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Friday, 15 December 2017

On Hitler, Putin, Tsipras and the markets

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  • Peters 475px June 2014

Anthony Peters sees markets ignoring some looming geopolitical risks.

Yippee! The Dow closed at an all-time high of 18,288.63 points and the broader S&P did just the same at 2,117.39 points. Yippee! The NASDAQ closed above 5,000.00 points for the first time since the height of the dot.com bubble. Spreads are still on fire with the iTraxx S22 Xover trading close to its best at 256.31 and the CDX HY S23 at a high of 107.70. I could go on; the VIX closed at 13.04, having been at 19.42 on the same day last month.

Yippee! That rather bold 30-year Portuguese guvvie, the 4.1% 2/45, which came to market on January 13 at a price of 99.466, a yield of 4.131 and a spread of 282 bps over mid swaps is now, seven weeks on, trading at a mid of around 128.00 which represents a yield of 2.72% and a spread of 155bp.

Where’s the quiz? The PBOC has just eased again, the ECB is about to embark on QE and the Fed looks to be on hold for a bit longer. This world is the best of all possible worlds in which black swans have gone extinct and only an idiot would not be long up to the ying-yangs and poking around in the back pocket to see if there isn’t some extra coinage floating around to put into tech stocks. What could go wrong?

Markets are deeply self-obsessed. Other than for fat headline events they don’t seem to worry about big picture political matters. The funeral today of Boris Nemtsov won’t influence the ECB so who cares? I do.

Don’t mention Hitler…

In the draft for a so far unpublished piece in which I looked at comparisons between the post-1929 crash year of 1936 and post-2008 crash year of 2015, I mused: “Vladimir Putin is playing an entire pack of rather simple nationalist cards and the Russian people seem to taking the bait, hook, line and sinker.”

The historical parallels between Putin’s call for all ethnic Russians to be brought back into the fold are clear and uncomfortable, and I am concerned by the way in which the period in European political, not military, history from 1933 to 1945 is hidden away in a black box, never to be mentioned in a comparative fashion.

That the German people found in the mid-1930s that they had been locked into an externally imposed network of treaties which prevented them from escaping the trap of high unemployment and low growth, and that they simply used democratic parliamentary elections to lift a party into power which promised to turn its back on these agreements and to put the national interest ahead of compliance to hostile external powers’ wishes is hardly mentioned. Is that not exactly what is occurring in Greece?

I hear the cry of “How dare you compare Syriza to the NSdAP! That’s comparing Alexis Tsipras to Adolf Hitler!” It’s not. It’s acknowledging the growing schism between the idealism of the internationalist leadership and the often brutal reality of life in the national playing field; “panem et circenses” can also fail.

There are sinister developments going on and nobody cares. In that unpublished text, I went on: “ZIRP and its cousins have so far prevented a repeat of the economic collapse of the early 1930s but the prevailing question is whether they have banished the cathartic depression and the risk of war or merely postponed them?… Soaring asset prices conveniently serve as opium for the leadership classes but for the “sans-culottes”, whether in the outer suburbs of Paris, the economic wasteland of Northern Athens or the deserts of Syria and Iraq, a rising stock market and nifty quarterly earnings mean little to nothing. What help is cheap credit to those who can’t obtain it in the first place or rising stock markets to those without shares?”

A further thought was: “The crux of the problem is and remains the fairly random use of GDP as a measure of all things. GDP measures output, irrespective. I have long argued that we need to find a measure, not simply of output, but of value added created. The deficit as a percentage of GDP measure, so popular with politicians, encourages spending which creates nothing than, well, more GDP. Hire 100 people to watch the grass grow, pay them out of borrowed money and the deficit/GDP ratios remain unchanged while jobs are created and GDP growth is generated. The multiplier effect even makes brisk growth appear to happen. If one, however, looks for the value added, the calculation stalls.”

Although it is not the markets’ job to be political, there are insidious developments taking place, and not only in Moscow and Athens, which could, over time, put the entire jolly system – including our little Planet Markets – at risk. The currently irresistible rise of nationalist and disintegrationist political movements speaks volumes. Low interest rates and rampant asset prices won’t make them go away.

More to the point, I’m not sure that Joe, Hans, Jean-Claude, Giovanni and Jose Six-Pack will let us get away with another burst bubble. NASDAQ at 5,000 – celebrate or panic?

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