US Treasury Secretary Steve Mnuchin’s comment about a weaker dollar being good for US trade and opportunities, and its immediate impact on the value of greenback, made all the headlines but it was President Emmanuel Macron’s pointing to the crisis of globalisation that should be given more attention.
Mnuchin was in some ways doing nothing other than preparing the ground for the arrival today at Davos of his boss, Trump the Disruptor. If a weaker dollar – the index hit a three-year low of 89.15 after Mnuchin had spoken and has continued to fall overnight to 88.84 at the time of writing – is supportive of the international competitiveness of America’s goods and hence the domestic economic growth scenario, then it is quite clearly within the scope of Trump’s America First objectives.
There followed a flurry of activity, both in markets and in the media, the bookend of which was delivered by Commerce Secretary Wilbur Ross who laconically commented that Mnuchin was not advocating of itself a weaker dollar but that although a “trade war has been in place for quite a while, the difference is the US troops are now coming to the ramparts”. One cannot but agree with Washington, albeit in a clearly qualified manner, that the rest of the world has taken the US for granted as the consumer of last resort, that as long as the dollar was strong and imports and credit were cheap Joe and Nancy SixPack would snap up whatever was on offer.
Roll the credits
Although the administration’s thinking, “lower dollar, less imports, more exports, America fights back” is easy to follow, it suffers one fatal flaw by disregarding the power of imported disinflation, maybe the greatest driver of the goldilocks economy both before and since the financial crisis. Although the credit crisis of 2007/2008 nearly brought the global economy to its knees and the decade-long recovery has spread a feel-good factor that we are now enjoying by way of economic growth in all corners of the globe, it would never have worked without millions of Americans lining up at the cash till, credit card in hand. Those credit card debts are still being refinanced by the beneficiaries, be that the Japanese, the Chinese and anyone else who enjoys a trade surplus with the US…which covers pretty much everyone who is anyone.
Mnuchin was in a way saying that Washington doesn’t really care where the dollar trades, or Treasuries for that matter. Will it foster inflation? Yes it will. But with the US national debt heading towards US$21trn and total indebtedness of public and private sector together knocking on US$70trn, the prospect of a decent bout of inflation is not to be sneezed at.
Macron walks on water or so one might be led to believe. There is nothing he says that is not taken as being the words of the infallible oracle of the industrialised West. Just 12 months ago France was the sick man of Europe with an uncontrolled deficit, deep-seated social issues, a large and uppity ethnic minority underclass, arcane labour laws and statism that went out 20 years ago, and a far-right, xenophobic movement which polled second in the presidential elections. Now, just eight months on, France is supposedly the leading light and the arbiter on all things moral. The French president declared that globalisation is in crisis. Quite right it is. But as I humbly pointed out in Tuesday’s column, the unemployed Western industrial worker doesn’t care much for how the lot of his Chinese or Vietnamese peer has been improved by open markets.
Whether the UK referendum, the election of Trump, or the flop of Mutti Merkel, they all bear the same message: that charity begins at home. Macron was elected not because France doesn’t see it that way but because Penelopegate cleared his path to the right and the electoral system assured that he became unbeatable. Please don’t get me wrong; France certainly has a new-found spring in its step. But please also don’t assume that the banlieue is now suddenly a calm and beautiful flower garden.
It’s nice to hear all the Davos glitterati tell us how the model that made them rich and powerful has been blown off course. The fact that it was the Trump jump that has made them a bucket load richer than they were this time last year when they all hated him is beside the point. I wonder how many of them will register their protest by kneeling when he enters the hall or by walking out? They didn’t get where they are today by taking moral stances so I’m sure he’ll get a rousing, standing ovation. ‘Nough said.
Back in the real world, the ECB central council meets today and a tricky agenda it will be faced with. Euro/dollar is at US$1.2425 as at this morning, a level not seen since December 2014. No need to panic. Six months earlier, in May 2014, it was within spitting distance of US$1.4000. At that point it was the eurozone that was being accused of launching a trade war and a race to the bottom, the same criticism that is now being levelled against America. The conundrum, however, which will be facing Mario Draghi and his merry men is how to bring the ECB’s stated long-term objectives into line with a global economic growth scenario – let’s shelve the term “recovery” – that exceeds all previous forecasts. Is this a flash in the pan, the last hurrah, before consolidation or has the economy really embarked on a sustainable growth trajectory, which just a few months back seemed unachievable?
Commodity prices might be on fire but so is euro-dollar so it is easy to overestimate the inflationary impact. At the same time European competitiveness is being challenged. The ECB, already lumbered with trying to do the right thing for 19 divergent national economies with 19 idiosyncratically elected governments, is now also faced with a roguish America, a new chairman of the Federal Reserve System and a US Treasury Secretary who reckons he has larger fish to fry than the level of the greenback. Draghi, a master of talking for 15 minutes, having a room full of journalists hanging on his every word but at the end having said next to nothing, will today have to be on the top of his game. Maybe Davos and the anticipation of Trump’s performance will help him out.
2017 was a great year for investors even though we most of us don’t know quite why. Could 2018 be winding up to be the same again or is there a clutch of black swans hatching in the undergrowth? Is this the time to be gearing up or taking chips off the table? I know what my thoughts are; what are yours?