The media are all over the place on the back of the collapse of German coalition talks.
But at the time of writing the euro-dollar rate is US$1.1754, no more than half a cent lower than before the announcement that the Liberals had walked out on Mutti Merkel.
To put that into context, the one-month average parity was US$1.1669 and the 12-month average is US$1.1154. The euro only pushed above its current exchange rate on November 14 and the currency has been trading down from its recent high of US$ 1.1847 since last Wednesday, long before the “shock” announcement that Germany is in a constitutional deadlock. So if we close our ears to the political correspondents who cover Germany and look at what the markets think, it’s rather more of a non-event.
Poll pot
But what is going on in Europe’s most powerful nation? The first observation has to be that the media are all talking of the CDU/CSU block that Frau Merkel is leading, the Greens and the Liberals who are the coalition partners of choice, and of the SDP, the centre-left party of Willy Brand and Helmut Schmidt who have decided not the re-enter the coalition with the right. The reason for this given this morning was that they had suffered such a staggering defeat at the September Bundestag elections that they have chosen to stay away. This I believe to be, in substance at least, complete rubbish.
The reason the SPD is staying out is that if it, the second-largest party in the Bundestag with 20.5%, were to enter government with Merkel’s Union, winner of 32.9% of the vote, then the third-largest party in parliament would assume the role of the official opposition and that, in case you’d forgotten, is Alternative für Deutschland, the AfD. Thus the FDP and the Greens became the front runners to form what in Germany has been termed the Jamaica coalition – black, yellow and green – and the AfD is the teddy bear in the woodpile. The commonly trafficked assumption has been that, in order to keep the AfD out of any formal role within the Bundestag, the Greens and the Liberals would swing in behind Merkel and that “Realpolitik” would win the day. It might not look that way today although my political instincts tell me that the pragmatic solution remains the closest and that after everybody has thrown their toys out of the pram they will pick them up again give it another try and that they will succeed in forming a government without having to reach for a futile looking re-run of the elections.
Foreign exchange markets appear to agree with me and as long as any movement in the currency, irrespective of direction, remains within the range of a normal trading day it’s not worth mentioning. Half a cent off the euro is just that.
The real worry is that the media are behaving as though the AfD didn’t exist and most certainly not as the third-largest party, the choice of one in eight German voters. Although the populists have not electorally swept everything before them, they are sending a message that the political class ought to listen to. That message is that a disproportionate amount of government time and taxpayers’ resources are being expended on satisfying the needs and demands of minorities while the majority feels underappreciated, its opinions are underrepresented and it is being fiscally taken for granted.
I have next to no doubt that the black/yellow/green coalition will be formed for the Liberals are the most likely losers in a putative re-run of the general elections. The German voters will not take kindly to a party that has destabilised the political consensus and put at risk the country’s role as central pillar of the EU. I do hate the current fashion for ending everything on “watch this space” but in this case I shall make an exception.
Long haul
On the subject of spaces, most asset markets don’t seem to be in good ones. Most principal equity markets lost ground during the course of last week although in the greater scheme the losses barely register. There remains too much money chasing not enough assets – or at least not enough assets that pay a living return - and four days before Thanksgiving is not the moment to suddenly decide that going short the market is the position to make a great fortune. Time and again this year my basic tenet has been that as long as coupons can’t compete with dividends, equity markets remain the place to be. It’s worked for the first 46 weeks of 2017 and there is no reason to believe that it won’t hold good for the remaining six. Anyhow, bonuses have been decided so there is no need to and nothing to be gained from hanging one’s rear out of the window…
Finally, I hear there was a meeting involving overseas regulators at which it was attempted to elicit what MiFID II adds to the wellbeing of the world. The answer, I understand, is not one that our authorities would want to hear. That said, they have spent several years not hearing what they have been told by the markets so why expect them to suddenly and miraculously change that habit? The most depressing observation, to me at least, is the sycophancy of buy and sellside commentators alike who try to assure us that MiFID II is a great idea and that it will make the investment world a better place. The implementation and maintenance costs of this complex of disjointed and confused thinking are enormous and anybody who believes this to be an expense that will not be borne by those whom the regulation is supposed to protect is smoking something that would bring most of us a criminal record.
Please don’t get me wrong; the intentions embedded in MiFID II were entirely honourable but look at it this way: would football become a better game if you put 22 referees on the pitch, one to keep an eye on each player? The markets are not a perfect place. There are rotten apples everywhere, the same as every football game has a “diver” and a shirt-puller. But would the disproportionate cost of 22 refs be justified if the beautiful game were to be destroyed to bring about marginal improvements in equitability?
Take that thought with you and have a good week, short as it might be. Anyone for turkey?