@Donthe Robber

Watch out

Donald Trump’s reneging of the Kurds in northern Syria, his cynical treatment of Ukraine and his weak ambivalence on the Hong Kong protest movement may fit the pattern of his usual behavior, but to those outside the US these developments cut away the moral, military and diplomatic backstops that the US has provided to rest of the world for the last seventy years.

These acts pull up the drawbridge on the old liberal order, and now set in motion a fragmenting world of ‘patriots’, as he might put it. Another four years will render this regression permanent, with many yet unseen, negative consequences.

While many Americans will be happy that President Trump is committing fewer resources to what are other people’s problems, they must also realize that the cost of this is the end to American exceptionalism – this will have long lasting implications for the dollar, US multinationals, the security of America and Americans, for American culture and even for basketball.

For those who care about these things there are several things that can be done.

To start, technocrats, former public servants or even ‘experts’ from the military, economic policy, diplomacy and human development led sectors like education, need to speak loudly and clearly about the damage being done to America’s credibility, its institutions and human capital. Jim Mattis for example, entirely missed the opportunity to do this with his recent book.

Then, moderate Republicans, who if they have a sliver of moral courage and an ounce of sense, must start to put the future of the US – at home and abroad – ahead of career expediency. As it stands, they are more supine than many of the emerging nation governments they disdain. The very least they can do is stop blocking the rule of law, and the cloaking of the transparency of government.

As this occurs, the President will fight back. His greatest talents are his ability as a gutter scrapper, and his instinct for how to caricature his opponent’s weaknesses. He flatters and bullies, belying his own foibles. What no Democrat, or Republican for that matter has done so far, is to match him in this respect. Some might feel it is beneath them but it is the only way to loosen his electoral base.

Whomever succeeds in taking on the President will need to show that @DontheRobber is robbing the future to prop up the scam that the present is ‘great’. Corporate tax cuts, an alarming rise in corporate and government debt and a fiscal deficit that is unusually large for an economy in expansion, have all boosted the economy in the past three years, to cripple it in the future.

Record levels of wealth inequality rob the public in general, and the next generation. Equally, a short-term focus on a damaging trade war is disturbing corporate investment and supply chains, while the lack of real investment in education will rob the economy of a key source of productivity. Blindness to the consequences of climate change will rob many of the President’s supporters of their livelihoods as we move into the 2020’s.

The trade agreement with China, yet to be finalized, is a fine case in point. It falls far short of the terms that had initially been proposed, doesn’t at all tackle the concerns corporate America had and leaves open too many points of uncertainty. To their credit, the Chinese have done very well here.

In politics, the modus operandi of the President and those who enable him is robbing public life of any vestige of civility and fraternity, and risking divisions that will carry through this century.

The sense that America, its social fabric and its economy, are being robbed is just one, clear way of encapsulating the consequences of current policy making from the White House. It is now breaking old conventions, alliances and economic relationships on a nearly daily basis, and the cost of this needs to be made tangibly clear to Americans, lest the country, like a real estate speculation gone wrong, is sold away to opportunists.

Have a great week ahead,

Mike

A World of Patriots and Dreamers

China marching on, obstacles ahead

Last week’s UN General Assembly reflected a number of emerging trends – the miring of public life in older democracies (US and the UK) in banality and controversy, and the flourishing of climate change as a mainstream political issue, are just two.

These trends are part of the fracturing of the old-world order, and pointers as to where the new order may lie. Underlying each of them is the contentious issue of how political debate is conducted.

One striking statement at the UN was President Trump’s remark that ‘The future does not belong to globalists. The future belongs to patriots’. Practically, coming from the leader of the world’s superpower it is another nail in the coffin of globalization, in addition to being an embarrassing conflation of the meaning of nationalism with patriotism.

One of the ironies in Trump’s many grand statements is the way they echo in China. In fact, China is well ahead of Trump in conceiving of how to put the ‘country ahead of the global’. A memorable example was the 2017 World Economic Forum when the Chinese leader Xi Jinping made a speech that claimed the mantle of globalization for China (from the USA).

The curious aspect of this is that while China is a large spigot in the world economy, it is one of the least globalized countries in the world (it ranks in the bottom quarter of nations according to my own measure of globalization). In his own way, Trump is reacting to this, but his crude view of China does not do justice to its history nor the amplitude of its ambition.

Well before MAGA (Make America Great Again) Xi Jinping coined the term ‘China Dream’ in a speech when visiting the National Museum of China in November 2012, having taken the office of general secretary of the Communist Party. The 70th anniversary of the founding of the People’s Republic which occurs next Tuesday 1st October, will bring this into sharper focus.

China’s view of itself in the future, or the Chinese Dream, is colored by past generations of economic and cultural greatness. Recall that at the time of the Founding Fathers, the United States was but an emerging, even frontier economy and that at that time China accounted for nearly 40 percent of the world economy. By 1950, 150 years later, America made up a third of world economy, and China’s share had shrunk to 10 percent.

Given this backdrop China wants to elevate itself to a position of economic power (perhaps regional dominance) and of policy power in Asia with its own regionally relevant rule-based order so that it is, at the very least, not subject to the domination of Western countries and institutions (the film Amazing China, to be found on Youtube,gives a sense of this and of what is ahead).

China’s rise over the past thirty years has not been given enough credit by commentators and politicians in the West. Few of them are really curious about Chinese history and the Chinese approach to economics, politics and society. Mike Pence’s speech to the Hudson Institute last October was a sign of this, and one of the great challenges China will face in coming years is the realization in Washington and Brussels that China is pulling level with them in some domains.

Looking ahead, the great risk for China is that the ‘Dream’ runs out of momentum, economically in that growth slows, and politically in that people in China question a model that exchanges liberty for stability. The underlying risk is that not having experienced a formal recession in close to twenty years there is a great deal of inefficient capacity built up in China and that a downturn will expose this. If it does, rising unemployment will create a new political challenge for the all-powerful Xi Jinping.

In this respect, the manner in which China manages the protests in Hong Kong will provide a clue as to how the Communist Party will manage emerging political challenges. A physical, confrontational approach will open up many risks – political contagion, sanctions on the Hong Kong economy and a loss of soft power. A more drawn out approach that contests the legitimacy of the ‘two systems’ and that penalizes locals in Hong Kong by slowing the local economy may well dampen the crisis from a Chinese perspective. It must then confront the tenor of elections in Taiwan in early 2020.

Political volatility is thought to be the preserve of the West. One of the great surprises of the early 2020’s may be the way it spreads across emerging countries, with China as no exception.

Have a great week ahead,

Mike

All consequences are at your risk

Lasers battle cameras in Hong Kong

The Chinese military garrison in Hong Kong released a video under the banner ‘All consequences are at your risk’. This an excellent dictum, though only when applied to the behavior of investors, banks and central banks in financial markets. Readers of The Levelling will know that I think the consequences of risk taking across markets are badly distorted, and risk taking and risk baring are mis-aligned.

The dictum might also be applied to President Trump’s twitter account, whose latest salvo has been to up the ante in the trade war between China and the USA after a very lukewarm meeting between US and Chinese officials in Beijing. China, which has been relatively restrained during the trade war will now respond, potentially with a boycott of certain US goods. US tech and capital goods companies look vulnerable.

Then, I should say emphatically that the ‘consequences/risk’ dictum should not apply to largely peaceful crowds in Hong Kong who protest in favour of democracy and an open society of sorts. China, for its part in the domains of economics and technology, has shown an ability to learn from both history and other countries. It should also do so with regard to the situation in Hong Kong and resist the urge to adopt a heavy handed approach.

While the backdrop of the trade dispute helps to paint events in Hong Kong as a context between China and the West, this is not the case, my sense is that the protesters are more standing up for their preferred ‘system’ than against China. A more violent response will change all this.

One of many reasons I drawn to the case of the Hong Kong protesters is the parallels with Levellers. The Levellers were generally constructive in their approach and experts at pamphleteering (the social media of the day). Similarly, the Hong Kong protesters have a (rather short-term) list of demands and are also particularly resourceful, deploying lasers against facial recognition cameras.  The second reason is that the Levellers failed in their project, as many other idealistic, reform minded movements have. Recall the brutal way the Arab Spring was suppressed. The Hong Kong movement need to study the history of other groups, and guard against being outmaneuvered.

One trigger that may upset the balance of power is the scope for damage to the Hong Kong economy, property market and financial sector, and any contagion they may hold for international markets.

A transformation of the protests into a deeper conflict would have grave humanitarian and political implications, and I am simply reflecting my own expertise in focusing on the economic consequences here.

First, the Hong Kong stock market is the fifth largest in the world, heavily dependent on financial and property stocks, and a crucial gateway for Chinese companies that want to access liquid markets and international investors. A sell-off would be contagious via an unwind of investor positioning, the unwind of investment products and heightened credit risk across Asia.

Secondly, the Hong Kong property market, one of the pillars of the local economy, is one of the most precarious in the world in terms of valuation. A house price to income ratio of 18 times is eye watering in a market where the purchase of property is funded by relatively large cash deposits. Also, the property market is heavily financialized in terms of the number of funds and investment products that are tied to it.

The third risk is the Hong Kong dollar peg. In recent months the Hong Kong Monetary Authority has been spending more of its large reserves in supporting the peg. A stronger dollar, combined with lower local interest rates in Hong Kong has put upward pressure on the peg.

Well-established currency pegs are very hard to break, but any signs that the HK peg is pushing its lower limits in the context of a weaker local economy will at least fuel speculation about the peg. This in turn can lead to negative feedback on the local economy and property market, and by extension may also see investors worry more about the yuan. When the yuan weakens, international markets go ‘risk-off’.

There is now an unfortunate ‘perfect storm’ of factors gathering – stronger dollar, deeper trade dispute, acute tension on the streets of Hong Kong. For the sake of people in Hong Kong I hope it doesn’t worsen, though if it does expect contagion to spread quickly to financial markets.

Have a great week ahead,

Mike

What Boris should say on Hong Kong

St Mary’s, Putney – site of the Putney Debates

I spent much of last week in London where in between meetings and torrential rain I managed to get down to Putney to pay homage to St Mary’s Church. Those of you who have read ‘The Levelling’ will at this stage know that the nave of St Mary’s is adorned with the following quote ‘For really I thinke that the poorest he that is in England hath a life to live as the greatest he.” It comes from Colonel Thomas Rainsborough, an officer and military hero in Oliver Cromwell’s New Model Army and a leading member of a group called the Levellers.

The Levellers were a prominent mid 17th century group who created the first popular representation of constitutional democracy in the form of their Agreements of the People. Standing in front of St Mary’s I wondered what the Levellers might think of today’s world and its bizarre goings on.

In particular two political events, or rather processes, might interest them – the election of the next Tory leader and by extension British Prime Minister, and protests in Hong Kong, both of which are watershed moments.

To start in Westminister, where Boris Johnson has taken the lead in the Tory leadership race, and with Jeremy Hunt or, my wildcard bet Rory Stewart, as the likely challenger to a Boris centric No. 10. The Levellers liked their politicians to be modest and honest as the following quote shows ‘by woefull experience found the prevalence of corrupt interests powerfully inclining most men once entrusted with authority’. In that respect they would eschew the cult of personality that has infected the Westminster circus.

The Levellers, being a practical lot, would also scratch their heads at the lack of really concrete policy proposals from the major candidates. They would also worry that the spectacle of Brexit has distracted so many in politics from the business of government and that as a result there has been a policy holiday whilst elected officials have engaged in three years of parlour games. This lack of policy leadership is now showing in infrastructure, crime and social cohesion and is an underlying risk for the UK in general.

In that respect most Britons have had enough of Brexit, many will think it can’t get any worse. They may be wrong. Once the Tory leadership contest is over the Brexit circus will start over again. When it does, the risk is that any forbearance the EU showed Theresa May evaporates, and that it takes a tougher line on financial services for example. This will come as little comfort to business people, workers and the Treasury.

One last thought on Brexit, which is that in my view Brexit is really a national crisis of identity that happens to have been channelled towards European politics. One sign of this crisis of identity is the lack of voice and diplomatic clout that Britain has with regard to the situation in Hong Kong.

I recall the television pictures of bowed head of Chris Patten at the handover ceremony in 1997, an image that perhaps said more about Britain’s place in the world than that of China (incidentally one of the interesting elements of the handover was a memorandum that Prince Charles authored on it – there are not many copies in circulation but worth a read if you can find one!).

Indeed, few of the Tory leadership candidates are willing to speak forcefully about the situation in Hong Kong at a time when many natives of the city regard the current protest as a vital test and perhaps the decisive one at that. For those in Hong Kong that I have spoken with, the culture, way of life and public life of Hong Kong are at risk of being subsumed.

From a markets point of view the reaction to protests in Hong Kong has been relatively muted and should remain so given that the extradition Bill has been delayed.  In the event that tensions rise again, the risks are high given that Hong Kong is the fifth largest stock exchange in the world, has probably the most overvalued property market and a currency peg. One might well argue that the economic and sentiment impact of Hong Kong being subsumed by China should be comparable to those of Britain leaving the EU.

Against this background, one news item to watch, beyond the US-China trade dispute, is a speech on US foreign policy (vis a vis China) by Vice President Mike Pence on June 24 at the Wilson Centre in Washington. The last such speech by Pence in October 2018 at the Hudson Institute was I felt, breath taking in its hostility to China, and there is a risk that ahead of the G20, we get a repeat of this.

As a last word, my sense at this juncture is that markets are vulnerable to a resetting of very dovish rate expectations by the Fed, to the realisation that the trade dispute between the US and China is a schism rather than a tiff, and that the earnings season sees recent macro weakness played out in profit and loss statements. Safe assets are very well bid – look at bunds and gold – risky assets are looking complacent.

Have a great week ahead

Mike

From the Banquet at Hongmen to Hong Kong

…as I was saying…regular readers of the Sunday letter will know that I have taken a break from it in recent weeks to recast the note around my forthcoming book ‘The Levelling’, and I hope that some will be happy it is back.

For those of you who are new to my list (please let me know if I should not have you on the list, or if you have colleagues or friends who would like to join it) I will send out a letter each Sunday morning (the one time people have a chance to read something) that mixes history, politics, markets, geopolitics and economics.

Given the intersection of these factors a good place to start this week is the Banquet at Hongmen, which occurred in China in 206 BC. In an age that is in Game of Thrones overdrive the story of Hongmen will appeal to many (indeed there is already a film about it called White Vengeance (2012)). In China, the tale is short-hand for duplicity and assassination and it featured in the Chinese press last week as part of the more popular response to President Trump’s tariff increase on China.

As an anchor point, ‘Hongmen’ serves a number of purposes that of course effortlessly dovetail into the themes of The Levelling. The first is that internal politics matter – Hongmen occurred at a time when the Qin and Han dynasties were contesting power. In this regard, for all that we hear today about the 2020 Presidential election campaign, we hear equally little about political debate within the Communist Party on topics like trade and relations with the USA.

Second, the cycles of the rise and fall of nations matter a lot. China has had many such cycles and America has effectively to complete a full cycle. Some may feel that this comes across in the bravoura of America’s interaction with other countries, but we should also bear in mind the context and patience that China’s history affords its leadership.

A third related point here is that China’s long history has given it a deep culture and sense of civilization. This is lost on some. Kiron Skinner a State Department official has recently tried to cast US-China relations as a ‘Clash of Civilisations’.  This is a lazy use of Samuel Huntington’s work. A better parsing of the situation is multipolarity, where the world moves away from globalization towards a system driven by three large regions (US, EU and China) who do things in distinctly different ways.

In this context, the trade dispute is a marker of China’s rise and the belated realization of America’s elite as to how it should curb this. Tariffs are not at all the apt tool. There are better avenues. For example, America is extremely powerful financially, in terms of the usage of the dollar, depth and centrality of its markets and the power of its banks. Indeed, one could argue that the US is more hegemonic in finance than it is militarily.

Another avenue is leadership in international rules and standards. Many new fields such as artificial intelligence, genetic editing and cyber war have grown so quickly that they have bypassed international laws, philosophies and norms regarding them. One challenge for the US is to take the lead in outlining new standards and laws in these areas. Unfortunately this is something it does not appear prepared to do, especially in areas like climate change. If anything the US is ceding soft power to China.

To jump to finance, the market view of the trade dispute is that some form of resolution will be forthcoming. The drop in volatility on Friday suggested that US markets are moving from being positioned for a risky outcome, to one that is more sanguine. Other Asia centric ones like the KOSPI index South Korea and the Australian dollar will need to strengthen in order to give the all clear.

If a trade deal is struck, it will mark the beginning of a formal rivalry between the US and China, the start of more ‘nation first’ patterns in consumption and corporate investment and the end of bodies like the World Trade Organisation. There may be many more flash points.

Here, many tend to focus on great naval battles of the future in the South China Sea. In my view, one looming touchpoint is Hong Kong, where there is a fierce debate ongoing around a proposal to permit the imprisonment in China of those sentenced by courts in Hong Kong. For a city-state with a very expensive housing market, dollar currency peg and large stock market, this may be one area where geopolitics again ripples through markets.  

Have a great week ahead,

Mike