Some years ago the “pink ’un” had an advertising slogan which read “We live in Financial Times”. We did and the phrase was a sublime piece of copy writing. Now, like it or not, we live in political times.
From the Brexit vote to the logic-defying choice of US presidential hopefuls, from the slaughter of the innocent in Nice to the Turkish coup attempt, from the Gordian knot of Venezuelan mis-government to the dead-lock in the Spanish parliament, the principle of politics before economics or even guns before butter seems to be rearing its ugly head.
In a little over two weeks we will be marking the 102nd anniversary of the outbreak of the Great War. As regular readers will know, I regard that conflict, known as World War I, really as the second leg of the 100 Years War between Germany and France which lasted from the 1870 outbreak of the Franco-Prussian war to the fall of the Berlin Wall in 1989. Students of early 20th century history will know that war was never supposed to have happened in 1914.
Tensions had of course been mounting across the continent. There had already been a serious domestic revolt in Russia in 1905 after the defeat by Japan, France was gagging for revenge after its abject military humiliation in 1871 and there was the naval arms race between Britain and Germany. Contemporary and conventional wisdom, nevertheless, had it that the price of war was too high and that the risk to booming global trade would never let a ruinous military conflict happen. Ooops!
We have lived for the past 50 years or so in the firm belief that economic growth was and is the guarantee of peace. By and large that is true although it has led to some fundamental structural problems, the first of which has to be the obsession with growth at all cost. In order to maintain the growth trajectory, our nations and societies have indebted themselves up to the armpits and in some cases even beyond that.
As the debt-fuelled growth model begins to run out of steam, so many of the political undercurrents that have been buried under a wave of material goodies are beginning to rise to the surface, only to find a political elite which has no clue as to how to address the problems. Half a century of promising voters more for less is about to take its toll.
Turkey poses a terrible problem for the West. Recep Erdogan was democratically elected on an Islamist programme that included a reversal of many of the democratic achievements of the secular state established by Kemal Ataturk after the Great War. How does one deal with a military coup against a democratically elected government with the avowed objective of securing liberal democracy? Is this not in some respects similar to the Venezuelan conundrum? All the while, the Russian bear has broken out of the pit and is questioning the status quo. Could it be that Vladimir “put me in” Putin is ahead of the game by walking away from the dominant western model of trying to suppress every nascent problem by simply printing more money?
The British people – or at least 52% of them – set aside the threat against their economic and financial well-being and voted to leave the EU. In some respects this is not entirely dissimilar to the Turks, the majority of whom chose to back Islamist moral rhetoric over promises of Western in general and EU-specific inspired material wealth.
Why all of this on a Monday in July? Not that the “silly season” has begun yet but there are some quite serious seismic shifts happening in the world and although they will have no immediate impact on the way most investors think, one would do well to begin to learn to include geopolitics in one’s asset allocation model.
Talk today is of the entire Russian team being banned from the Rio Olympics. In 1969 Honduras and El Salvador went to war over the outcome of a game of football. Whether or not Russia systemically corrupted the drugs-testing regime in Sochi is not the point; national prestige is tied to sports in 2016 in the same way it was in 1914 to the number of Dreadnought-class battleships a country could call upon. The West needs to take on board that there are parts of the world where happiness is not measured by the size of the TV screen at home and the number of trainers in the cupboard.
Political correctness determines that if uncomfortable thoughts are neither thought nor articulated, they will go away. The US believed that by replacing the Spanish and Italian word for black with the English word for negro, racial prejudice would simply evaporate. As the borrow-to-spend economy tires, such beliefs are proving to have been fickle.
All of the above and much more may or may not be true and none of it immediately impacts the markets. Risk assets opened strongly this morning, most likely on the basis that the political unrest and uncertainty will motivate central banks to maintain their respective accommodative stances. I’m not sure that that is particularly smart thinking but standing on a railway track facing a speeding train while declaring that nothing ought to happen because it’s not supposed to be heading in that direction doesn’t do much good either. Thus I maintain my rather weak belief that there is still nothing better to do than suspend logic and trade momentum. At the moment, that necessitates being long risk. Have a good week.