Back once again for the renegade master
I’m back, and by far the most seismic of events to take place while I was away was the staggering defeat that Mutti Merkel suffered in the Bundestag elections.
Like a sea quake, it happens here but the real damage is wreaked elsewhere when the ensuing tsunami hits coastlines a long way away. I kept reading about her victory but all I could wonder was what she would have given to have lost with 42% of the popular vote, as Theresa May, did rather than the 32% with which she is supposed to have won.
The biggest loser, however, is the EU. The voice of reason that is Germany’s deeply realistic finance minister, Wolfgang Schäuble, will have be silenced. Schäuble might not be the only person out there who understands that austerity is not like a quick dose of antibiotics after which one can revert to normal service in a couple of days, but he is one of the few to whom anybody listened.
Austerity is the economic equivalent of the Twelve Steps of Alcoholics Anonymous, in which one acknowledges first that one has an addiction problem - in our case chronic overspending and over-borrowing - and then collectively undertakes to resist the temptation, one day at a time. There is no magic bullet, no quick fix that can take care of things.
Christine Lagarde might have been right when she said in a speech last Thursday at Harvard’s John F. Kennedy School of Government that the global economy was enjoying “the broadest-based acceleration since the start of the decade”. However, many sceptics fear that she sounded a little like Chuck Prince, erstwhile chairman and CEO of Citigroup, when he declared in the middle of the exploding sub-prime crisis that the music had not yet stopped and that he and his bank were still dancing. The question, Madame Lagarde, is not whether we are growing or not but how that growth is being funded.
Quantitative easing, one might come to believe, is the public finance equivalent of the self-certification mortgage and ZIRP and NIRP therefore the equivalent of the great teaser rates. Schäuble, often derided as the quintessentially conservative Swabian, once governed Europe’s richest industrial provinces where Thomas Edison’s principle of 10% inspiration and 90% perspiration are imbued in the national psyche. Schäuble’s departure is the sea quake, the concomitant tsunami of which cannot be seen on the open sea but which will, sooner or later, break over the EU’s shores.
Power to the people
Another seismic event remains Brexit. I think the scariest bit of it all is not what we see in the political arena, which is not particularly edifying on either side of the table, but the desperately childish exchanges that one reads in newspapers’ comments section. One might have expected some informed debate in these areas but what I see is the same taunting schoolyard behaviour that we had in the immediate aftermath of the referendum in June 2016. What many have missed is not the threat to European integration that emanates from Brexit, or even from the perfectly visible though rarely articulated defeat of Merkel’s coalition government, but from Poland, the future bad boy of Europe.
Poland might be in the clutches of right-wing nationalists but that is what can happen if one embraces the system of democratically elected government. The Poles’ attitude is worrying but at the same time a warning shot that Brussels would do well not to intentionally overhear. Its message is simply that Poles did not spend 40 years resenting being told what they could and could not do by Moscow simply to let Brussels do the same for the next 40.
The UK continues to tear itself apart, which is not fun but at least it shows that people care about what happens next. Theresa “Kitten Heel” May might be deeply embattled and her Brexit strategy might well be criticised for not presenting a vision of the end game but to me that is a bit like accusing Noah of not knowing where he was going to make landfall even before it started raining. On the other side, anybody who heard Jean-Claude Juncker, the muppet-in-chief, give his speech in front of the European parliament in Strasbourg, opening the 2017/18 session, might have noticed that he seems not to have acknowledged that a very substantial portion of the union’s annual budget is about to go up in smoke and that it too will need to cut its suit to match its cloth in the future.
Looking at debt markets, I continue to get the feeling that there are still too many borrowers who should not be borrowing being given money by lenders who should not be lending. My holiday re-read of Michael Lewis’s seminal account of collapse of the sub-prime market in 2007/2008, The Big Short, might soon be ready to be re-written, simply replacing “sub-prime mortgage” with “high-yield corporate” or “emerging market sovereign”. Consumer debt is not only building up – that’s one part of the problem – but if it were withdrawn, then Christine Lagarde’s positive growth story, driven by demand, would also very hurriedly go south too.
The Federal Reserve has not yet taken away William McChesney Martin’s legendary punch bowl but some younger economists’ and strategists’ pre-emptive reaction seems to be that they have no right to. That is correct. They might not have not the right but they do have the duty. One commentator I read every day, Beat Matzinger of Julius Baer in Zurich, who quite openly and very successfully creates a compendium of other people’s thoughts, wrote that economics are out and that the only game in town is waiting for the announcement of Janet Yellen’s successor at the head of the Fed. He might be right but if we’ve sunken that low in the tea-leaf-reading game, then things are getting pretty bad.
Finally, I’d like to thank the many readers who have written to me during my time away, who have said how much they have missed my daily pieces and who demanded to know when I’d be back. I had intended to return to writing regularly at the beginning of this month but I find myself preparing to undergo radical surgery to deal with the rather unexpected appearance of a cancerous prostate. This is scheduled to happen next Monday, and it might be several weeks before I’m fully up and running again. At the same time there are realignments taking place at Sol Capital, some of which are related to the rather destructive MiFID II regulation.
One way or another, please stay tuned.