@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

From Rotten Heart to Braveheart?

Boris was wrong!

Regular readers, especially those toiling away in dusty cities will be less than amused that I have written this note in the beautiful setting of Nafplio, in south west Greece, whilst attending the excellent Eliamep/JeanMonnet30 seminar.

That the Greek stock market is up 35% this year and its bond yields trade some 33 percentage points below their levels of five years ago suggests some closure on the euro-zone crisis.

Another sign of this came in the market reaction to additional stimulus from the ECB. Effectively European asset prices did nothing, which I hope will persuade the ECB to move on to other policy aspects of the euro-zone system such as the need to properly regulate Europe’s fintech and payments sector.

Another important milestone in the ‘story for Europe’ came with the announcement of the composition of the von der Leyen Commission. In a previous Sunday note I have mentioned the method behind the creation of European Commissions found in the tale of political ‘three cushion billiards’ recounted by the late Wilfried Martens, formerly Belgian Prime Minister, in his 2009 book ‘I Struggle, I Overcome’.

The Commission has done well this time, though it was not always the case. One of the first books I read that helped to explain how Brussels worked was Bernard Connolly’s ‘The Rotten Heart of Europe’. It was a huge hit (in the UK) and hugely controversial. Indeed, a second edition came with a cover recommendation from the then editor of the Spectator Boris Johnson (‘one wanted to stand on the desk and cheer’).

The book did much to propagate Euroscepticism in British politics, and I suppose we might trace some of the roots of Brexit to it. With some irony, Brexit has however shown that the Commission can function in a forceful way. The challenge for the EC is to now step up a level and reinforce itself for a multipolar world where it will compete more acutely with China and the US, with at the same time Russia snapping at its heels.

Perhaps for this reason the new EU President referred to her Commission as a ‘geopolitical one’. It is welcome that there is a growing realization in Brussels of the implications of the emerging multipolar world, but for my liking, Europe-Brussels does not yet have a strategic mindset, and does not fully have a sense of its power and identity in the world.

There has already been some controversy over the designation of a Commissioner with responsibility for migration as one who would ‘Protect our European way of Life’. This clumsy effort at communication is likely a nod to right wing parties across Europe, the kind of people who ‘value the Church and families as opposed to bike riding vegetarians’ as one person put it to me.

What this incident should do, is spark a serious debate on what the core values of the EU are, and in ‘The Levelling’ I invoke Alexander Hamilton to do this. The more public life in the US and the UK disintegrates, and the more heavy-handed China is in Hong Kong, the more we are reminded that liberal democracy is at the core of Europe’s value system. One of the challenges is to make the benefits of this clear to people in Poland and Hungary whose leaders contest such a view of the world.

Back to the Commission, where several appointments will have macro and investment implications. Overall, the Commissioners are less wealthy than the Trump cabinet, better organized than the Johnson government and more colourful than the Xi Jinping administration.

Trade first. The appointment of Irishman Phil Hogan as trade commissioner means the EC will hold a firm negotiating line on Brexit, and that it is increasingly focused on the risk that President Trump might open up a trade war with the EU. The appointment of Sabine Weyand to the trade team reinforces this view.

Then, the re-appointment of Margaret Vestager as EU Competition Commissioner underlines the fact that a growing market trend will be regulatory risk to large US tech companies. Europe has already taxed and fined the FAANG companies and some Democrats increasingly agree with this stance. As the 2020 election approaches, tech will be increasingly under regulatory scrutiny and like it or not Europe will lead the way.

The final point worth waking here is the emphasis that the EC is putting on green investment, on governance in Eastern European countries and on socially responsible finance. This all adds up to a much greater emphasis role for ESG (Environment, Social and Governance) in investing and markets, not just in Europe but further afield.

So, the EC is moving away from ‘Rotten Heart’ but is not yet ‘Braveheart’!

Have a great week ahead,

Mike

Is Trump Hoover?

Herbert Hoover in better times

Over a week ago I penned an article for Dow Jones/Marketwatch where I predicted (note that I only use this verb after the event) that the recent rate cut by the Federal Reserve would mark the top for equities. The subsequent volatility, and of course last week’s missive on the yuan, prove me to be a financial market genius.

More seriously, recent volatility is a reminder of the fragility of investor behavior and of the risks lurking in the global economy. On a longer scale, as we approach September, they are a reminder that while the global financial crisis of 2008 did not quite end in an economic depression, neither has it produced a true economic renaissance. Many of the factors that caused the crisis in the first place—indebtedness, corporate risk taking and poor governance—have simply been in abeyance, hibernating, and are now again emerging into the daylight.

One consequence of these persistence economic fault lines is that we are in a political depression. In this light, some respected commentators—notably, Madeleine Albright in her book Fascism: A Warning—draw parallels between political figures today and those of the 1920s and ’30s. Recent events in the US, and comments by the President reinforce the parallel.

In ‘The Levelling’ my intention is to avoid the gloomier comparisons with the 1920’s/30’s, but the deepening trade dispute between the US and China makes them inevitable. One reason that President Trump has been eager to push the Federal Reserve to cut interest rates is that he ‘doesn’t want to be the next Hoover’.

Other commentators have already been making this comparison with Herbert Hoover (President from 1929 to 1933). Paul Krugman recently wrote that the level of tariffs applied by the Trump administration is now close to that of the Great Depression.

Hoover was different to Trump in that he distinguished himself in various ways, notably in his humanitarian work in Belgium with the US Food and Drug Administration, and in Central Europe in the aftermath of the First World War.

In other ways, he has several things in common with President Trump: German/British parentage, a business background, and a mastery of new communications channels, in Hoover’s case the use of radio (rather than Twitter) to reach voters and the introduction of the press conference as a regular political event.

Furthermore, the trade dispute between the United States and China has excited commentators who fear that Trump may repeat the mistakes of the Hoover government. Even the Wall Street Journal editorial team warned last year that the Trump trade team is like Senator Reed Smoot and Representative Willis Hawley, promotors of the disastrous 1930 Smoot-Hawley Tariff Act. The same newspaper now talks of a ‘Navarro Recession’, in honour of Trump’s trade adviser Peter Navarro.

 The Act aided and abetted the onset of the Great Depression with the introduction of tariffs of up to 60 percent on twenty thousand types of goods imported into the United States. The net effect of the Act was to squash any hope of an economic recovery in the aftermath of the Great Depression and to cut world trade by 33 percent.

In addition, readers might tremble to know that Hoover took office with US equity valuations at very high levels. Robert Shiller’s excellent database highlights that the US market’s price to earnings ratio was at 32 in January 1929 (the highest it reached was 44 in December 1999) and that it reads 29.5 today, which is 75 percent higher than the historical average of 16 and thus puts the market in expensive territory from a valuation standpoint. Eight months into Hoover’s term the Wall Street Crash occurred, and the United States lurched first into recession and then into the Great Depression.

Whenever the market wobbles as it did last week, some investors revisit the ‘Great Depression’ hypothesis, and many others point to a coming recession. For my part I am sticking to my cautious line for a number of reasons.

First the trade war is a reminder of the many policy risks in the world (widespread negative yields are another pointer), and of the fact that as growth slows, countries will squabble more over the crumbling pie of globalization.

Second, moves in other asset classes than equities – government bonds, even corporate and high yield bonds and particularly commodities are bearish

Third, the world is becoming more fractured. South Korea and Japan are locked in a trade dispute, and there is a growing risk of some form of confrontation between India and Pakistan. Do not of course forget events in Hong Kong, and the untethering of the yuan.

With lots to watch, have a great week ahead,

Mike

Charlie Chaplin and the Japanese bond market

The future all over again – satire and dictatorship

On May 15 1932 there was an attempted coup d’etat in Japan, led by a militant, nationalistic faction in the Imperial Army. The principal victim was the Japanese Prime Minister, Inukai Tsuyoshi. The perpetrators of the coup were given relatively light prison sentences, a pointer to the less democratic and belligerent Japan that would soon follow.

The bizarre element of the coup, which fortunately did not succeed was a plan to murder the actor Charlie Chaplin. The thinking was that such a deed would incite popular fury in the US, and thus lead to war, in which Japan would prevail. At the time of the coup Chaplin was watching a sumo wrestling match with the Prime Minister’s son, and thereby escaped the assassins.

This was more than lucky and in many ways Chaplin’s film The Great Dictator is a fine riposte to the destructive nationalism and totalitarianism that took hold across the world from the mid 1930’s. It is a film that still resonates today.

The view that this incident presents of Japan is also interesting. At the time, economically at least Japan was still an emerging market. Indeed the poor performance of the Japanese stock market around the second world war period is responsible for the historic muted performance of emerging markets relative to developed over the past seventy years.

While our view of Japan today is of a placid country, its history in the past two centuries is a reminder of the pitfalls of isolationism, nationalism and war – concerns that are now echoing louder across the international political economy debate. It should be said at the same time that that the post second world war relationship between the US and Japan is a good example of how two feuding countries can come together (Al Alletzhauser’s ‘House of Nomura’ is good on this topic).

That relationship is pivotal today for a number of reasons. First, a series of military equipment purchases by Japan, mostly notably of over 100 F-35 stealth fighters, manifestly aligns it as America’s fulcrum in Asia and unambiguously points to a change in its defence doctrine.

Second, as the world’s third largest economy, and a cyclical one at that, Japan is a large cog in the trade dispute between the US and China. There was a time when America feared the rise of Japan as it now does China, and any fans of economic history may know that during the 1980’s and 1990’s Donald Trump was an eminent Japan-trade basher. For those of you who want a market scare, the April 13 1987 cover of Time magazine carried an image of Uncle Sam pitted against a sumo wrestler under the banner ‘Trade Wars – the US gets tough with Japan’. The stock market crashed five months later. Does history teach us anything?

Japan may profit strategically from the curbing of China by America, though economically it will suffer from the diminution in world trade and through the side-effects of a stronger yen. In that respect, this weekend’s G20 finance minister’s meeting, lead by Taro Aso, is important as it offers an opportunity to begin to mend relations between the US and China. If this does not happen, then Japan’s bond market offers up a vision of what a trade damaged financial landscape may look like.

Last week, Japanese two year bond yields dipped towards minus 20 basis points, very close to the lows of the last decade. That German and many other euro-zone bond yields are at similarly low levels (indeed globally 11 USD trillion worth of bonds trades with negative yields) will encourage many commentators to suggest that Europe is the next Japan. In this respect if bond yields are a forecast of future growth, this is not an optimistic view.

Here, one of the central tenets of The Levelling is that there is too much debt in the global financial system, and that too little is being done about it. Quantitative easing makes this worse by diminishing the urgency which with indebtedness should be tackled and creating the circumstances where economic actors feel that they can take on even more debt. In many cases, Japan being one, debt clogs and distorts the economic system, and until it is paid back or restructured, economic growth in indebted countries (most of the world) will remain sluggish. Its all enough to make me think of Charlie Chaplin’s depression era film Modern Times.

Have a great 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

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