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Tuesday, 19 September 2017

Go placidly amid the noise and haste

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I shudder when I am reminded that I have spent the best part of four decades in the financial markets and it only gets worse when I ask myself how much I have learnt during that time. 

There is, however, one immutable lesson that has stuck with me and it is one that we should all jot on a Post-it note and stick on our screens: irrespective of how far a market moves on political events, the underlying economics will, ‘ere long, get the better of them, and that one makes easy money by trading against the move. 

“Ah!” I hear you cry “Why didn’t you sell into the Trump jump in November 2016 but why would you buy the Trump dump of the past few days?” I did not because the Trump jump was about economic optimism, about deregulation and about a politically and fiscally more business-friendly environment but the collywobbles that have gripped markets since the summary firing of FBI director Jim Comey and the slip-sliding of core Republicans in Congress are about politics and not economics. 

On the contrary. Should the ethical snowball become an avalanche and should it end up sweeping away the president, he will be replaced by Vice President Mike Pence who would, without a doubt, continue to drive forward the stated economic and legislative programme upon which he and Trump were elected to office. And, to be sure, he would do so with a lot more convincing support from the Republican majority in both houses. 

A Trump-free Washington, should that come about, would most probably be a more focused Washington and one that markets should feel perfectly comfortable with. 

Living in political times might be interesting but we should all be cognisant of the fact that the headlines are being written by political journalists and not those of the business and economics desks. And when the political hacks begin to opine on the economic impact of political events, they tend to forget that wealth and prosperity is made by business and not by politics. Governments can shape the legislative environment but at the end of the day it is up to those who provide capital and labour who have to spit in their hands and make it happen.

 

EU TURN 

Which brings me to an article published in yesterday’s Daily Telegraph, which was written by the much-admired Ambrose Evans Pritchard and which was based on the opinions of my erstwhile colleague Holger Schmieding, currently chief economist at the noble house of Berenberg. For well over 15 years Holger and I have disagreed on the EU. I have always had strong points when declaring it to be a deeply flawed construct but Holger has been right in maintaining that it is a long way from collapsing and that reports of its imminent death are vastly exaggerated. 

AEP’s article argues that German’s Hartz 4 labour reforms, which took effect on January 1 2005 and dragged Germany out of its labour market and benefit payments logjam and put it on track to become the powerhouse it now is, have run their course and that the economy has passed its best. France, on the other hand, has these kind of reforms ahead of itself and that non-ideological reforming Macronomics – I do hope that word hasn’t been patented and copyrighted although my old friend Mr Tix has owned the Macronomic Blogspot for quite some years – is about to launch a new golden age for La Grande Nation. 

Never say never but it took a Margaret Thatcher and near civil war to shake Great Britain out of its socio-economic torpor. The de-industrialisation of Britain threw millions onto the dole and it took many years for employment levels to be restored. France avoided that fate by creating ever more public service jobs and now over 35% of the workforce is directly employed by the government. That number rises if one adds in the 61 industrial corporations in which the government still holds a significant stake. The country has over 3.5m jobseekers and shifting them from being recipients of the benefits system to contributors is a tall order. The French social model needs more than just a re-spray. It was repeatedly noted before the elections that all of France knows that something has to change but that nobody wants to be the first one to have to make the sacrifice. Maybe the time has come when the country is ready to make the great leap forward but it is surely too early to take this for granted.

 

TARGET PRACTICE 

On Wednesday I wrote: “President Trump’s authority seems to be disintegrating in front of our eyes. China, already burdened with critical amounts of debt, is trying to expand further on nothing other than even more borrowed money; Russia has, for all intents and purposes, again become a military dictatorship even though its leader doesn’t wear a uniform.” 

For the comment of Russia I took a thorough beating from one market observer whose opinions I value highly. He correctly notes that despite the ups and downs of the Russian economy, Vladimir Putin has remained hugely popular. The Assad regime may not be to our taste but the Western-backed removal of authoritarian regimes in Libya and Iraq hasn’t done the countries and their people much good either. The total failure of the West’s obsession with what it deems to be democracy, so he argues, has led to a multi-layered edifice of misinformation aimed at justifying policy failures and that Russia, for lack of a better Feindbild, is being demonised. Although I don’t entirely agree with this view, it has validity and the West has got its knickers so far in a twist that it is lashing out at Russia and blaming it for everything that it, the West, has got wrong. 

With respect to the observation on Latin America he had no complaints and events in Brazil yesterday have supported that. Just a few weeks ago I was looking at Brazil and wondering whether the corner had been turned but an 8.8% drop in the Ibovespa and concomitant 8.8% slaughtering of dollar/Real don’t look pretty. An old bon-mot has it that Brazil is the county of the future… and always will be. Lots of people have made lots of money in Brazil but many more have lost their shirts. Brazil shone in August last year when it issued, despite the Petrobras corruption scandals, US$1.5bn of 30-year notes at plus 357bp and with a coupon of 5.625%. Yesterday that bond dropped from 101 to below 95, which was still only plus 300bp and by this morning it has recovered to be trading back up again at around 98. On this, I trust bonds more than equities. Make of that what you like.

 

There are plenty of commentators out there who see risk asset markets as overpriced and due a huge correction. Some thought they’d found it in the Wednesday sell-off. I still disagree and my guess is that in a few days all this will have been forgotten. We might be living through an age where every morning brings new shocks and horrors from the political sphere but we should not forget that at the same time over 95% of the US and British and over 94% of the German workforces get up and go to work to create wealth. 

Alas, it is that time of the week again and all that remains is for me to wish you and yours a happy and peaceful weekend. I heard on the radio last night that the English Football Association has agreed to reform its management structure and to admit more women into the corridors of power so as not to lose millions of pounds of government funding. Government funding for football? Would somebody please be kind enough to assure me that I didn’t hear that? Next they’ll be telling us that taxpayers are funding RBS bankers’ bonuses… 

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