Long remains the new neutral

9 min read

As if markets were not political enough at the moment, we are now faced at the same time with, for lack of a better description, the two faces of the Trump presidency.

On one hand we have the Washington village in uproar over the president’s alleged description of former FBI Director Jim Comey to a delegation of Russians as a “nut job”, which has once again led to a debate as to what he said, to whom and whether it might or might not have been appropriate; on the other hand he has turned up in Riyadh where the first lady has flagrantly refused to cover her head but where the president has clearly charmed the natives.

JIVE TALKIN’

The one thing we all, love him or hate him, agreed on when Trump won the elections last November was that he would tear up the diplomatic rule book and that he would do things his own way. He has scored major points in the Arab world by not feeling compelled to turn their countries into western-style democracies. Yes, the human rights record of Saudis is questionable by our standards but who are we who have left a trail of destruction in Iraq, Libya, Afghanistan and Syria while waving the flag of liberal democracy to propose more of the same in Saudi? Whereas Barak O’Bama felt the need to lecture Arab leaders, the Donald appears to take a position of “If you help us defeat terrorism, even if it does purport to be Islamist, then we will happily let you do things at home your way”. So far, so good. Now let’s see how that attitude plays out in Jerusalem.

As we in finance know to our own detriment, the overriding desire at the top of our respective political piles is to control everything in the belief that a risk-free environment can be created. Trump’s rather more Darwinian approach to live and let live apparently acknowledges that people will get hurt now and again in a less tightly controlled world but that that is the a price worth paying if wealth can be created along the way. If ever there was an evocation of the great socialist playwright Bertolt Brecht’s famous statement “First comes the grub, then comes the morality”, then this is it.

Trump’s obvious success – so far – on his Middle East trip is still in stark contrast to his troubles in Washington where has identical approach to the Gordian knots of modern day political etiquette have got him into what could develop into serious trouble. Let’s face it, whether or not he told the Russians that firing Jim Comey took the pressure off the investigation into relationships with them is really a minor point for, as a fact, it was clear for all of us to see. On one hand we spend all out time bemoaning endless reams of political double-talk and then when we have a politician who calls a spade a spade we get upset too.

STAYIN’ ALIVE

A large part of the protracted rally in the value of risk assets since the presidential elections in November has been based on markets’ expectations for a more pragmatic Washington facing a less cowering and paranoid Wall Street. Trumponomics calls for easy decisions to become easier and tough ones tougher. Yet, even in the happy world of Make America Great Again, all is not that simple as has been demonstrated by the Ford Motor Company, which announced last week that it was going to reduce its global workforce by 10% and today added a major revamp at management level. CEO Mark Fields is to walk the plank and be replaced by Jim Hackett – not to be confused with Jim Hacker, the bumbling protagonist of “Yes, Minister” and “Yes, Prime Minister” - a turnaround specialist who has recently managed the advanced technology division within the company.

Fields was supposed to be the incarnation of the new generation of automotive executives who would lead the industry out of the mass bankruptcy era of 2008/2009. Just to remind, both GM and Chrysler ended up in Chapter 11 along with dozens of their component suppliers while Ford only just escaped and might not have done had it not have had a significant number of Ford family members who insisted the company tough it out. Since hitting a post-crisis interim high of around US$18 per share in July last year, the stock has been on a steady slide and closed on Friday at US$10.87. Has Ford really lost its way again? The big automakers are all facing the same problem, which is that they involved in a race to an unknown destination. Electric car technology may be developing rapidly but our ability to generate enough energy to feed the beast most probably isn’t. Changing admirals in the middle of a sea battle is placing a big bet on a random outcome. Having been paid US$17m last year, I have no fear for Mr and Mrs Fields and their heating bills this winter. Not bad for someone who has just been fired for failure.

TRAGEDY

Meanwhile, here in Europe, the Greece things rumbles on as the powers that be in Brussels and Frankfurt try to find yet another new way of making a bankrupt country un-bankrupt. Wolfgang Schäuble, the chief hawk, still refuses to issue a blank cheque to Athens and in doing so also continues to attract the ire of all those who don’t care what it costs to maintain the veneer of a successful single currency project, as long as whatever that is is principally underwritten by Germany. Things might become more interesting if Mutti Merkel succeeds in her quest to have Jens Weidmann, the president of the Bundesbank, replace Mario Draghi at the head of the ECB. Her demand is not unreasonable, given that the Netherlands, France and Italy have all had a crack at the whip. Weidmann is an instinctive hawk, though some may say realist, of the same ilk as Schäuble who lives in that arcane world where one endeavours to live within one’s own means and not within those of somebody else.

Elsewhere, Friday saw WTI finally close above US$50 per barrel again and early trading would have one believe that it will continue to go higher. Bond yields are also edging higher as the expectations fade of Trump being impeached and removed from office. I’m not sure whether markets have ever looked at what it takes to remove a president from office although they would do well to read up on the subject before blindly selling into it.

YOU WIN AGAIN

The UK election bandwagon rolls on, now fired up by the Conservative manifesto, which suggests that pensioners will now be asked to give up a few benefits for the good of the collective. For years the young have moaned that the baby boomers have done nothing for them and have only defended the wellbeing of their own. Now that Theresa May is doing the opposite they are moaning too. It would appear that she is confident enough of victory that she is prepared to lose some potentially winnable seats in order to make some radical changes to the social security structure. As I just said about our German friends, one cannot go on living on somebody else’s means.

So there we are; we go into the new week with strong political dynamics but otherwise bland and directionless markets. Long remains the new neutral and at the time of writing index futures point towards further recovery from last Wednesday’s big wobble. If momentum continues, the heavy one-day losses might well be recouped by close of business today. Yes, long remains the new neutral.

Have a good week.