, it is wrong to hold that we live in a globalised world when dependencies are shifting (the US and Europe want to be much less dependent on China for instance) while the US and China barely have any political and policy connections, and are, in the minds of many, about to embark on war.

The second encounter that set me thinking about globalization was that I ran into Prof Barry Eichengreen, the international authority on foreign exchange, financial flows and who was passing through Europe on his way back to the US from India, where he had delivered a paper entitled ‘Globalization and Growth in a bi-polar world’. Whilst I believe it impossible to enjoy globalization in the context of a world that is severely divided, I was much more careful to pick an argument this time, given Barry’s great mind.

In the paper he charts how trade (relative to GDP) – one of the tenets of globalization – has faced severe headwinds but remains at high levels and has changed course somewhat (trade and investment flows have pushed out to countries like Mexico and Vietnam). Capital and financial flows have retraced even more, and the Eichengreen paper details China’s efforts to deepen its financial markets and boost the use of its currency (though its political economy is a major obstacle to this).

The Eichengreen paper, based largely on what we see in trade and capital flows, paints a picture of the contours of globalization as we have come to know it, as remaining in place. However, I would add to the argument other metrics of globalization – the flow of people, the flow of tourism and overseas education, the flow of ideas and of political and diplomatic discourse between nations. On many of these criteria, walls are going up, and it is impossible to speak of there being a consensus on one global system or way of doing things. Markedly, most of the institutions of the globalised world order (IMF, WHO, World Bank to name a few) are defunct.

My argument is that globalization is not to be confused with the ongoing growth of trade, or the business cycle, it is a very specific form of interconnectedness of nations and regions that is breaking down. It started with the fall of communism, and mostly likely died with the snuffing out of Hong Kong’s democracy in 2020.

This idea was part of a great discussion I had with Chris Watling of LongView Economics as part of their podcast series. LongView is perhaps the best independent markets and economics research firm, and one of the elements they tend to capture very well is the idea of (short and long-term) cycles of risk appetite in markets and economies. In that context, the idea that we are passing from one long-running economic ‘regime’ (globalization, to something else, was apt. 

The Interregnum will be a period of breaking (down the imbalances that have built up with globalisation such as climate damage and debt) and making (new world institutions and the integration of technology into economies and societies). It will be a noisy, chaotic process and its success is not yet a given.

For the moment, the very least we should do is accept that globalization has passed and start to think about the future.

Have a great week ahead.

Mike

The Contagion of Chaos

It is holiday season in France, and not wanting to miss out, we have headed down to Aix en Provence for a long weekend. But, it’s not all fun and games, as there is the excellent ‘Rencontres Économiques’ to attend. The Rencontres is where the French establishment come to discuss the state of the political economic world, in the sun (think of it as Roland Garros for economists). For their troubles, the French have to listen me preach to them on democracy, which is timely to say the least.

The weather was too good and the company so interesting that it would be unfair to define the mood as ‘fin de regime’, but with the second round of the election happening on Sunday 7th, the sense is all about ‘rupture’, and it is hard to believe that there can be a positive scenario for France in the next year or so. As a quick aside the two major pre-occupations of the speakers were the manipulation of social media content (by Russia and other actors) and a sense of frustration with the phrase ‘America innovates, China copies and Europe regulates’.

In this week’s Irish Times, I wrote on the implications for Europe of Emmanuel Macron’s demise. I believe that he is finished as a political force, and the implications of this will ripple across Europe.

Macron as a ‘lame duck’ will no longer carry as much sway as he did in Europe, and from the point of view of countries like the US, may no longer be regarded as the prime mover in EU politics – in that respect Tusk, von der Leyen, Kallas and Meloni are relative winners. The other risk is that Germany in particular finds it hard to cooperate with a RN led government if that transpires, and this will also change the dynamic in EU politics.

Domestically, Macron has twice remade the French political landscape, first creating and energising (but not rooting) a new centre, and then recently, destroying that centre. France now faces an illiberal form of democracy, perched on the very unstable pillars of the far-left and far-right.

The upshot is that the Rassemblement National will be the largest party in the Assemblée, menacingly close to a majority, and now part of the political establishment. On the other side, stepping over the bodies of the few remaining members of the parties of the centre, is an inchoate far-left grouping, with few realistic ideas as to how to improve France’s economy or mend its society.

As such, the likely outcome of this Sunday’s election is a technocratic government in the context of a constitutional crisis. In recent times, France has had three cohabitations (Mitterand-Chirac, Mitterand-Balladur, Chirac-Jospin) but never had to assemble a technocratic government, in the same way that Italy has managed for example (Mario Monti and Enrico Letta were interesting speakers at Aix).

French media is now increasingly featuring constitutional experts opining on how the constitution might steer the formation of a technocratic government, and in some cases, also speaking on the future of the president in the context of this unprecedented political crisis.

The French constitution was never designed with this kind of exercise in mind, it was crafted to form majority governments. Therefore, forming a caretaker technocratic government is an experiment and I suspect that there will be a lot of behind the scenes debate as to who might be best to lead such a government – if that is to be the case.

Formally, the process is led by the president, but with Macron damaged by the detonation of his own political grenade, this now becomes more complicated. Indeed, it will be interesting to see how he can recover from this. France has a difficult year ahead, a constitutional crisis likely punctuated by unrest and the risk of an economic shock.

With a sense of calm and normalcy now finally returning to the UK on this momentous weekend, there is a sense that Macron has caught the ‘contagion of chaos’. He has made an ill-considered decision, in the manner of David Cameron or Rishi Sunak.

If France is having its ‘fin de siècle’ moment then the UK is turning the page. Thursday’s momentous election has swept the Tories out of power, led to a recovery in the Lib Dem vote, sanctioned the Scottish Nationalists and the unionists in Northern Ireland. A major positive was a rise in the number of female MPs (41% of parliament). While Labour only received a third of the vote, Keir Starmer has a huge stock of political capital in parliament.

Like many others I have caricatured him as steady and boring. My sense is that Labour will remain so for the foreseeable future, until they are familiar with the levers of power.

The striking, first task of Keir Starmer will be the NATO summit (July 9-11) where I expect that he will re-affirm the UK’s commitment to its existing military-security goals, especially on Ukraine (compared to the Tories the one area that may change is Israel/Palestine where there will be more emphasis from Starmer on finding a negotiated peace). Notably Starmer will have the luxury of being the most popular of the major NATO country leaders, and one with a fresh start.

From a foreign policy point of view, I expect him to stress better relations with the EU and Ireland specifically, but it is far too early to expect any initiative on trade. I also expect that the tenor of early policy announcements will be focused on the reform of ‘public life’ (House of Lords, corruption).

If he is really daring, he might visit France. 

Have a great week ahead,

Mike