The State of Politics

I passed through London last Wednesday and after lunch had the good luck to pop into Chatham House to see Prime Minister Theresa May’s last public speech. Truth be told, the invite I received specified only that a senior politician would be speaking, and as I trundled down the motorway towards Bordeaux airport early that morning, I was expecting be treated to a last hustings hurrah from Jeremy Hunt. Instead, Theresa May turned up to deliver a speech on ‘The State of Politics’ (though not under Chatham House Rules).

I had not seen her speak before and after I did many things fell into place. As she is at the end of her tenure as PM she deserves at least a ceasefire from the criticism that has been directed at her. However, the general lack of emotional investment in her comments and her willingness to avoid engagement on questions led me to think that she naturally won few passionate political friends in Westminster and Brussels.

To be fair, some comments did strike a chord and her thoughts on the antagonistic, negative and now habitually hostile approach to politics in the UK and US were worth listening to. In particular she lamented the lack of compromise in politics today, the deepening of divisions (the ‘Squad’ debate in the US is a very good case in point) and the rise of absolutism. What she meant here is much less the enforcement of the primacy of principles, but the conviction of those with extreme views that their perspective is right to the point that other competing views are excluded. That at least is my too wordy definition of what she said.

Absolutism can have many political effects – some voters are drawn by strong views while others are put off. In general, what we can call absolutist views get more media and social media attention than more moderate views. Bad ideas fly faster than good ones. In the longer-run, absolutism may end up breaking apart very well-established political parties, further destroying bi-partisanship and generally producing bad policies.

We might well argue that absolutism is everywhere, even in financial markets. A pronounced trend in recent months has been the strong rise of bond and equity prices in tandem, to the point that the correlation between them has reached historical extremes. The price action in each, major asset class suggests a strong degree of conviction, almost to the point of absolutism.

Surely, neither equities nor bonds can both be right? Indeed, both could be wrong. Bond prices reflect weaker economic growth, potentially lower trend growth and the apparent willingness of central bankers (Korea cut rates last week for instance) to force rates lower.

Equities exuberantly reflect this ‘surrender’ of central bankers, but in my view do not reflect lower growth. In that respect an ongoing macroeconomic shock (a longer, deeper, sillier trade dispute is the likely cause in the near term), in the context of very low unemployment may well be the signal that equities have peaked.

One remarkable offshoot of the absolutism in equities and bonds (in the sense that both have risen together) is that wealth – at least financial wealth has risen sharply. Indeed, I would hazard that with house prices generally now more choppy, the mass of household wealth (financial plus housing wealth less debt) is close to a peak. There are other signs that this may be the case, such as generous IPO (initial public offering) pipelines that suggest that business men and women want to sell businesses,

Ironically, whether we are at a peak in wealth will depend very much on the major central banks, whose overly generous approach to quantitative easing has spurred the creation of financial wealth, and at least in the case of the USA has pushed wealth inequality to historic highs. The Fed in particular is now wrapping itself in policy knots, because any change in policy could produce a large wealth effect, at least for the middle classes.

Central banks are however likely to treat any recession as an excuse to cut rates and open up the policy toolbox. This means that household balance sheets in developed countries should be relatively solid, and that financial risks will be focused mostly on corporate balance sheets (in the US and China) and on government balance sheets (in China and select EU and EM countries).

The exceptions are perhaps Hong Kong and Australia – where property prices and leverage are high. I would also put the UK in this bracket. As I left the May speech on Wednesday, I picked up a copy of the Evening Standard, whose headline read ‘property slump accelerates with biggest drop in prices in a decade’. If this continues, the ‘state of politics’ will become even more complicated. May is leaving at the right time!

Have a good week ahead,

Mike

Secrets of leadership – vision and ‘glue’

The Levelling is published on this coming Tuesday (in the US). As an author who has to sell books, I should perhaps say that differently, something like ‘Globalization is dead, the Levelling is coming’.

In the very last part of the book I wrote that I finished the final edits whilst on holiday in Corsica, and that I had noted that such was the volatile state of world affairs, that I wished nothing too dramatic would happen until the book was published lest it upset the thesis of The Levelling.

What is strange is that while the last seven months have been very volatile in terms of financial market action and economic performance, relatively little has occurred in terms of what Harold Wilson called ‘events’. The one traumatic, unexpected event I witnessed during that time was the fire in Notre Dame, while the event that has yet to happen, is Brexit.

Elsewhere, President Trump has been busy prosecuting the end of the American century and the beginnings of a multipolar world, and unbeknownst to him, the onset of the ‘Levelling’. His actions have sidelined the institutions of the 20th century, many of whom are defunct. He is squandering American soft power at a moment when it arguably most needs it – in Latin America for instance, and he is vandalizing the wiring of the global economy.

Here, when economists and commentators address the issue of the trade war, they tend to focus on high level indicators such as the impact of tariffs on growth and inflation. What will be far more telling, but not yet obvious are the disruptive changes that tariffs and tough trade rhetoric do to corporate supply chains and to investment plans. There are already signs that corporate spending across Asia and the US is dropping, and we should expect that in many cases cross border investment flows will slow.

Arguably, uncertainty for corporates might be lower were there a vision for a post trade war international economic order. None exists, not in the White House and not in bodies like the World Trade Organisation (WTO). If anything, the White House is reacting against the vision offered by the concept of the Chinese Dream or Made in China 2025.

The notion that vision is important, leads me, by a tangent to the question of leadership. There are thousands of books on the topic – from the points of view of management studies, military experts, sports people and so on. Many writers have poured forth on the secret sauce of leadership, on ingredient of which must be ‘vision’ or more aptly the ‘vision thing’ as. Ronald Reagan had it in a very broad sense, George H Bush mulled what he called ‘the vision thing’ and Bill Clinton worked hard to enunciate his vision. Theresa May had none.

The reason that leadership is on my mind is that once the dust clears on the European Parliamentary elections, the haggling over the runners and riders in the next EU executive will take place. Here the most notable change will not be the entry of any particular character, but the exit of Mario Draghi from the European Central Bank. Europe and the euro-zone will and should miss him.

It is my personal view that Draghi is perhaps the only true European leader of recent years. He has had vision – and has demonstrated another key quality of leadership – that of binding people together in difficult circumstances. At a time when the shortcomings of the euro-zone system were laid bare, and there was a risk that the entire apparatus might pull asunder, his political skills acted as a glue to hold it together.

In the style of much of the leadership literature, Mr Draghi’s leadership skills are probably transferable to other domains – he might as easily take the reins at Barcelona FC or Juventus. It may well be more fun than becoming the next Italian Prime Minister or President. For its part, the EU will have to replace the Draghi ‘glue’ with an overhaul of the machinery of the euro-zone system.

Finally, again, in contrast Theresa May had no leadership ‘glue’ with which to bind the many factions in the Tory Party together. My sense is that whomever succeeds her, will need that ‘glue’ to help colleagues accept the reality of the Brexit deal on offer from the EU, and to face into the challenge of piloting Britain’s new, lonely furrow in world affairs.

Have a great week ahead

Mike