If equity markets are the brains and debt markets are the lungs, then foreign exchange markets have to be the heart and circulation of the economy.
What part of this imaginary body commodities might represent I will leave to the readers’ imagination. Without a doubt, if we want to take the pulse, all we have to do is to look at the performance of the currency. On that basis, and after yet another dump in the pound, the UK would not look to be in rude health. But there is another way to look at things.
This week will we see the World Economic Forum take place in Davos juxtaposed with the expected declaration by the UK government that it sees no way out other than a hard Brexit and then, on Friday, the inauguration of Donald John Trump as the 45th president of the United States. I am old enough to be able to remember where I was when I heard that John F Kennedy – 35th holder of the office, misogynist, serial philanderer, nepotist, son of a millionaire bootlegger whose election to the White House is still tainted by accusations of it having been bought through back-room deals with the unions - had been assassinated. I am also old enough to remember (and in a most minor way having taken part in) the student protests of 1968. I know exactly where I was when I heard that Bobby Kennedy had been shot and I recall the killing of Martin Luther King. In other words, I have a clear memory of much that affected social change over the past 50 years.
What I don’t think though is that Kennedys and the Kings would have regarded a convocation in a Swiss ski resort, initially niftily established to help fill the hotels during the slack period between the Christmas holidays and the half-term winter break as the pinnacle of modern liberalism. At a cost of some US$20,000 a head, there are 2,600 delegates, by invitation only of course – what a way to call for equality! Davos is possibly one of the most visible expressions of where it has all gone wrong and why it is that Joe, Hans, François, Giovanni, Juan and Jeroen SixPack are fighting back. Looking at some of the themes of this year’s Davos, one must surely come to the conclusion that the world has moved on faster than the management committee has been able to get its head around. President Xi’s presence gives it all legitimacy but away from the self-satisfied enjoyment of champagne and canapés, the moral authority of Davos is surely fading fast.
Trump’s wind of change
Trump continues to swipe in all directions as his interview with The Times demonstrated. Brexit is good, the EU isn’t. Mutti Merkel is wrong but Vladimir “Put-me-in” Putin isn’t. What we must ask ourselves is whether Trump, odious an individual as he may or may not be, has caught the wind of change while the majority of the ruling classes are still hanging on to a model which has, temporarily at least but possibly permanently, run out of steam.
I note the outrage over the fight that Trump has picked with politician and civil rights activist John Lewis. But if I take a step back, Lewis has no right to claim that Trump is not a legitimate president. Trump didn’t write the rules, he simply worked around them better than his opponents.
There is no provision in the constitution for counting the popular vote and thus, like it or not, Trump won the presidency fair and square and unless and until a dirty tricks campaign on the scale of Watergate is revealed, he will remain legitimate. As a state representative who is bound to uphold the constitution, Lewis has no right to question the legitimacy of the new president. “The black community is outraged”; how outraged would it have been if the same comment had been made by a white politician and if Trump had given, verbatim, exactly the same response? Who, I wonder is playing racial politics with whom?
I make this point very consciously. We must all guard ourselves, especially more liberal-minded Europeans, from confusing personal dislike of the Donald with up-front and wholesale dismissal of all of his economic and political programme. We might wonder how Trump made it to the White House but our not being able to do any better than elevating Jean-Claude Juncker to the presidency of the European Commission doesn’t inspire any special confidence in the efficacy of our own rules and institutions either.
Hard Brexit
Europe will also be challenged if Theresa “Kitten Heel” May comes out fighting as is now expected. Word is that she is prepared to tear it all up and exit the union, the customs union and the single market while throwing down the gauntlet to the rest of the EU. I tripped over an article this weekend which spoke of the fears of German farmers, were the UK to exit totally. Germany exports €4.3bn of agricultural produce to the UK while the UK only sends €1.3bn worth of food-stuffs back. The German farming community doesn’t want to lose the market as well as the significant net contributions by the UK to the EU budget, which would surely be reflected in a reduction in financial support for the agricultural sector. This is not about everything that the UK risks giving up but the negative impact that a hard Brexit would have on the rest of the bloc. For the first time I hear a clear, grassroots chorus from the mainland calling upon Brussels to think of a practical and workable compromise. The farmers in question have absolutely no desire to be sacrificed on the altar of hard political principles.
Meanwhile Chancellor of the Exchequer Philip Hammond is also putting pressure on Brussels by letting it be known that he would have no scruples about turning the UK into an offshore tax haven and of taking on the remainder of the EU head to head.
The ECB meets on Thursday and although nothing is expected on the monetary policy front, it will be interesting to see whether there is any shift in its overall position. DBRS has just downgraded Italy to BBB (high) from A (low), which should by rights call for a change in collateral haircuts. That will barely have been part of the master plan.
Asian markets traded lower today on a softer dollar and Europe will most probably follow suit, that is other than the UK where the pound is falling faster than the greenback… I’d be happy over the next few days to buy a ticket to the grandstand but not to aspire to be running around the pitch.
Have a good week.