Looking through the pomp and circumstance of Young Macron’s splendid inauguration yesterday morning (did I hear anything other than a rephrased “Let’s make France great again”?) we had a weekend where we were treated to both the dark and bright sides of globalisation.
On the one hand, we had a massive attack of malware which laid waste to hundreds of thousands of computer systems across the planet – demonstrating once again the frailties of long lines of communications (as learnt variously by King Charles XII of Sweden, Emperor Napoleon I of France and Chancellor Adolf Hitler of Germany), even if they are hidden from sight in the virtual world.
And on the other side, we have Chinese president Xi Jinping making grand announcements with respect to his “One Belt, One Road” project, touted in the media as a revival of the old Silk Road, the objective of which is effectively to re-establish a land-based transport infrastructure between the industrial powerhouses of north-western Europe and south-eastern Asia.
Although the Donald and his merry men remained firmly on the American continent, the rest of the world was there to applaud, not least of all Vladimir Putin who knows exactly what happens and what disruptive power he is handed when critical lines of communication have to cross the endlessly large and remote areas of his country.
Not even Ian Fleming, who incidentally grew up on the family estates not five miles from my front door, could have made that one up.
While markets are hopping up and down celebrating the prospect of further infrastructure-based economic impetus coming out of the Middle Kingdom, none of them seem to care too much about the deepening risks to the global socio-economic edifice emanating from yet more debt funded growth. How typical is that?
Marine Le Pen might have been defeated at the polls last Sunday and AfD might have taken a pretty serious drubbing, along with the SPD, at the hands of Mutti Merkel’s CDU in the North Rhine-Westphalia state elections, but the fact is that just because voters have cast their ballot one way or the other does not mean that the problem has suddenly gone away.
I dined last night with a friend who, having emerged from an adult-sized career in both industry and the law, is now acting as chairman of at least one listed company. Not unlike myself, he sees the problems we are facing not in the debt that is mounting but in the lack of inflation needed in order to erode that growing debt pile.
THERE IS A general election on June 8 in the UK (the thumbnail outcome of which is a foregone conclusion) and two rounds of French parliamentary elections (the result of which is anything other than certain) but I would argue that the FOMC meeting on June 14 is more important than both.
The US needs to raise rates. It’s as simple as that.
It has become quite evident over the past few years that lowering of rates, despite some of the claptrap emanating from the ECB, does nothing for inflation. The fact is that increasing the dose of morphine might keep the pain at bay but it does not cure the disease.
Central banks continue to behave – whether encouraged by their political masters or not is open to debate – as though a painless exit from the aftermath of the global financial crisis has, in a best case scenario, been achieved, or, in the worst one, is still possible.
In the final analysis, it will have to have been the Federal Reserve that fires the starting gun on the real recovery. I do not mean “recovery” in nominal GDP growth, which we already have, but a rebalancing of the “debt-pile to life-style” equation. Living the high-life on the credit card don’t win no prizes.
Joe SixPack may not conceptually understand real returns, but he does understand nominal returns and an increase in income on savings would be quickly recycled. Whether or not Mr Inflation is busily spending Joe’s hard-earned savings while he’s not watching does not seem to matter.
In the 1960s and 1970s we were told that monopoly demand was inflationary and therefore dangerous. Infrastructure spending would drive inflation for money was being put in consumers’ pockets while the products which generated that income were not freely available for consumption. War, with its demand for non-consumables, was the most inflationary of all human activities – or so we were taught. The failure of that model is there for all to see in Japan where boundless infrastructure spending has done nothing at all in terms of generating either follow-through consumption or inflation.
The next step has to be to try something else and the FOMC holds most of the cards on that front. Madame Yellen has the reputation for being a dove and, although it might seem counterintuitive, the dovish option has to be to tighten. Raising rates and putting spending money in people’s pockets has to be the way forward – there are still more savers than there are debtors.
YOUNG MACRON SPOKE of the challenges of the future and his desire to tackle them. Well, it wouldn’t have been much of an inauguration speech if it hadn’t been full of the joys of spring, although he inadvertently highlights the greatest weakness of the EU of which he is such a staunch fan.
For 60 years the EU has resolved its problems of the past by behaving as though they would simply go away by focusing on grand projects for the future. For 60 years it has believed that if it buries its flaws in enough concrete in the form of new initiatives, those failures will be neutralised.
Macron may be young and dynamic but until some of the nonsense of the past has been addressed and unpicked, there is no way that waving a sword and crying “En avance!” will lead the country anywhere.
Students of military history, especially that of the Great War, will be acquainted with France’s military principle of “attaque a outrance”, the main result of which was the fruitless death of hundreds of thousands of its citizens.
BEFORE LEAPING FORWARD, there is a need for us to circle back and review where mistakes were made in the past. Committing US$124bn to infrastructure spending, as Xi Jinping has just done, is not necessarily the smartest way to go. Raising interest rates and putting some nominal wealth back into people’s pockets while rotting down the dent pile is.
Meanwhile most Asian markets quite liked what Xi had to say about the bright side of globalisation while disregarding the shadowy side that was manifested by the malware fiasco. Index futures would have one believe that both Europe and the US are headed in the same direction. The economic calendar is relatively light this week and so trading will be momentum driven. So far, so good.
Oh, and in case you missed it, Russia and Saudi have agreed to extend the output limits on oil. WTI opened a dollar a barrel higher this morning at US$48.80/bbl with Brent at US$51.82.
Have a good week.
PS: I will be travelling again this week so reports will be on the irregular side. Please bear with me.