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Tuesday, 21 November 2017

Good morning Vietnam

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I lingered over breakfast this morning in order to hear President Trump’s complete keynote speech live as he delivered it to the APEC plenum in Da Nang. 

For the first time I heard him clearly and lucidly articulate his issues with global trade agreements. The customary wild attack on all and sundry while waving the stars and stripes was replaced with a fairly measured suggestion that he has no issue with other countries and governments flying their flags but that in exchange they would have to accept his vision for Americans to therefore be allowed to run their own up the flagstaff. 

The standing ovation he received most definitely did not look particularly spontaneous. In his own inimitable way he stated that the Indo-Pacific region had had its assistance in developing its economies but that now that they have reached critical mass, the time really has come to level the playing field. Fine words, to be sure, but very hard to convert into reality. 

 

I love the smell of napalm in the morning 

The objections he expressed to subsidised state-owned industrial complexes pitching themselves against free-market competition makes sense but the chances of this being changed in the short term seem remote. He declared that the WTO has let down the US and in my opinion the West and East treat rules in a different way. Those who have tried to do business in China will be well aware that Chinese contract partners may sign all the agreements but they do not consider the content of the documents to be strictly binding. I can speak from first-hand experience of Chinese suppliers signing the identical agreement to supply the very same parts with two different buyers and then unceremoniously telling one of the buyers that it had changed its mind and had no intention of delivering under the contract. In the event the jilted company, on the board of which I sat, could do nothing, – seeking legal redress in China was not much of an option – folded its hand and went out of business. 

In effect Trump is saying that if the Asian economies continue to flout the rules, then the US will too. But rather than to do so by stealth and deception, he will do it by simply tearing up the agreements by which he believes only the US feels obliged to abide. This all looks fine on paper, or at least on the bits of paper that the president hasn’t already torn up, but in practice an iron curtain is about to descend across the Pacific. This can only make everyone a loser and the US, for all intents and purposes, will most probably lose more than the others. 

Meanwhile the Dow yesterday shed 101.42 points, or 0.43%, as markets attempted to digest the many messages that were coming from Washington in the context of tax reform. The proposed deferral in the cut of corporate taxation to 20% until 2019 knocked the highflying bank stocks off course and there was uncertainty with respect to the change in the treatment of carried interest, an issue for private equity investors. In the greater scheme though a loss of two-fifths of one percent is as good as no loss at all and left the market still above the level of November 1’s close, thus handing back the gains of five subsequent all-time record highs. With or without the issues surrounding tax reform a spot of healthy consolidation was more than overdue and therefore a mild sell-off is in its way more affirming of the ongoing rally than another new high would have been.

 

Gordon is a moron 

The Brexit debate rolls on. Now the invisible Scotsman, the one who believed he’d abolished the boom-and-bust cycle and who told us that he’d saved the world, now reckons that Brexit is not a done deal and that it can be avoided. Well Gordon, today’s news is tomorrow’s fish and chip wrapper and I doubt that too many people care what you are thinking even though many still hope against hope that this country will change its mind and decide to stay in. 

It is now suggested that the UK government has no more than two weeks to agree the divorce settlement with the EU negotiators before the post-Brexit trade negotiations go for a burton. I have no idea what figure the other side will ultimately settle for but my guess is that the final sum will be somewhere in the €45bn-€60bn bracket. Key will be the valuation of the unfunded pension liabilities. The UK side will be banking on the EU not wanting to set the British share of that pot to be too big for that would remind EU citizens just how big the remaining share of that figure really is. 

Unfunded public sector pension liabilities are one of the best guarded secrets in contemporary Europe but the buy-out figure for the UK could end up shining a light into a very dark corner. Neither side wants to do that and I suspect that the UK has slightly more leverage in that space than most observers have appreciated. The muppet-in chief, Jean-Claude Juncker can keep his “well over €100bn” and put it in the same dark place where he stores his brandy reserves. 

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. Tomorrow marks the 99th anniversary of the armistice and this year’s remembrance will be largely dedicated to the memory of the 1917 battle for Passchendaele, the British Empire’s equivalent of Verdun. Tonight England and Germany will be playing a football friendly at Wembley and both sides will, following FIFA’s backing down on its shameful and humiliating objection, be wearing poppies, a very noble and highly appreciated gesture by the German side. If they can do it, so can we. Wear your poppy with pride.

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