Sunday, 20 January 2019

Ever decreasing circles

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Markets might well have got off on the wrong foot this morning and a tricky week could well lie ahead. 

The US Senate’s failure on Sunday to find a way out of the debt ceiling gridlock pushes the government into a third day of shutdown and although the debate will continue today, the differences between the two sides don’t appear to be closing. The Senate majority and minority leaders, Mitch McConnell and Chuck Schumer, are intent on coming to a solution, each with a carrot and a stick in hand. The two big bargaining chips are immigration funding and the allocation of funds for the construction of President Donald Trump’s wall. 

The strange or, maybe on reflection, not so strange phenomenon is that markets really don’t give a toss. They watch what’s going on, perform a perfunctory wriggle, and move on. We’ve all watched these histrionics far too often to take them particularly seriously although they do demonstrate that Trump’s promise to tidy up Washington, to “drain the swamp” as he had it, has gone nowhere. The same childish standoffs that did so much to turn the American voters against the DC establishment and which lifted the Donald into the presidency continue as ever. I noted some weeks back that democracy is in crisis and is failing, an observation which I took some stick for, but the ongoing debt ceiling pantomime is, to me at least, a prime example of where consensus politics, the cornerstone of the democratic parliamentary system, is struggling.


Auf Wiedersehen, Pet

In Germany things are no better. Where can one see a better example of a stable and prosperous economy not leading to equally stable government? The international media are this morning full of excitement that Martin Schulz has secured a majority within the SPD supporting coalition talks with the CDU/CDU block of Mutti Merkel. At first sight this is good, although below the surface there is more wrong than right. SPD opposition to the coalition was based on the huge losses it suffered in the last Bundestag elections that many believe to have been the result of the party having sold out its core values in exchange for the junior partnership in government. The British Liberals know the feeling. Thus Schulz’s brief will be to push harder for the left-wing agenda. At the same time Merkel is being criticised by her own party faithful for having ceded ground on the right to the AfD, for having compromised her party’s core values and she, in turn, is facing demands not to move any further to the left. In other words, anybody out there who believes that the grand coalition is now a done deal would do well to think again. I would ascribe not more to a 40% chance of a successful outcome of the new coalition talks and even if Germany does end up with a black/red grand coalition, it will be a messy and unhappy affair. 

I observed in October that, in the aftermath of the elections and while the news media headlines were still trumpeting a Merkel victory, she looked weaker and more damaged than Theresa May. Four months on that has not changed. For many years Merkel’s strength was that what you saw is what you got. Now people are beginning to ask themselves what it was that they actually saw and their conclusions are not in all cases particularly flattering.


The New Statesman 

And then there is Davos. I still have to giggle at the definition of it being a place where billionaires tell millionaires what the middle classes are thinking. It’s so true and I can conceive of few more inappropriate places for the widening gap between rich and poor to be discussed. Maybe former Zimbabwe president Robert Mugabe’s stoop would have been less appropriate but that’s about it. Assuming 2,500 delegates at a cost of around US$40,000 per head (US$20,000 for the accreditation and US$20,000 in ancillary costs), the WEF chews up US$100m for which we get treated to the opinions of singer/song writers and Hollywood A-list actors, The set-piece panel discussions are vacuous and the real value is in the networking that takes place behind the scenes. No doubt some of the great M&A deals of the year will trace their roots back to the odd chance encounter in Davos and on that basis US$40,000 is cheap at the price. So the Global Economic Forum is in effect no more than a corporate speed-dating event dressed up as morality health club with cameras pointing through every keyhole. 

I just wonder how often Pope Francis’ blunt attack yesterday on the rampant corruption that stalks Latin American public life will be brought up and highlighted and whether, if Trump had said the same thing, he would have been castigated as a racist as he was when dubbing a number of countries “shitholes”? I suppose that, as every year, the Global Economic Forum will come and go and that it will do no more to change the world than would a boy scout jamboree held within the same Swiss alpine valleys.


The Good Life 

Meanwhile back in the real world the S&P 500 broke through 2,800 for the first time on Friday to close at 2,810.30. Analysts are perplexed by the current volatility and the reasonably significant daily swings. Sure the 1% daily move by the S&P is still not with us although the daily up and down moves have been quite pronounced. Although we are getting new all time highs, technicians would regard the ups and downs as a sign that the market is looking for a verification of the current levels and the time has come to follow closely the volumes on up-days and the volume on down-days. If the former begins to look a bit thin it’s time to get out. There is, however, so far no sign of the up-days looking weak so there is as such no need to panic. The overall pick-up in the VIX – although it did close down 0.95 on Friday at 11.27 – is also worth keeping an eye on although its predictive capacity has largely been lost and to still call it the “fear index” would be ascribing powers to it which it does not really have. 

This morning UBS reported its full-year figures and a positive surprise they provided too. Sergio Ermotti’s controversial binning of the investment bank and the bank’s withdrawal into wealth management remind me of Nikolaus von der Flueh’s advice to the Swiss confederates after their defeat at the battle of Marignano in 1515. It was there and then that the roots of Swiss neutrality can be found and the rise of the wealth of the nation set in. The bank announced an 8% increase in its dividend and a share buy-back of SFr2bn over the next three years. It might be a bit too early to declare that UBS is back but it is most certainly looking better than it has done in the best part of a decade. The fact is that if UBS, so badly damage by the financial crisis, can show signs of recovery, then the playing field should be good for its peers and we can look forward to some positive news from many other formerly flattened European banks. The European reporting season is off to a good start. 

And yet markets are unsettled. I’d expect to see investors begin to take some chips off the table over the coming weeks and with trading inventories now replenished even good news might be met with a softer market environment. Maybe the time is coming for some of the fact to be sold… 

Have a good week.

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