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Monday, 23 October 2017

On Oxford economics dons and wars of attrition

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I had the pleasure of being invited to my first seasonal drinks party this past week-end and very pleasant it was too; a lesson of how, with car keys in pocket, to make a single glass of prosecco (my smart spell-checker recognises champagne but not prosecco) last for well over an hour. Hey ho! The shindig in question was given by a retired Oxford economics professor…

Anthony Peters, SwissInvest Strategist

While he was walking the house guests around his collection of contemporary art, I found myself in a corner (and in a clinch) with one of his erstwhile faculty colleagues.

After the first few niceties, we were at each other’s throats over the Chancellor’s Autumn Statement. I was of the opinion that, in the greater scheme it had ticked the boxes. He, on the other hand, was moaning that the government was failing, that austerity wouldn’t foster growth and he went on to spout all the usual superannuated nonsense about the government needing to spend more in order to kick-start the economy.

Never having met him before, I was confident enough to pull out all of my own old chestnuts about us having to desist from trying to apply 20th century economics to a 21st century economy and all the other bits which I bang on about and which regular readers will know all too well by now. I suppose I gave him a bit of a sixteen gun broadside so he upped sticks and went to look at the artwork instead.

Unfortunately, in the current economic and fiscal crisis, there is no America which, by standing up in order to be counted, makes the outcome a foregone conclusion.

I was left with an image of World War One where the troops were dug into heavily reinforced trenches and where the only thing the generals seemed to be able to think up was throwing ever more men in ever larger assaults against the enemy. (If QE isn’t working, let’s try a little more of it…- sound familiar?). Failing strategies don’t become better by trying them in larger size and at some time we will either have to sit back and consider a fundamentally different approach to our socio-economic model and the way government interacts within the process or we will all eventually sink without trace.

It was the German Chief of the General Staff, Erich von Falkenhayn, who dreamt up the idea of war of total attrition, who coined the phrase of “bleeding the enemy dry” which, in the end, he did to his own army. He effectively calculated that if he could kill the French at Verdun faster than his own troops died, he would have to win eventually. Although he had been relieved of command by late 1916, the scene for attritional warfare had been set but the appearance of America with its apparent endless pool of human resources on the Western Front in 1917 effectively meant that it was game over for the Axis.

Unfortunately, in the current economic and fiscal crisis, there is no America which, by standing up in order to be counted, makes the outcome a foregone conclusion. In the event, it took a second, devastating war, twenty years later, to resolve the issues. Look at the time frame and have a good think…

Mediterranean machinations

Meanwhile, the more immediate issues in Europe concern the Greek debt buy-back and the political goings on in Italy.

Once of the conditions for the next tranche of the Greek bail-out to be paid out was that it repurchase €30bn of its bonds in a tender. This offer closed on Friday and, behold, only €26bn of bonds have been tendered. This is not all bad.

According to a lovely piece put out this morning by David Fuller at In Touch Capital, the enthusiasm with which the Greek authorities had been playing up the success of the tender may have encouraged holders not to come out to play. The higher prices paid and the concept of being in possession of a scarce piece of paper could well have helped them to decide to hold out.              

By the letter of the law, Greece has failed to meet one of the key conditions for the disbursement of the first €31bn of aid but, along with ITC, I can’t see this being a stumbling block. Either they get awarded an A-star for effort or they get to re-open the tender offer for the balance. Personally, I am unimpressed with the hubris emanating from Athens but maybe it’s time even for me to cut the Greeks a bit of slack.

As far as Italian politics is concerned, I wrote on Friday that: “Italy has a long history of short lived governments which must, at some point, beg the question as to whether the country’s economic success – and the huge leap forwards in the past fifty years should not be underestimated – is because of despite the shenanigans of Rome politicians”.

My view has not changed over the week-end and I remain a long term buyer of Italy over Spain; The 5 year and the 10 year spreads are now both at 80bps, on economic fundamentals too tight in my opinion but it could go tighter yet.

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