The Art of Politics

One of the telling quotes in ‘The Art of the Deal’ (Tony Schwarz and Donald J Trump) goes ‘You don’t reward failure by promoting those responsible for it, because all you get is more failure’.

That might also be the view of the American people, though given the very close-run Presidential election, it is hard to know what is on their minds, and what they define as success or failure. If the COVID-19 outbreak hadn’t happened, we might easily have seen a robust victory for Donald Trump.

Previously, in the aftermath of contested elections – from 1876 to 2000, a sense of compromise has eventually prevailed. In previous elections, the vanquished candidate respects the ‘majesty of democracy’ as George H Bush put it. They are then praised, and in some cases such as Jimmy Carter to George W Bush, their reputation rises the further out in time they go from their time in office. This time, as they say, might be different.

It is hard to see how Donald Trump’s reputation can acquire a rosy hue, but at the same time he has stamped his mark on American politics, and it is now clear that his election in 2016 was not an aberration.

Trump will not leave the political scene in the way other presidents have – I suspect he will continue his presidency virtually through twitter and a tv show, and his daughter may soon, in the fine tradition of dynastic America politics, run for high office.

The telling factor that supports the case that Trump will not ‘go away’ is that he has established a new political method and has transformed the political landscape in the USA. This is not to be confused with the notion of a ‘school of thought’ or political philosophy, but rather an approach or what we might call ‘art’ of politics.

It has several elements, which may well be adopted by aspiring and incumbent political practitioners across many countries.

One pillar is ‘to break things’. Trump has a gift for zeroing in on derelict institutions, political opponents and viciously undermining them. His international political legacy has largely been to nobble many of the institutions of the twentieth century – NATO, the WTO (World Trade Organisation), WHO (World Health Organisation) and the UN, to name a few. In this respect his place in history will have been to bookend the closing of the period of globalization by attacking and neutering the institutions of the ‘globalists’.

While Trump is not a builder of institutions, I feel that lily livered, liberal politicians of the centre should more actively question the relevance of bodies like the WTO, and at very least repurpose them. NATO and the EU both need to review whether the composition of their membership makes sense in the light of the behavior of countries like Turkey and Hungary, respectively. German politicians in particular need to put on the ‘Trump hat’, even momentarily, and question the world around them.

One lesson from the Democrat showing in the election is that there is a strong appetite for change, and in some cases reform, across America and that this needs to be met by what politicians offer to the public. This is just as much true for Europe as it is the USA.

This is about as far as I would go in demanding that mainstream politicians emulate Donald Trump.

He has other gifts though – like Herbert Hoover with radio, Reagan and Kennedy with tv, Trump has a gift for (social) media. That social media is setting the rhythm of political cycles is not a new thought, but Trump’s successful banalization of the political world through it is.

In a recent note (‘Democracy’s Depression’, 24 Oct) I wondered if better policing of social media content, more reliable internet user identity checks and improved filtering of facts should make social media richer, and a better platform for discussion. Europe and a Biden administration might even work together on this. The cohabitation of a Democratic President and Republican Senate make policy avenue an unlikely one however.

Trump also it seems has the ability to set people free – from laws, common sense, decency and reality. In this regard he is a masterful populist.

The great danger for politics in general and democracy in particular, is that other ‘sorcerer’s/sorceresses’ apply Trump’s tricks, without his profane charm. This will lead to a degradation of society, and commensurately places a high bar on what Joe Biden and Kamala Harris need to do to repair America. What has troubled me most in recent years, is the ease with which democracy and the rule of law has been eroded in the US and other countries.

The risk now is that it may require even deeper divisions and then younger generations (I am thinking of ‘Ivanka ‘24’, ‘Pete ‘24’ and ‘AOC ’24’) to banish the spectre of Donald Trump.

Have a great week ahead

Mike

Fantastic Corruption!

In May 2016, at a summit on anti-corruption the then British Prime Minister David Cameron said in hushed tones to Queen Elizabeth, ‘We’ve got leaders of some fantastically corrupt countries coming to Britain… Nigeria and Afghanistan, possibly the two most corrupt countries in the world’.

A month later he lost the Brexit referendum and the UK has been in a state of chaos ever since.

Nigeria most likely had little hand in Brexit, but the complacency of Cameron did. So too, according to last week’s Commons Intelligence and Security Committee’s report into Russian influence in British politics, did the openness of the Cameron government (and others) to the generosity of Russian donors (fourteen ministers in the Johnson government, including six cabinet ministers have accepted donations from Russians living in the UK).

Britain, which for so long and in the eyes of so many, is the country that has epitomized the rule of law (for instance see Tom Bingham’s book of this title). Its lackluster response to financial and other incursions by Russia, the politization of policy (Cummings v Whitehall) and the faulty response to the COVID 19 crisis have contributed to the view that the robustness of institutions and the rule of law are in decline in Britain.

It is not alone. Last week in an interview with CNN House Speaker Nancy Pelosi declared that the stock market was ‘rigged’, and that this might not be such a bad thing. For a country whose value set is based on capitalism, this is an astonishing admission, though less surprising in the context of the vandalization of the rule of law and institutions in the USA by the President. Most US Presidents have underlined the importance of the rule of law, from Eisenhower to Kennedy to Reagan, but not Donald Trump.

Like Downing Street, the change in moral tack at the White House points to the testing of core values in the two countries whose empires formed the basis of globalization (Britain in the 19^th century and the USA in the 20^th century), and in that respect, is yet another crack in globalization.

Policy makers in each country should play attention to the elaboration of the link between the erosion of the rule of law to the end of empire by Edward Gibbon in ‘The Decline and Fall of the Roman Empire’. More recently, there is plenty of evidence to show a link between economic growth, financial stability and the rule of law across countries.

If politicians in say the UK, or any other European country for that matter, are happy to take donations from citizens of Russia and China, it is harder for them to claim the moral high ground over China in foreign policy. It is equally problematic for US Secretary of State Mike Pompeo to travel the world looking to build an alliance of democratic countries against China whilst the rule of law is undercut in the US.

If the idea of the rule of law is going out of fashion in Washington and London, it is gaining some allure in Brussels.

Much has been made of the hard won result of last week’s European leaders’ summit (it was the second longest ever, only 25 minutes behind the Nice summit in 2000) in the sense that it has created fiscal capacity for the EU. While the classic division between fiscally conservative or ‘frugal’ countries and those like France and Italy who are fiscally indulgent was on display, a new fiscal fissure is opening up.

The agreement reached last week introduced some (yet mild) conditionality around the rule of law in terms of how it binds aid to EU members (the likes of Bulgaria, Romania and Poland are on the minds of Brussels). Though no sanction has yet fallen on the Viktor Orbans of the world this move is part of a new trend where European values are going to play a more prominent role in political discourse (seven of the top ten countries in the World Justice Project report on Rule of Law are EU states).

In the future, collaboration will be done less on the basis of geography and more on the basis of shared values – this might mean that bodies like NATO and the EU may lose rather than gain members.

It also means that the nations of the ‘old’ world need to realise that their economic and political advantage comes from the rule of law, and that the current race to the bottom in terms of practice of the rule of law, is self-defeating.

Have a great week ahead,

Mike

The Restoration

The middle of the 17^th century was an extraordinary period, especially for political and institutional innovation. The Treaty of Westphalia in 1648 gave us the nation-state, books like Hobbes’ ‘Leviathan’ were produced and in England the first expressions of popular constitutional democracy were aired. The tumult of the period was dampened with the return of King Charles II to England, in what was called ‘The Restoration’, which is a phrase that comes to mind when I think of Joe Biden’s Presidential hopes.

To start with, I won’t try to map the US in 2020 on to Europe in the late 17^th century, save to say that both periods are marked by a sense of a ‘world turned upside down’.

However, the notion of an American Restoration is appealing in the sense that a Joe Biden Presidency would restore the thread of Democratic policy (through Obama to Bill Clinton), and very importantly would restore the competent workings and full staffing of institutions like the State Department. The idea is that the American machine of state (I wrote about the French one last week) would once again purr into action, and American credibility would be restored. The question for Biden, the Democrats and America, is whether he can accomplish more than ‘a Restoration’.

With Biden now well ahead of the President in most opinion polls on national and state by state levels, and Donald Trump sacking his campaign manager last week, the prospect of a Biden Presidency is now very real, though financial markets it seems are not yet pricing this in.

The success of Biden’s campaign and the tenor of his potential presidency will rest in good part on the extent of the economic damage ahead. If high unemployment and bankruptcies are a reality into the presidential debates in September and October, the tone of policy will tilt much more towards social justice (a topic where both Bernie Sanders and Elizabeth Warren are very comfortable).

A Biden White House would likely focus much of its stimulus effort on infrastructure, particularly so in the ‘green’ economy. What is much less clear is the extent to which they would consider rejigging the tax system to place a greater tax burden on wealthier Americans and corporations. This may well be teased out in coming months. I also expect that foreign policy under Biden will be much more assertive, especially so towards Russia and China.

Biden’s next step is to choose a running mate. My judgement is that Biden will choose Kamala Harris as his VP, not least because she has a track record in policing and justice, which is one policy area which the Trump campaign is likely to amplify. Other VP candidates like Susan Rice may suffer from the fact that the Biden team already has a very well stocked foreign policy and security bench.

For his part (and provided he doesn’t drop out of the race!) Donald Trump will inevitably contest the election in a divisive way. Trump’s key weapon over Biden is his social media and network TV reach, and here he can do plenty of damage (to himself also).

There is plenty that he can agitate on – such as contesting the logistics of the election (i.e. postal voting), to stoking tension of topics that resonate with some voters – China, defunding police forces and the prospect of more economic stimulus. He may even claim credit for a COVID-19 vaccine, should it materialize before November.

However, such an approach may not win him a second term as it may merely serve to reinforce the views of the 40% of Americans who think ‘he is doing a good job’. Moreover, with a record number of women now contesting elections for Congress, and more states reacting in a constructive way to racial and other inequalities, the broad socio-political tide may be turning against Trump.

It is now widely recognized that Trump has vastly diminished America – it is financially weaker, its soft power is squandered and its institutions are less admired. He may now also wreck the Republican Party.

Should the Democrats take control of the Senate, it is not impossible that the rump of the Republican Party might split into those who share Trump’s political convictions, and those for whom he was a convenient political force. The ‘convictionists’ could form a harder right wing party, while the ‘conventionists’ might repent and try to rejoin the mainstream in the fashion of the country club Republicans of the Reagan era, led potentially by someone like Liz Cheney.

For their part, the dilemma is what tone to strike across states so that they take back the Senate. A mild ‘re-unite’ America approach is the most likely one, at the expense of the muzzling of the likes of Bernie Sanders. Once in power, the Democrats will be more interesting in that they feel more comfortable following the tack of the likes of Elizabeth Warren, and more emboldened in reinforcing regulation in areas like corporate governance and environmental protection.

A scenario that (according to polls today) brings about an end of Trump politically, cripples the Republican Party and reinstates the Democrats may well restore stability to America, but my worry is that it won’t change it, and much less so may postpone some of the radical policy that is needed to truly revitalize America.

The manifest social tensions, political stasis, and extremes in wealth/inequality as well as declines in human development indicators point to the need for more than a simple restoration.

Have a great week ahead,

Mike

Shemozzle

Mike Tyson is apparently coming out of retirement. America may need him. Last week on the Sino-Indian border Line of Agreed Control (North Sikkim to be precise) there was a mass brawl between Indian and Chinese troops. Helicopters (China) and fighter jets (India) were scrambled to add heft to the situation, which left several injured. The incident recalled the word ‘Shemozzle’ a Yiddish word that denotes chaos, uproar and confusion. In Ireland, sports commentators have used it to describe fights between opposing hurling or Gaelic football teams.

I fear that ‘Shemozzle’ now enters the lexicon of geopolitics, not least because tensions between nations are rising. One relationship to watch is that between China and Australia, where trade, political and diplomatic relations are worsening. I advise my Chinese friends to be wary – every time Australia play Ireland in ‘Compromise Rules’ football, there is a large scale ‘Shemozzle’.

The notion of a ‘Shemozzle’ is not a bad one to describe the world – tensions are rising as governments try to advance beyond lockdowns, and scarce resources such as vaccines will be fought over. In addition, the tension between markets and the reality of the economic damage from the coronavirus is growing.

In my April 4^th note (https://thelevelling.blog/2020/03/28/why-did-nobody-notice-it/) I laid out three broad scenarios – an optimistic one called ‘Easter’ which outlined how much of the crisis could be over by the end of April, a more sober one called ‘Summer’ which flagged late summer as the point at which we should have largely mastered the effects of the virus, and then a tail, very nasty scenario called ‘Winter’ where the effects of the virus drag on and the economic damage is severe.

As it stands, it seems that equity markets have priced in the optimistic ‘Easter’ scenario while it looks more likely that economies and societies will get ‘Summer’. The tension between high equity markets and the real world betrays a range of factors – the oversized role of the Federal Reserve and wealth inequality for instance.

I am focused on the performance of small cap indices and bank stocks (as opposed to tech stocks) as the lead indicator of where the economy and markets will go, given the risk of a credit crunch. In general, the performance of banks has been very weak, with some like Wells Fargo in the US hitting March lows and others in Europe (e.g. Société Générale) hitting their lowest levels since 1991.

At the other end of the market the outperformance of technology stocks also reflects a lack of forward thinking that in the US as in other countries, corporate taxes will have to rise in order to offset the generous stimulus programs put in place by the government. The five large tech companies (FAANG’s) who make up 22% of the market capitalization of the S&P 500 index are vulnerable here, given their earnings. This is perhaps the so-called ‘black swan’ that investors have not priced in.

To stick with the idea of ‘black swans’, a phrase that is now in the popular lexicon as meaning a high impact event as opposed to a highly improbable one a la Karl Popper’s conception of the term, the two recurring ‘swan’ questions I keep hearing are ‘will Europe breakup?’ and ‘will the US and China go to war’. That people continue to think about these questions shows that in effect they are not focusing on events (black swans) but processes.

In particular, the evolution and deterioration of the relationship between the US and China is a process that bears watching. In a week where the Economist front cover declared ‘Goodbye Globalization’ an opinion poll from the Pew Research Centre showed that close to 65% of Americans have a negative view of China. This compares with only 30% some ten years ago and the darkening in Americans’ views of China tightly tracks the demise of globalization.

With rhetoric picking up, and supply chain restrictions on Huawei now more severe, there are three elements of this relationship to watch in the short run. One is the friction between China and American allies in Asia (Australia) amidst talk in China that it needs to prepare itself for military conflict. Another is the shift in supply chains, the most interesting development here is Taiwan Semiconductors’ decision to invest USD 12 bn building a plant in the USA. Also, China may respond in kind to the Huawei announcement on Monday.

Then finally, is the politics – lambasting China, however illogically (the President has stated that cutting ties with China would save USD 550 bn) creates political capital for Donald Trump, and as such we should expect no let up in anti-China rhetoric until November. The question is what damage this does to trade and diplomacy, and whether it leads to a real ‘Shemozzle’.

Have a great week ahead,

Mike

Peak Stocks, Peak Trump?

I recently gave a ‘Levelling’ related talk in Paris, where one of the points I made related to the way in which markets and finance have dominated our lives. I am often sensitive to the way markets are discussed in France. In contrast to the USA, where markets are seen as a source of wealth and to a degree, a part of American culture, in France, the opposite is the case.

This, in my view has something to do with France having a much longer economic history (August Landier and David Thesmar’s book ‘Le Grand Méchant Marché is worth a read on this point), and therefore more financial crises, than the US. Indeed, when John law was blowing up the French economy, the US was a ‘frontier market’ and colony of King George I.

One perspective on markets that I think interesting is they way they act as laboratories, signalling the impact of real-world events and economic policies. Markets can be brutally honest in this regard, pricing the effect of tragedies, wars and economic blight in an unsentimental way.

Some recent market behaviour has been revealing. For instance, the price of soya beans fell once the US and China signed their ‘trade’ deal. The drop in soya bean prices likely reflects a very sceptical view on the quality and enforceability (specifically that China would buy large amounts of US agricultural produce). In my view, this scanty deal only serves to provide the President with some politically helpful headlines, eases the stress on the Chinese economy and, profoundly underlines the fracturing in the relationship between the two countries.

In contrast to weakness in agricultural commodities, there are other market price moves that tell us little about the real economy, but a lot about how the plumbing of markets works. The recent, rapid rise in the price of Tesla stock is a case in point (the value of the company has doubled in the past six months and its equity value is worth more than the likes of Volkswagen, who produce far, far more electric cars). The rise in the value of Tesla tells us little about the health of the car market (modest in the US, weaker in Germany and China), but a lot about investor behaviour and the state of banking.

First, in terms of investor behaviour, by October of last year there was a sizeable community of investors sceptical that Tesla would ever become a profitable business. This set of investors had established large ‘short’ positions in Tesla stock. However, as markets rose, they were forced to cover or buy back these short positions, pushing the price ever higher. Anyone who thinks the sharply rising price is an indicator of Tesla’s future is mistaken, it is simply a function of investor positioning.

Another reason for the hubristic move in Tesla stock is that the federal Reserve has been infusing markets with more liquidity. There was a time when earnings, corporate strategy and good governance were determinants of stock performance. Today, in the USA at least, it seems that liquidity is the pre-dominant driver. In the aftermath of the global financial crisis, the banking system has changed in that the nature or species of participants in lending markets has become more diverse.

Hedge funds, private investors and asset managers now participate in lending marketplaces that were once the preserve of banks. The other change is that regulation has pushed banks to have smaller balance sheets, so to that end they are less sizeable players in many corners of financial markets.

At the same time, the amount of debt in the world has ballooned. The effect of this debt load, the changed composition of the banking marketplace and the refinancing pressures it puts on the marketplace is that the Fed now needs to lubricate the wheels of capital markets more often.

As it does so, it adds fuel to speculative fire, which in recent weeks has taken many measures of risk taking to extremes (Tesla’s rise is one example). Regular readers will know that I hold central banks guilty as charged for encouraging people to take on, rather than calibrate risks.

One upshot of this is that strength of the stock market is being used as a self-marketing tool by President Trump (in a recent note I commented that the number of his stock market specific tweets had increased sharply since November). Trump also loudly eggs Fed Chairman Powell on to be more accommodative. As such the Fed is now losing credibility, in a way not seen since the mid 1970’s, and it is entangling itself in asset prices in a way that will compromise it and the US economy.

As for President Trump, the potential near-term peak in equities might mean we have seen peak Trump, especially given the commencement of the impeachment hearings next week. His approach is that of a classically short-term property speculator – take on debt, pump up the value of an asset and then try to sell it. As he does so he is mortgaging the pensions of future generations, and potentially, his next four years in the White House. The stock market is due a correction, and so is Trump.

Perhaps someone, even in Paris no less, will write a book called ‘Le Grand Méchant Président’.

Have a great week ahead,

Mike

The Fracturing continues – from Tehran to Taiwan

A friend of mine, who is also a successful sportsman (rower) once told me that he trains every Christmas day, just in case his competitors take that day off. It is a quirky piece of advice but one that I have long since borne in mind.

Thus, as I returned home from my Christmas morning run, I was interested to read that Russia, China and Iran – were using the Christmas period for a naval training mission in the Gulf of Oman. Presumably, like my friend, they thought the US and its allies were taking Christmas day off.

The exercise points to the emerging rivalries of the 21^st century. China and Russia are members of the Shanghai Cooperation Organisation (SCO), which readers of the Levelling will know that I consider to be one of the geopolitical ‘gangs’ of the future. Their rival regional gang is the ‘Quad’ (India, USA, Japan and Australia).

The significance of the SCO, and the recent exercise with Iran, has now been heightened by the killing of Iranian general Quassem Soleimani. Indeed, it is just one of many implications (by the way in my last missive before Christmas I noted that in 1998 Bill Clinton had responded to impeachment by launching an airstrike on Iraq, and that another President might try the same tactic).

The immediate one is that the USA will find its moral and diplomatic power diminished, and both its allies and foes again demanding whether the White House has a coherent approach to policy making (Israel’s muted reaction was telling).

For example, the missile strike on Soleimani cuts across an increasingly successful financial and clandestine war against Iran that was producing inflation, unrest and a surge in crime across the country. The airstrike will now allow the Iranian regime to paint its socio-economic troubles as being generated by the hand of the CIA and MI6 (there is a long held, view across Iran that foreign spy agencies are behind political and economic turmoil in the country).

The killing of Soleimani also means a likely diminution in the American presence in Iraq, that Americans are less rather than more safe, and an altogether more uncertain outlook for some of the smaller states in the region, notably Bahrain, Dubai and Abu Dhabi. While the tension between both Iran and the US is perceived to have diminished following the Iranian riposte, I think this dispute is not over, and the event itself will lead to a hardening of attitudes.

To return to the SCO, Soleimani’s death will underline the rationale for this grouping and we should expect to see it become more prominent. Russia in particular may now look to play a stronger role in the long term future of Iraq and Syria (potentially with the backing of Chinese capital).

Russians will underline how the Kremlin was both concerned and emboldened by the 2003 invasion of Iraq, that it later took aggressive measures to defend what it perceived were threats to its hinterland (in Georgia and Ukraine).

At a grander level, the killing of Soleimani will cause tension within NATO, and will heighten calls by many for an EU army, that can at some stage have the capacity to act alone, though with the US under the NATO umbrella. It should also, at least in terms of the security and foreign policy push the UK towards rather than away from the EU, and in my view this partnership could well be one of the more stable pillars in the post Brexit relationship.

In sum, this critical event points to some near-term event risk, notwithstanding the apparent de-escalation (Iran’s public de-escalation points to stealth retribution), and an elevation of longer-term geopolitical risk (and by extension political risk in the US in the context of the election).

Geopolitical risk, or rather geopolitical events, rarely trouble broad equity and debt markets but my worry is that we are now seeing a fracturing of the world order (this weekend’s Taiwan election is a case in point and expect the newspaper pundits to talk of Taixit from Sunday), and the emergence of a one where geopolitical friction becomes the norm. Expect this to be increasingly reflected in the securities of pan-global companies, certain emerging market debt securities and in safe haven assets.

The real reason for calm across markets is central bank liquidity. They are the monetary battleships of the 21^st century, more powerful than many armies. What might happen if they are deployed in a conflict?

Have a great week ahead,

Mike

Remaking a World on Fire

It has been an eventful year for me, but the most striking moment was witnessing the fire at Notre Dame cathedral. Having run towards it, I was unprepared for the extent of the conflagration, green and orange flames bellowing out of the church as the sun blazed angrily in the background. It was a traumatic evening, where thousands of onlookers were silenced by the significance of what they saw.

At the same time, it would be wrong of me to try to draw a parallel between such an apocalyptic event and the state of our fracturing world, though that thought is at the back of my head, not least given the way in which the ‘old’ world order is increasingly vandalized by politicians, not to mention the outbreak of protests around the world.

A better parallel, as supersized cranes moved around Notre Dame this week, is that the time it will take to rebuild and remake the church, some five or more years, will also be the period of time required to put the era of globalization behind us and have the makings of the ‘next world order’.

The roadmap towards this ‘order’ will look something like this – economically the world will grapple with the ‘next recession’ which will be more severe in indebted economic sectors (China’s economy, corporate USA and some emerging countries), and will eventually culminate in some form of world debt conference. Once this is accomplished, the quest for a model of organic economic growth will begin.

Politically, I hope that we will see more independent, bottom up efforts by individuals and new groups/parties to rethink what the contract between people and those who govern for them will look like. Then in terms of geopolitics, the world will be increasingly dominated by the ways in which the three great ‘powers’ – the EU, USA and China pursue different paths on issues like the internet, democracy, human development and finance. This is a limited, big picture sketch, the rest is of course in the Levelling.

Forecasting – really more a form of ‘macrotainment’ than a science – is easier on a five year view, but given it is the end of the year, I also want to offer up a few pointers on at least two events over the next few months.

First, I expect economic and political headlines to be first driven by the unravelling of China’s credit boom – we will hear more about defaults of indebted Chinese companies and resulting pressure on its banks. Expect ‘China is Spain’ to be a headline we see a lot. The policy task for China’s leaders will be complicated by ongoing protests in Hong Kong and importantly, the result of Presidential elections in Taiwan on January 11^th. My guess is that one result will be a drop in Chinese interest rates in 2020.

Second, impeachment will deepen America’s divides. With the process now started, it looks for right or wrong, that the Senate will not vote to impeach President Trump. The trial itself, especially if likes of Mick Mulvaney and John Bolton are called as witnesses, will prove a spectacle.

If we bear in mind that Bill Clinton responded to his impeachment with airstrikes on Iraq, then Trump’s emotional letter to Senators is mild by comparison. He may try other means of weaponizing impeachment – link it to the stock market (Trump has sent 21 tweets about the stock market in the last 30 days, the most since 2018), trade policy with Europe or immigration.

The immediate political implication of the Senate not impeaching the President is that the Democrats lose their ‘silver bullet’ against Trump, and with it the sense that morality, the law and institutions are powerful buttresses against bad behavior. In turn, this will colour the Democratic Presidential selection process. The Democratic candidate will need to have a very clear policy message, an ability to scrap with Trump in the political gutter (see my October 13 blog ‘Don the Robber’, https://thelevelling.blog/2019/10/13/donthe-robber/). So far, none of the leading Democratic candidates is strong on these points (someone like Mike Duggan of Detroit could fit this bill in my view).

For Trump, and his supporters, a failed impeachment will open up the road to the acceleration of his policies on immigration, trade (EU) and on identity-based politics. Mounting, structural risks like climate damage and indebtedness will get worse. The next election will be driven by identity, race and values, and there is a very good chance that Trump could win.

So, enjoy this Christmas, there is plenty of disruption to come in 2020!

I am back in touch on January 12.

With best wishes, Mike

Deal done – Trump saves euro!

In a missive I wrote earlier this year I puzzled whether Trump would fall victim to the same policy mistakes as Herbert Hoover (‘Is Trump Hoover?’,https://thelevelling.blog/2019/08/11/is-trump-hoover/). This does increasingly look to be the case, as the economy is slowed down by the debilitating consequences of trump’s trade war with China.

However, a reading of the Art of the Deal (consider quotes like ‘I’m the first to admit that I am very competitive and that I’ll do nearly anything within legal bounds to win. Sometimes, part of making a deal is denigrating your competition’) hint at some method behind this week’s trade related threats to China, the EU and France, not to mention the ongoing undermining of NATO.

It grants far too much credit to Donald Trump to describe him as the architect of a new world order, rather he is the bull in a china shop of increasingly brittle crockery. His role, in the context of the fracturing of the old, globalized word order is to help highlight what elements in that world order are fragile and which ones are resilient. The checks and balances in the US political system, and the wisdom embedded in them through the Federalist Papers for instance, are so far proving resilient.

Arriving in Europe this week, Trump clearly had two targets in mind – the EU and NATO, both of which lie on the deepening faultline of the consequences of America’s diplomatic estrangement from Europe. Trump has rarely had anything better to offer either institution save scorn and division. In my view this is a pity, and simply wrong.

NATO and the EU are fine examples of how collective action usually requires a strong common cause to enforce it, and that absent the magnetism of that common cause (broadly speaking the Cold War), cohesion between members begins to ebb. In addition, both institutions are finding that they have a common design flaw – namely the lack of an exit. Neither NATO nor the EU (not to mention the euro-zone) have processes where a recalcitrant member can be kicked out. Brexit shows us that even those who volunteer to leave, find it difficult.

To make an analogy, no public building can be used without a fire escape or carefully marked ‘exit’ in place, and it should be the same for multi-lateral institutions in a changing, multipolar world. This multipolar world is one where nations will increasingly have to take sides. In this context, Turkey’s membership of NATO will become increasingly problematic, and the position of EU members like Hungary, and prospective candidates like Serbia also looks strained. My prediction is that both NATO and the EU will have to change their uni-directional membership rules to include a ‘black-balling’ process.

That NATO rests on the emerging faultline of US-EU relations gives us a clue as to its future. The logical contradiction is that the White House could soon declare a trade war on Europe, at the same time as partnering with the EU to fight ‘real’ wars. To paraphrase Justin Trudeau, it is enough to make ‘jaws drop’, though it is not as peculiar as it seems. For instance, in October, as the final wrangling over the UK’s Brexit deal was taking place, French commandos joined their British counterparts in a joint operation called ‘Griffin Strike’, part of a larger cooperative exercise between Europe’s two military powers.

One way for the EU to contribute to its own security in the context of a multipolar world where the US is a less unambiguous ally, apart from making sure its military kit works (only one sixth of German helicopters and fighter planes are operational), is to develop its power as an economic and financial player.

Theoretically this approach fits into the ‘total war’ doctrine developed by Russian General Valery Gerasimov, where financial networks are just as useful strategic tools as fleets of submarines. The effect of American sanctions on Iran is one recent, powerful example of this.

To that end, the new Commission has a long task list, but it should focus on the following. First, bolster the international credibility of the euro by enforcing the Maastricht guidelines of debt levels to the point that countries with debt above the Maastricht threshold should have a portion of their debt deemed ineligible for ECB purchases and for collateral exchange.

Second, continue to clean up the follow of ‘dirty’ money across Europe’s banks and fintech players. The relatively new EBA (European Banking Authority) has failed to do this. Third, think how infrastructure development in countries like Poland and Greece can be better supported by the EU and by EU based private investors, instead of those countries swaying towards Chinese state led investment.

If these and are other measures are enacted, Donald Trump may prove the catalyst for a stronger euro financial system.

Have a great week ahead,

Mike

Ne vous mêlez pas du pain

Food set to become a controversial geopolitical issue

‘Ne vous mêlez pas du pain’ – do not meddle with bread, is the sound advice that Anne Robert Turgot, the 18^th century French economic thinker and administrator gave to Louis XVI. It was good advice, which the King did not heed.

Turgot knew better, he was Controller General of Finances in France between 1774-1776, a period marked by the ‘Flour Wars’ when bad harvests pushed up the price of grain, and consequently, bread. The riots were a precursor to the Revolution, at a time when nearly half of disposable income was spent on basic foods like bread (and salt).

The link between food prices and unrest has held since then (and has a pedigree going back to and beyond the Roman Empire). In 2007 as dollar and commodity price volatility marked the beginning of the global financial crisis, a spike in soft (agricultural) commodities led to unrest in countries as diverse as Haiti, Mozambique and Bangladesh.

Then four years later, a spike in grain and other food prices catalyzed the Arab Spring, markedly so in Egypt which is highly vulnerable from the point food security. Some countries in the region, notably Kuwait, ducked such unrest by introducing grants and subsidising food consumption for over a year.

The case of the Arab Spring underlines two other factors, both also found in the likes of Venezuela today. First, rising food prices are usually the ‘last straw’ for citizens in countries that are badly run, corrupt, suffer poor institutions and that are often also oppressive. Second, in many of these countries, as in pre-Revolutionary France, staple food stuffs like bread make up between one third to one half of discretionary spending.

This was the case in India in recent years, where spikes, or more appropriately bubbles in onion prices led to political agitation. For example, in mid 2013 there was fivefold spike in the price on onions, partly due to shortages, partly due to hoarding. Similar, dramatic spikes have occurred to garlic prices in China.

Since that period (2012-2013) world food prices have thankfully been stable, according to the UN FAO global food price index. One area of recent turbulence which is worth watching is pork prices in China. Swine fever has led to a sharp rise in the price of pork, which because foodstuffs account for some 30% of China’s inflation basket, has driven CPI (consumer price inflation) to 3%, close to its highs of the last eight years.

While China is not at all as fragile as Egypt, the spike in pork prices if it persists, will have a number of short and longer term macro impacts, one of which is that China may not have the demand for the 20 billion dollars or so of soya beans it has promised to purchase from the USA.

Chinese consumers will feel more constrained, and the rise in prices will, in the context of weaker property prices, contribute to a sense of ‘squeeze’ (recall the phrase ‘squeezed middle’ (class) in England). Relatedly, higher headline inflation makes it more difficult for the People’s Bank of China to cushion weakness in the economy with rate cuts.

The spike in pork prices is also a reminder of how food is at the centre of geopolitics. China, though vast, has a relatively constrained arable land mass, and will in the future have to import more food as well as try to buy land or crop facilities in other countries. Other food ‘vulnerable’ countries are India, Indonesia, the Democratic Republic of Congo (DRC), Bangladesh, Pakistan, and Ethiopia. Global warming and diminishing water supplies in many of these countries may mean that food security becomes an even more acute risk factor.

In contrast, the US has vast expanses of farmland, a good chunk of which could be used for food stuffs if it were not for ethanol subsidies. In the future, it may use food in an altogether more strategic way.

In the shorter term, the investment impact of higher pork prices is to make Chinese consumers nervier, to constrain policy makers there. That means that demand for hard commodities like oil and copper will be muted, Chinese interest rates volatile and overseas food producers more attractive.

Further out, trade wars may give way to food wars.

Have a great week ahead,
Mike

Lessons from Brexit, so far

In the past week a short video clip of Laurel and Hardy’s struggle to get away on holiday, under the title ‘How England plan to leave the EU’, has gone viral (especially so in the German speaking world). Whilst an uncharitable view, European leaders are as I write, discussing a second Brexit extension, and the prospect of a Christmas general election in Britain is now high.

In my view the first part of Brexit is almost over, in the sense that terms now seem to have been agreed between the EU and London. The potential scenarios are now narrowing, and point towards a less disruptive form of Brexit in the near future. Against that backdrop, where I caveat plenty can go wrong, it is time to begin to draw some lessons from Brexit, especially as other parts of the world become more agitated.

In many respects Brexit is a global event because it was the first rupture in a world where the liberal order is being levelled, and where a sense of the fractured and chaos are now normal. The second such rupture was the election of Donald Trump, and today events in Hong Kong, Chile and Syria illustrate the emerging democratic, economic and geopolitical faultlines, where American policy in particular will be tested.

The savage and unpredictable political process that is Brexit has produced very few winners, but for observers outside the UK there are clear lessons.

One, which is ever important ahead of the 2020 election, is that unless issues like immigration, national identity austerity, declining human development (think education attainment and healthcare standards) are correctly channeled, they will destroy a nation. Britain is bitterly divided because of Brexit, as is the US by Donald Trump.

In Britain, previously sacrosanct roles such as that of the Queen, the functioning of Parliament and the Constitution has been pushed to breaking point, as it should be said, has any sense of ‘truth’ in politics. Like America, Britain’s checks and balances are just about holding up. That few political leaders today could pen something like the Federalist Papers is just one reason for Americans to revere its constitutional heritage. Hong Kong, and arguably the increasingly ‘managed democracies’ of Eastern Europe echo this tension.

Geopolitically, the European Union (EU) has emerged from Brexit with the lesson that when it is united, its size and technocracy are formidable. For all the castigation of the EU by British politicians, it has thoroughly outclassed London. The White House should take notice of this in case it considers a trade war with the EU.

In Brussels today, where a new Commission is soon to take office, Brexit is becoming a side issue and there is more and more attention being paid to the role that the EU needs to play in a multipolar world. Here it is stealing a march on the US and China, in two respects. The values of liberal democracy are more consistently being enunciated by European leaders, and the EU is fast becoming the first mover in setting the rules and regulations that govern new technologies.

More locally, one of the dramatic side-effects of Brexit is the way it has detonated the historic relationships between Ireland, England and Scotland. Scotland will very likely become an independent state in five years time, there is growing talk of a united Ireland, and Ireland itself will be the only EU country with strong cultural ties to the USA.

What happens to Scotland and Northern Ireland is a key part of the next chapter of Brexit. Scotland will need to think more clearly about its economic model as an independent country, and on the merits of being an EU member. Northern Ireland, whose socio-economic problems have long been neglected by London, arguably needs a Marshall style plan to transform its economy which is heavily dependent on state disbursements, and that needs to follow the example of social investment in countries like Sweden and Switzerland.

Then finally, what Britain (effectively England) does next after Brexit will be a vital lead indicator of where other countries can go in a world where globalization is being levelled out. One avenue is a purgatory of post Brexit recrimination, a lack of leadership to tackle underinvestment and a susceptibility to nationalism.

Another, more optimistic one that could reflect the best instincts of Britain is that a new generation of political leaders comes through to replace the likes of Boris Johnson and Jeremy Corbyn. They would then begin to tackle the many policy issues that have been given little thought as Brexit has raged on – the need for the UK to develop a new economic model especially one that focuses on the potential of its regions, what role the UK plays as a mid-sized geo-political power and the need to focus policy much more on human development issues like mental health and education.

You never know, the same might just happen beyond the shores of the UK.

Have a great week ahead,

Mike