Monday, 19 March 2018

The Great Disruptor

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Wasn’t Donald Trump supposed to be the Great Disruptor? In some ways he is but aren’t disruptors supposed to be progressives, to be the ones who throw over accepted norms and move us, albeit kicking and screaming, into uncharted territory? 

If that is the case, then Trump, to use a topical equine analogy on the first day of the Cheltenham Festival, falls at the first. He is not, as his intervention in the Broadcom/Qualcom merger would suggest, a disruptor at all but a regressive dinosaur. And hiding regressive policy behind rather shallow arguments such as risks to national security rings painfully hollow. 

Let us take a step back and survey the situation from a distance. What we find is that the borders governing political and administrative activity and the borders (or lack thereof) governing economic activity rarely overlap any longer, if at all. We call the latter “globalisation” where activities, whether in manufacturing or services, flow naturally to the areas where they can most smoothly and efficiently, let alone cost effectively, be performed. By adopting “America First” Trump is selling snake oil, which assumes that political borders and economic borders can somehow be brought back into alignment. That, I believe, we largely regard as being rather one-dimensional and superannuated thinking. What we fail to appreciate is the EU’s attempt to go the other way and to expand the political borders to match the economic borders is equally regressive. 


Trade table

I have among my friends many fervent haters of the concept of Brexit but I suspect some of them, if they are honest with themselves, might acknowledge that Brexit fosters the idea that economic and political borders do not necessarily coincide and that the way forward is to find a way of embracing broadmindedness in both fields. In his much repeated interview with CNBC yesterday Justin Trudeau, the boyish-looking Canadian prime minister, made just this point by reaffirming that the US’s and Canada’s mutual economic interests do not preclude them from being independent nations. Although there is much talk of the UK looking at the Canada/EU free trade agreement as a model for its future relationship with its mainland neighbours and former EU partners it ought really to be striving more towards one that resembles the one between the US and Canada.

The tariff debate rumbles on but, in the classical tradition of markets, boredom with a subject for which there is no visible binary solution has already set in and investors and traders are seeking the next subject that will tickle the income-generating taste buds. This week provides us with an unusually rich raft of economic releases from the US and all and sundry will be using the results in an attempt to divine what remains in the Fed’s tightening tank for the rest of the year even though the mood music is being made at a much higher level. We aren’t yet one quarter of the way through 2018, and we might have so far only observed the first of the eight FOMC meetings of the year - the next one is just a week away – but is seems unlikely that the fist-tightening move of the year will be visited upon us in the middle of the uncertainty that is being generated by White House trade rhetoric. 

Although the Fed admits that the economy is running at full employment, or even a bit more than that, it will struggle to pin the tail on the post-tariff donkey. Rising import prices for semi-finished goods in the steel and aluminium space and for much sought-after European cars will surely push inflation but at the same time finished US goods will become less competitive on international markets as a result of which the overall output trajectory as well as that of the jobs market could quite rapidly find themselves in reverse. 

This is not a time for the FOMC to be posturing, new chairman or no new chairman, and the smart money has to be on no change in monetary policy but a statement which confirms that the tightening gun is locked and loaded but still shouldered. The eurodollar strip is certainly displaying anticipation of a far less aggressive medium-term approach by the Fed than it had done just a matter weeks ago although the front months are screaming for early tightening. I humbly suggest that they’re wrong. We shall have to see. Raphael Bostic, the head of the Atlanta Fed and normally thought to be on the more hawkish side, suggests that the trade situation calls for caution while Lael Brainard, normally the dove-in-chief, appears to be suggesting that the next tightening move is right upon us. Make of that what you will. Fact is that it is always easier for a central bank to leap forwards than it is for it to back-track.


Spring forward 

Finally, to the UK where Chancellor of the Exchequer Philip Hammond is preparing to deliver his spring statement. Winston Churchill once referred to Clement Atlee as a sheep in sheep’s clothing; I wonder what he would have made of Hammond? The key to his speech will be that things are better than they might have been but still not good as he’d like them to be. He insists that debt reduction is the most important feature of his vision. One can’t argue about that; what one can argue about, however, is what austerity actually means. It had seemed, in the middle of the financial crisis, as though austerity meant living within ones means or, more precisely, no longer spending what one did not have or what the invisible Scotsman who abolished the boom-and-bust cycle and who saved the world thought he ought to be receiving in fiscal revenue from the banking sector and had already spent. The leader of the opposition, Jeremy Corbyn, and his socialist shadow chancellor, John McDonnell, believe austerity to some kind of Tory tool of class warfare which has to be countered on the beaches, in the fields and on the streets. I’m sure we all wished it were so but sadly it isn’t. Mr Micawber was quite right, you know…

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