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Tuesday, 19 June 2018

I scream Cohn!

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Another one bites the dust; this time it was Gary Cohn, Goldman alumnus and economic adviser to the Donald. 

And as after every significant resignation from the White House staff the president tweets that the “team” is stronger than ever and that the departure makes little to no difference to the functioning of the administration. 

That might or might not be true but what is indisputable is that when Trump won the election to howls of scepticism and Cohn turned up on the docket, the sense prevailed that there would be some cool heads and honed brains in the White House to counter the likes of Steve Bannon and other more radical voices. Bannon is long gone, the president himself having seamlessly assumed the role of chief ideologist. No doubt he believes that he has no need of an economic adviser either. Why would he for, let’s face it, he knows everything anyhow. 

The departure of Cohn can come as no great surprise, given his clear opposition to the tariff policy that Trump has decided to pursue. I refer back to the day Trump won the Republican nomination as candidate for the presidency. I wrote at the time that Trump as no more a Republican than he was a Democrat and that he was no more than a cuckoo in the nest. A voice in the desert. How he, a former Democrat, was able to bamboozle the GOP into believing that he had any cares whatsoever for traditional Republican values utterly escaped me but he had successfully played the system, as he subsequently did to the electoral system, and Republicans couldn’t contain themselves. How could they, having found a man capable of bringing on board the deepest of traditional blue-collar Democrat voters? 

But the issue of tariffs and trade wars has blown wide open the debate as to what Republicans stand for and where the president is to be found. No country has done more to foster globalisation than the US, albeit that it failed to appreciate that China would ultimately prove to be more adept at leveraging open borders. But all was good as China poured cheap goods into the US; and the more it poured in, the greater the disinflationary effect became. And the lower inflation fell the more Alan Greenspan’s Fed could ease rates. The more he eased rates and the cheaper credit became, the higher real estate values went and the more credit Joe and Megan SixPack could draw down to buy even more cheap imports. Thus the line of people using money they haven’t got to buy stuff they don’t need. The world of “I want it and I want it now” was born. 

What many failed to realise was that Trump would propose, if running on one leg is entirely impossible, an instant solution based on amputating the remaining one rather than seeking a laborious remedy through prosthetics and months and years of rehab. Cohn, along with most economists, could see this perfectly clearly although his mission to bring rational thinking to the Oval Office has evidently failed and he has thrown in the towel. All the mutual back-slapping between him and Trump cannot disguise that fact and with the Dow futures trading down 300-odd points at the time of writing, taking this benchmark index into negative year-to-date territory, it would appear that Trumpanomics is struggling not to hit the rocks and sink.

 

Chequered Korea 

There is also no sign whatsoever of the news out of North Korea with a suggestion that Kim Jong Un might finally be prepared to trade guns for butter giving an uplift to equity markets. I received a call yesterday afternoon from a journalist who wanted to know, given that Asian markets were already closed when the news hit the wires, whether I expected a strong positive reaction in the Asian morning. Negative. But if markets had traded down when the news flow was bad, he wondered, so why should they not rebound now that it’s got better? Would an easing of tensions not be good for both North and South? Negative. 

What Kim’s motivation might be is uncertain but there is no doubt that the time has come where even he can’t believe any more that nuking the US will feed his people. There might be no Henry Kissinger-like character performing shuttle diplomacy between Seoul, Pyongyang and Beijing for the cameras but I’m sure there will have been some inscrutable Chinese official who has been quietly and gently squeezing Kim’s gonads until he finally squeaked. What now? 

The lesson from 1989 and the history of German reunification is that both sides will be stuffed. I still have very clear memories of those heady days in the winter of 1989 and the spring of 1990. Initial enthusiasm turned into total despondency as the cost of installing even the most basic infrastructure in the former GDR came very close to bringing West Germany to its knees. I had travelled in the old East where the railways still, 40 years on, still bore the logos of the pre-war Reichsbahn. Nothing, absolutely nothing, had been invested in four decades. East Germany was an economic time-capsule. I recall a conversation at the time with a Cologne-based portfolio manager who told me that in five years all would be done. He’d evidently never been behind the Iron Curtain and therefore had no clue of just how backward the ‘workers’ paradise’ really was. My guess, and it’s only a guess, is that the differential between the Koreas today is greater than that of the two Germanys was a quarter of a century ago. 

Furthermore the closer the two Koreas become, the more one has to underweight exposure to the South. Reunification is like a leveraged buyout without third-party mezzanine finance in place and therefore not a clever space in which to park other people’s money.

 

Stocking up 

Finally, rather remarkably, the last major equity index in Europe not to be in the red is the FTSE MIB. I’m not quite sure what Italian stocks have to recommend themselves in light of the electoral fiasco but if anybody would be kind enough to let me know, my ears are open. 

In the middle of all of this, the one money-spinner in the last month has been – are you sitting comfortably? – bitcoin. From the lows of early February when it was trading below US$7,000 it has recovered to now being around US$10,500, a bounce of over 50%. It has in fact come close to US$12,000 in the past few weeks. I confess to having read that one incorrectly, having expected it to fall further. Since I have been involved in the blockchain space I have been asked many a time whether I have made out like a bandit in bitcoin. Regular readers will know my stance and that is that I don’t understand the dynamics and that I therefore don’t trade it. Maybe it really is better that way.

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