Reality check

6 min read

I’m sure most of us will have seen the pictures of President O’Bama and Chancellor Merkel looking rather silly wearing a pair of virtual reality headsets with cartoon character eyes on them. I suppose virtual reality is a great place to flee to when real reality doesn’t do what it ought to.

Politics, stupid

Austria might not be the most important place on the planet and, to be frank, it has spent the best part of a century – the Habsburg Empire fell in 1918 – descending to close on operetta-republic status. Its role in the 1930s has been neatly forgotten. It has also been forgotten that it produced a secretary-general of the United Nations who went on to become president of the Republic but who had to resign in disgrace when his suppressed, but evidently pretty enthusiastic, Nazi past was revealed. Anyone remember Kurt Waldheim?

What about the late Jörg Haider of the right-wing FPÖ, then the BZÖ, the first leader of a party of the xenophobic right in Europe to gain power in regular elections when he became governor of the State of Carinthia. And now, shock-horror, Haider or no Haider, the FPÖ has soldiered on until its candidate for the Federal Presidency, Norbert Hofer, took first place in the first round of last weekend’s elections with a 36% share of the popular vote. That in itself is scary. What is, in my mind, even scarier, is that the second slot, and thus the other berth in the run-off for the presidency, will be taken by Alexander van der Bellen who is backed by the Greens. Thus the next president will come from one of two parties which grew in what is known in Austria as the “APO”, the extra-parliamentary opposition.

While Spain is struggling – and failing - to find a government out the electoral deadlock of December and Portugal and Greece have vociferous anti-austerity governments, albeit with rather empty coffers, Austria is the latest country to join the ranks of the ungovernable. That, of course, is an exaggeration - the presidency is largely ceremonial - but the trend to protest movements trumping the established political order is clear. The AfD is rising in Germany and Marine Le Pen’s Front Nationale is in with a shout in France’s upcoming presidential elections. Had it not been for the UK’s rather quirky first-past-the-post system, the nationalist UKIP’s nearly 4 million votes would have had it as a major political force in the country too. UKIP garnered 12.6% of the popular vote to win just one miserable seat on the east coast whereas the SNP only took 4.7% of the national vote but romped home with 56 seats. In Germany, with less than 5% of the national vote, the SNP would not have even qualified to enter the Bundestag. Regional parliament, yes, national parliament, no. Representative democracy? Are they quite sure?

For over 400 years we have been quoting Shakespeare’s Hamlet with the line “There is something rotten in the state of Denmark” although we should be noting that there is something very rotten in the whole of Europe. The people are going one way and the established political elite another. Political consensus, the very basis of democracy, is crumbling under our very noses and all we seem to care about is whether we or our children can find a way to download the latest Star Wars movie for free.

Bad banks

As traders, we should know that everything is relative and that disappointment is not an absolute value but a function of expectations. The disintegration of political consensus is the result of a dramatic failure to manage expectations. Cheap electoral promises of unaffordable benefits are now coming home to roost as debts, private and public, mount up without the get-out-of-jail-free card which is inflation. Debt, debt and debt again….

In response to the observations by Charlie Haswell which I quoted at length yesterday, I received a reply from a senior banker who set up a business in the aftermath of the financial crisis which aimed to help banks work out some of their manifold bad loans but which failed because of the collective rose-tinted amnesia of the management of many such institutions.

He wrote: “I do agree with Charlie … but favour stronger solutions really; on the lines of Schumpeter’s creative destruction. And the Italian dud-loan sale failed because everyone knows there is another €100bn or more behind it so the clearing price is plainly wrong. As I told my Italian colleague recently (and he hasn’t spoken to me for a while), “It’s all well and good to create an Italian Bad Bank, but what the heck are you going to put into the Italian Good Bank?”.”

South Korea released its preliminary Q1 GDP figures this morning and at +0.4% quarter-on-quarter, they aren’t exactly sparkling even though the annual figure reads 2.7%. If one digs into them, one finds that it is not only sluggish export orders which are to be blamed but also a decline in domestic demand as households hit their debt ceilings. As we learnt post-crisis, simply increasing credit limits or lowering credit standards is not the answer.

I suppose the last hope is that the oil price continues to rise, which would support some of the struggling oil economies, improve their credit standing as well as feed inflation back into the industrialised nations. WTI closed on Friday at US$43.73 per barrel, a recent high. It fell back yesterday to the mid-US$42s but the trend is for higher. I already hear the first voices calling for US$60/bbl by year-end. Are those the same guys who told us three months ago that oil was going to US$15/bbl? I wonder.