Economics
The coming war with China
The above is the title of a 2015 film by the journalist and author John Pilger. It concentrates on US military ambitions in the Asia Pacific region. As a record of the arms industry looking for an enemy, it makes for disturbing viewing.
A different sort of war is already under way. This is the trade war of tariffs, of course. This has escalated to the point where the first set of options has run out – there is in effect no more trade left to tax.
I read a comment that the Chinese might soon get fed up with being the only adult in the game. They do have powerful options as heavy buyers and owners of US Treasuries (US government loan stock). They could stop buying new issues or even dump bulk holdings in the market.
Such actions could have very serious repercussions for the global economy. Let us hope they don’t get provoked beyond that legendary inscrutability.
It is worth remembering that the US president and his party have to play to please an electorate. No such inconvenience will worry the Chinese leadership.
Lehman Bros – 10 years on
September 15th 2018 will mark the 10 year anniversary of the event that history will record as triggering the financial crisis that was followed by global reactions that would have been seen as impossible in earlier times. Most developed economies moved their central bank rates to be net negative (in real terms) and central banks became the largest buyers of fixed income securities that have ever been seen, adding trillions to their balance sheets and effectively the same amount of new liquidity to the money markets. Money printing is not really the best shorthand, but that is what the average person easily understands as being the process.
It is perhaps disappointing to politicians and especially the top central bankers that they are not thanked much for acting to prevent a recession like that of the 1930s. However, the consequences of these actions have not yet fully worked their way through. Some have been good for many people – asset prices have risen as would be expected when there is loads more cash sloshing around. But because austerity was an accompanying part of the economic package in many major economies, there have been negative consequences for those who have no assets, or whose main asset is their human capital – their ability to sell their labour. Wages have not risen much because of contemporary changes in technology, society and the relative power of the socialist vs capitalist elements in politics.
It is in fact a rather unfortunate irony of the post financial crisis world that the solutions adopted to sort out the mess directly caused by irresponsible financial engineering – the invention of extra fictitious assets for those who already had plenty of assets – is in fact an application of more short term financial engineering. This is like giving the drunk guy another bottle of vodka because you feel sorry for him.
It is also much the same as the high interest rate lender offering a consolidation loan to the person who has got in a mess and can’t pay their credit card and bank loan instalments, knowing that they will struggle with the monthly cost but that there are valuable assets to be had if they default. The world remains relatively Dickensian.
The respected fund manger Edward Bonham-Carter (c0-founder and formerly managing director at Jupiter) recently made the point (in a piece about this 10 year anniversary) that global indebtedness is now at astronomic levels. In some emerging markets the stress of such debt is being thrown into sharper focus by the rising value of the dollar and less than stable politics (Argentina and Turkey). But debt in much larger economies is gigantic in comparison.
Most of the warning signs that preceded the last stock market collapse are now flashing, some quite urgently. As always the market won’t correct itself by slowing down gently and having a long pause, even if a proportion of participants know when to start taking defensive measures. It occurred to me once that maturity is knowing which drink is the last one you can have before you lose control and get ridiculously drunk with all the negative consequences. Most global stock markets have had that last ‘sensible’ drink. Some more drinking will no doubt raise a further temporary feeling of joy without consequences, but the hangover will be nasty.
Cold Turkey?
In today’s news about the financial pressure being exerted on Turkey by the Trump administration, two blog posts I have made recently are brought together.
Currency fluctuation is a risk that can impact all portfolios
This is as I explained: because many emerging economies have large amounts of US dollar denominated debt, the cost of servicing that debt goes up if the dollar appreciates relative to the currency of the debtor nation. That is one of those ‘rule of thumb’ justifications for selling emerging market and broadly Asian stocks (although not logical for Japan and China, at least).
Tariffs have unpredictable consequences
In this case, tariffs aimed at Turkey (because they are not being nice to Donald, it seems), may lead to default on debts owned mainly by international banks, thus awakening sleeping concerns about the liquidity of the financial system when central bank money printing ends.
Thoughts
Turkey is not a small country and of course was once a significant regional power, so is unlikely to allow itself to be pushed around. It talks about new alliances with Russia, although allowing for not such ancient history, one would not see the two countries as likely best mates. But ‘need is must’ sometimes as the saying goes and I am sure President Putin would like more influence South West of the Black Sea.
A worry is that US foreign policy is now so ignorant that Trump sees Turkey as just another Middle Eastern country (because it is Islamic) and therefore a natural enemy of the US. As I write that is seems bizarre, but I do believe it is possible!
It would be odd if this particular non-sensical action by Trump caused the market sell off that is rather overdue, but it will be a nervous few days. Investors should keep an eye on events and be prepared to take any buying opportunities.
As a final thought, the Euro has been quoted as depreciating in today’s news as a contagion effect from the Turkish currency crisis. But it has hardly moved against Sterling – an indication of how uncertain an option the UK appears to international traders as the Brexit dithering continues. The Pound looks likely to continue to fall against the US dollar so portfolio exposure to global trading businesses will benefit.
Christmas is coming soon – in my opinion
What! I hear that reaction as the UK weather simmers away at heat wave levels.
I am referring to the comment I posted on social media in the very early hours of the day when the Brexit referendum vote result was known – “The turkeys have voted for Christmas”.
In religious calendar terms, we are now in Advent and the first window on your calendar reveals the resignation of the entire Brexit department ministry.
What I meant by my comment was that the people who had the strongest grievance with the EU (for example, over open borders and immigration or the Common Agricultural Policy or social rights legislation), are not in fact the editor or owner of the Daily Mail nor Tory MPs who went to Eton, but actually ordinary working people who can’t get to see the doctor in East Anglia, or farmers in Wales or Dorset who don’t understand why the EU “dictates’ how they ought to farm, or Labour party members seeing wages suppressed by the employment of Eastern European workers. These people would be worse off because of the certain economic consequences of breaking up the Single Market and also in my judgement at risk of being worse off because of the substitution of US style capitalism for the more socially balanced European version.
I think the fact that the ‘turkey farmers’, the big international employers, are now telling bluntly how difficult it will be to operate out of the UK without a customs union is some evidence that my assessment was correct. There are other proofs that are beyond the scope of this post.
As I have written before, the long term interests of the UK (or at least England) might just be best served by Brexit (although I would not bet on it). As J M Keynes said – in the long run we are all dead.
To be clear (I could not resist using Mrs May’s word whisker), I do NOT believe that the EU does not need substantial reform, as do most of the members of the European parliament (except curiously the right wing parties who one assumes are all expecting it to disintegrate completely!). The Commission is far too powerful, agricultural policy is at times bonkers and the bureaucracy needs trimming. Unlimited immigration has undesirable social consequences: that is self evident (ask any Italian if you want another viewpoint). But equally the idea of the EU has huge merit in economic, social and peace keeping terms. So I would personally have preferred a more Maggie Thatcher approach – use British clout to get genuine reform from within.
Since I posted my highly pessimistic reaction to the vote, things have got worse. Many billions have been withdrawn from UK investment funds. The Conservative party looks to be heading towards the disintegration that John Major staved off with difficulty (ultimately assisted by one A Blair!) and which David Cameron naively tried to fix with the referendum proposal. Instead of UKIP, we now have the UKIP wing of the Tory party.
This represents political risk at the highest level for investors because this time the consequences of the politics are hard wired to the economics and the business effects. Boris may want to abuse business, but big business runs the capitalist world – not him. His ignoring business suggests to me he may be descended from King Knut.
I am not entirely pessimistic for investments in the UK in that what I am expecting is disruption, some specific negative consequences but then a rebalancing of the flows of business capital. Jobs will leave the UK for Eastern Europe (I can already see that from where I sit now) and that will reduce immigration from the more developed places like Poland, Czech Republic, Hungary and the Baltic States as the better educated citizens of those countries get jobs at home. Possibly some deals will be done with the US that might not have been done before, but I would expect that to be a matter of the UK buying more stuff from the US, not better jobs for UK workers – anyone who has worked on employee benefits for US owned businesses knows well that they screw every ounce of value from their employees.
Very close attention needs to be paid to portfolio composition and stock selection. Places like Japan and India that have large internal markets and are not hugely impacted by UK and US politics might be safer investment havens than would commonly be the case!
I will no doubt return to this subject over the coming weeks.